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Musick Peeler PUBLICATIONS INNOVATIVE EXPERIENCED ACCESSIBLE
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Excess Insurer Has No Subrogation Claim For Primary Insurer's Unreasonable Failure To Settle Unless...

08.25.2006
Excess Insurer Has No Subrogation Claim For Primary Insurer's Unreasonable Failure to Settle Unless There Is A Litigated Excess Judgment

In RLI Insurance Company v. CNA Casualty of California, 141 Cal.App.4th 75 (2006), the Court addressed the issue of whether and under what circumstances an excess insurer that steps up and pays some or all of its policy limits to settle an action against its insured, may then turn around and sue the primary insurer, under an equitable subrogation theory, for unreasonably refusing to settle within its policy limits when it had an opportunity to do so. The Court held that without a litigated judgment excess of policy limits in hand, an equitable subrogation action will not lie.

In RLI, the primary insurer, CNA, had an opportunity early in the litigation to settle a claim against its insured for an amount within its $1 million policy limits. After it refused to settle, the litigation continued until a $2 million pretrial settlement was reached, pursuant to which CNA and the excess insurer, RLI, each paid their $1 million limits. As a result, the matter did not proceed to trial, and no judgment was entered. RLI then brought an equitable subrogation action against CNA seeking reimbursement of its $1 million settlement contribution, asserting that CNA failed to accept a reasonable settlement demand within its policy limits, and the settlement paid was $2 million instead of $1 million.

In its analysis, the Court relied heavily on the California Supreme Court's decision in Hamilton v. Maryland Casualty Co., 27 Cal.4th 718 (2002), which concerned a defending primary insurer that refused a policy limits demand. In Hamilton, however, the insured then settled without the insurer's participation. The settlement included a stipulated judgment for an amount in excess of the primary limits and an assignment to plaintiffs of any breach of contract claim the insured might have against its insurer, in exchange for an covenant not to execute against it on the stipulated judgment. The question was whether the primary insurer was liable for that stipulated judgment. The Court in Hamilton noted that a primary insurer that unreasonably refuses to settle may be liable for the entire amount of the judgment rendered against the insured, including any portion in excess of the policy limits. However, the Hamilton Court explained that short of trial and entry of a judgment in excess of the insurer's policy limits, the insured has not suffered any damage, and a settlement resulting in a stipulated judgment thus could not give rise to a right to recover for refusal to settle.

RLI takes the "litigated judgment" rule enunciated in Hamilton and broadens it to apply to most, if not all, equitable subrogation actions against primary insurers. The RLI Court noted that its prior decision in Fortman v. Safeco Ins. Co., 221 Cal.App.3d 1394 (1990), that an excess judgment was not required for an excess insurer to sue a primary insurer for equitable subrogation, conflicted with Hamilton. As such, the Court declined to follow Fortman.

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