On October 1, 2013, the Missouri Court of Appeals, Western District, handed down its decision in Scottsdale Insurance Company v. Addison Insurance Company (WD 75963). This represents the first time a Missouri court has been called upon to resolve a dispute between an excess insurer seeking to recover from a primary insurer the amount contributed from an excess policy in order to resolve a claim where the primary insurer failed to settle the claim within its policy limits.

Earlier in the case, the trial court had entered summary judgment in favor of the primary insurer, Addison Insurance Company and United Fire & Casualty Company—collectively “United Fire”—on all counts pled by Scottsdale and the insured, Wells Trucking Inc. Each of seven alternatively pled causes of action sought to recover the amount Scottsdale had contributed toward settling a lawsuit filed against Wells Trucking. The Western District reversed the trial court’s decision and held that an excess insurer can recover the amount it contributed toward settlement from the primary insurer on a theory of equitable subrogation when the primary insurer has committed bad faith in failing to settle a claim within the primary insurer’s policy limits.

A Factual Background

In August 2007, a Wells Trucking employee driving one of the company’s trucks pulling a flatbed trailer was involved in an automobile accident. The driver of the other vehicle sustained severe bodily injuries from which he died.

At the time of the accident, Wells Trucking held a primary liability insurance policy with United Fire, as well as an excess liability insurance policy with Scottsdale. The United Fire policy contained liability limits of $1 million. The Scottsdale policy contained liability limits of $2 million, with the specification that it would not apply unless and until the underlying United Fire policy had been exhausted.

The decedent’s family made multiple demands that United Fire settle for the $1 million policy limits, including one attempt after it learned of Scottsdale’s excess policy. In August 2009, the decedent’s family increased the settlement demand to $3 million. United Fire and Scottsdale participated in pre-trial mediation with the decedent’s family in October 2009. At that point, the decedent’s family agreed to accept a total settlement of $2 million.

United Fire then contributed its $1 million policy limits toward the settlement, while Scottsdale contributed $1 million from the excess policy toward the settlement. Scottsdale expressly reserved its right to pursue United Fire for bad-faith failure to settle, and secured a written assignment from Wells Trucking of its bad-faith failure to settle claim.

Scottsdale subsequently filed suit against United Fire, seeking to recover the $1 million it paid to settle the lawsuit on one of seven alternative theories. The trial court entered judgment in favor of United Fire.

Scottsdale argues the trial court erred in entering summary judgment because Missouri should permit an excess insurer to pursue a primary insurer for bad-faith failure to settle within its policy limits under one of several suggested legal theories. This is a question of first impression in Missouri and has never been dealt with by a Missouri appellate court.

Analysis

The Missouri Supreme Court first recognized a cause of action in tort for bad-faith failure to settle in 1950. Insurers are not permitted to take a gamble on getting a favorable verdict rather than to make a settlement within the limits of the policy. Bad faith must be determined based on the particular facts of each case. In Missouri, bad faith on the part of the insurer would be the intentional disregard of the financial interest of the insured in the hope of escaping the full responsibility imposed upon it by its policy.

Settlement Based on Equitable Subrogation

The trial court concluded in its judgment that “Missouri law does not permit an excess insurer to bring a lawsuit for bad faith failure to settle against a primary insurer. This includes claims based on equitable . . . subrogation.”

Scottsdale argues this was “error” because but for the excess policy, Wells Trucking would have had a claim against United Fire for bad-faith failure to settle for the amount paid to resolve the wrongful death lawsuit over and above United Fire’s policy limits. Scottsdale thus argues it should be equitably subrogated to Wells Trucking’s rights, permitting it to recoup from United Fire the $1 million it contributed toward settlement.

Legal and Conventional Recovery

Subrogation originated as a creature of the common law. Basically it is classified as either legal or conventional. Legal subrogation arises from a condition or relationship by operation of law, whereas conventional subrogation arises by act or agreement of the parties. Subrogation is founded on principles of justice and its operation is governed by principles of equity. It rests on the principle that substantial justice should be attained regardless of form—that is, its basis is the doing of complete, essential and perfect justice between all parties without regard to form.

As a general rule, any person who, pursuant to a legal obligation to do so, has paid even indirectly, for a loss or injury resulting from the wrong or default of another will be subrogated to the rights of the creditor or injured person against the wrongdoer or defaulter, persons who stand in the shoes of the wrongdoer, or others who, as the payor, are primarily responsible for the wrong or default.

“Equitable subrogation” is a form of subrogation that is not founded in contract, but is a creature of equity. As with all forms of subrogation, equitable subrogation is intended to prevent unjust enrichment. Equitable subrogation is enforced whenever the person making the payment stands in such relations to the premises or to the other parties that his interests, recognized either by law or by equity, can only be fully protected and maintained by regarding the transaction as an assignment to him, either wholly or in part, for his security and benefit.

An Excess Insurer’s Right To Subrogate

Missouri has recognized an excess insurer’s right to assert a claim of equitable subrogation to recover from a primary insurer.  An equitable subrogation claim asserted by one insurer against another is routine. Missouri aligns with the majority of jurisdictions to recognize an excess insurer’s ability to recover from a primary insurer for bad faith failure to settle on a theory of equitable subrogation. In such a case, the excess insurer is not enforcing a duty owed directly to it by the primary insurer, but is merely seeking to recover the amounts the primary insurer would have been obligated to pay its insured but for the excess insurer’s performance.

If the remedy of equitable subrogation where bad-faith failure to settle is alleged is rejected, then a primary insurer would be permitted to benefit from the fortuity of the insured’s excess coverage by eliminating the primary insurer’s incentive to negotiate in good faith to settle a claim within policy limits. Rejection of the remedy would result in an insured receiving less than it has paid for, as the premium paid to a primary insurer includes the right to insist on the primary insurer’s performance of its duty to negotiate in good faith to settle within policy limits.

A primary insurer should not be allowed to avoid the consequences for its breach of the duty to protect the insured’s financial interests. Conversely, permitting an excess insurer to be equitably subrogated to recover for the primary insurer’s bad faith failure to settle will not increase the scope or nature of the duty owed by the primary insurer to its insured, and will discourage a primary insurer from gambling for its own benefit.

If an excess insurer recovers amounts it has paid within its policy limits from the primary insurer, then it is recovering in equity for a risk it contractually agreed to undertake and for which it accepted a premium. However, this is generally true as to every insurance subrogation claim. In the context of bad-faith failure to settle, any resulting inequity is outweighed by the inequity of permitting a primary insurer from effectively escaping the consequences of non-performance of its implied duty of good faith to negotiate in the financial interests of its insured. 

Subrogation should be applied where justice, based on the dictates of equity and good conscience, demands its application, and where the rights of the one asking subrogation are more equitable in nature than those who oppose the subrogation.

An excess insurer’s ability to recover from a primary insurer for bad faith failure to settle on a theory of equitable subrogation derives from rights the insured would have had but for the excess insurer’s payment. Thus, the essential elements of the insured’s claim are necessarily incorporated into the essential elements of the claim if asserted by the excess insurer. In addition, because equitable subrogation is intended to prevent unjust enrichment, an excess insurer must be able to establish that it acted to make the payment from the limits of its excess policy under the compulsion of a legal liability or to protect some other interest and not as a volunteer.

Equitable Subrogation

An excess insurer’s claim of equitable subrogation premised on bad-faith failure to settle requires the excess insurer to establish these essential elements:

  1. The primary insurer had the authority to settle a claim against its insured within (or by payment of) the primary policy limits.
  2. The primary insurer had the opportunity to settle a claim against its insured within (or by payment of) the primary policy limits.
  3. The primary insurer failed to do so in bad faith.
  4. The excess insurer made a payment within the limits of its excess policy to discharge an obligation it owed to the insured.
  5. Were it not for the excess insurer’s payment, the insured would have incurred damages in the amount of the payment as a proximate result of the primary insurer’s conduct.

Although United Fire paid its policy limits to settle the lawsuit filed against Wells Trucking that does not support the legal conclusion that United Fire failed to settle the claim against Wells Trucking within its policy limits. United Fire’s payment of its policy limits toward settlement is legally immaterial to whether Wells Trucking could have established a claim for bad faith failure to settle, and is thus legally immaterial to whether Scottsdale can establish a right to equitable subrogation.

The case was remanded to the trial court for further proceedings consistent with the opinion and allows Scottsdale to try to prove the elements of its right to equitable subrogation set forth in the opinion. 

Closing Thoughts

When a primary insurer has the opportunity to settle within its policy limits and fails to do so in bad faith because of the existence of an excess policy that satisfies any needed eventual settlement or judgment can, in Missouri, and the majority of jurisdictions, face a suit for equitable subrogation by an excess insurer who would have no reason to pay anything if the primary insurer had settled.

Scottsdale’s position in this case was made more difficult by its tardy response to the summary judgment motion but still temporarily prevailed. It must still prove the elements of the tort of bad faith before a judge and jury. It seems the insurer’s evaluation of the wrongful death claim was less than credible, because it started at $250,000 and increased to a $2 million settlement. Hopefully the two parties will settle their differences and stop wasting assets on attorney fees.