United States: Ace American Insurance Company V. Fireman's Fund Insurance Company

In Ace American Ins. Co. v. Fireman's Fund Ins. Co., 2 Cal.App.5th 159 (August 5, 2016), the California Second District Court of Appeal reversed the trial court's entry of judgment after it sustained a demurrer without leave to amend filed by Fireman's Fund Insurance Company ("Fireman's Fund") in response to a complaint for equitable subrogation filed by ACE American Insurance Company ("ACE"). The Court of Appeal held that ACE could maintain an action for equitable subrogation to recover a sum that it paid in excess of Fireman's Fund primary and umbrella policies, wherein, the underlying claim for which both carriers contributed to settlement could have been settled within the Fireman's Fund policy limits.

The parties' dispute arose out of an underlying personal injury lawsuit filed by John Franco against Warner Brothers Entertainment, Inc. as a result of a serious injury sustained due to an accident while on a movie set. Fireman's Fund insured Warner Brothers under a primary policy affording limits of $2 million dollars and an umbrella policy with limits of $3 million dollars. ACE provided Warner Brothers with excess insurance above the Fireman's Fund policies with limits of $50 million dollars. According to ACE, Franco made demands to settle his lawsuit against Warner Brothers within the Fireman's Fund policy limits. However, Fireman's Fund rejected such settlement demands. Ultimately, the Franco lawsuit was settled based on payment of the entire limits afforded by the Fireman's Fund policies and an additional payment made by ACE.

Thereafter, ACE filed an equitable subrogation action against Fireman's Fund seeking to recover the amount that it paid in excess of the Fireman's Fund policy limits. In response, Fireman's Fund filed a demurrer arguing that absent a judgment in excess of its limits, ACE was barred as of law from pursuing an equitable subrogation action against Fireman's Fund. Fireman's Fund relied on a decision issued by Division 5 in the Second District Court of Appeal entitled RLI Ins. Co. v. CNA Cas. of Calif., 141 Cal.App.4th 75 (2006) ("RLI decision"). ACE relied on an earlier decision issued by Division 1 of the Second District Court of Appeal entitled Fortman v. Safeco Ins. Co., 221 Cal.App.3d 1394 (1990) ("Fortman decision") wherein, the Court of Appeal held that an excess insurer could maintain an equitable subrogation action against a primary insurer notwithstanding the absence of a judgment in excess of primary limits.

On appeal, Fireman's Fund argued that the RLI decision followed the Supreme Court's holding in Hamilton v. Maryland Casualty Co., (2002) 27 Cal.4th 718 which barred a claim for bad faith against a primary insurer based on a settlement and stipulated judgment which did not require an insurer to pay any amount to plaintiff.

In reversing the trial court's decision, the Court of Appeal distinguished the Hamilton decision by noting that ACE had paid an actual sum in excess of the Fireman's Fund policy limits to settle the underlying Franco lawsuit. The Court of Appeal reasoned as follows:

Although Isaacson addressed CIGA's statutory duties, the Hamilton opinion referenced the implications of Isaacson for cases directly involving insurers: "Isaacson indicates that when an insured, faced with the insurer's unreasonable refusal to pay a settlement demand within the policy limits and exposed to potential personal liability substantially beyond the policy limits, actually contributes payment to conclude the settlement (in which the insurer also participates), the insured may recover the amount of his or her payment from the insurer in an action for bad faith failure to settle. In those circumstances, a bad faith action may be brought by the insured, or the claimant as the insured's assignee, despite the absence of a litigated excess judgment." (Hamilton, supra, 27 Cal.4th at p. 731.) The court contrasted the facts of Hamilton, where the insured neither contributed to the settlement nor risked execution of an excess judgment: "Where, as here, the insured, without the insurer's agreement, stipulates to a judgment against it in excess of both the policy limits and the previously rejected settlement offer, and the stipulated judgment is coupled with a covenant not to execute, the agreed judgment cannot fairly be attributed to the insurer's conduct, even if the insurer's refusal to settle within the policy limits was unreasonable." (Ibid.)

Here, the situation is more akin to Isaacson than Hamilton—Ace American alleged that Fireman's Fund unreasonably refused to settle within policy limits, and as a result, Ace American (as Warner Brothers' subrogee) actually contributed to the eventual settlement, in which Fireman's Fund, as the primary insurer, also participated. There was no stipulated judgment or agreement not to execute, as in Hamilton. As the opinions in Hamilton and Isaacson indicate, this is a situation in which a bad faith action may be brought by the insured or the insured's assignee, "despite the absence of a [174] litigated excess judgment." (Hamilton, supra, 27 Cal.4th at p. 731; see also Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 1114 ["a judgment against the insured (or, if we read the Isaacson and Continental Casualty decisions correctly, a payment by the insured in settlement of a claim) is a condition to the insured's right to assign to the claimant a cause of action for bad faith against the insurer."].) We therefore reject the assertion in RLI, urged here by Fireman's Fund, that Hamilton requires entry of a judgment against the insured before a claim arises for equitable subrogation.

The Court of Appeal also reasoned as follows in support of its reversal of the trial court:

Ace American has alleged that Fireman's Fund unreasonably failed to settle the Franco action within policy limits, and that as a result, the eventual settlement of that case exceeded the policy limits. Ace American therefore has alleged that it was damaged in an ascertainable amount as a direct result of Fireman's Fund's failure to accept the Francos' reasonable, within-limits settlement offers. We see no persuasive reason to hold that either Warner Brothers or its assignee, Ace American, must suffer that loss with no remedy simply because the case reached an eventual settlement instead of being litigated through trial. Ace American's alleged damages are clear, liquidated, and certain, and Fireman's Fund participated in reaching the settlement. These facts set this case apart from Hamilton, Safeco, and Wolkowitz. As the Fortman court aptly noted, "Courts easily [can] distinguish equitable subrogation cases with facts suggesting a collusive settlement from [180] cases like this one in which the excess insurer actually paid a settlement." (Fortman, supra, 221 Cal.App.3d at p. 1402.)

Lastly, the Court of Appeals justified its decision based on California's strong public policy of encouraging settlements. The Court of Appeal concluded as follows:

In sum, we conclude that in an equitable subrogation action, "an excess insurer which has settled and discharged the insured's liability may recover from the primary insurer an amount in excess of the primary insurer's policy limits if the excess insurer can prove the primary insurer's unreasonable refusal to settle within its policy limits resulted in loss to the excess insurer in an amount in excess of the policy limits of the primary insurer it would not otherwise have had." (Northwestern Mut. Ins. Co. v. Farmers' Ins. Group (1978) 76 Cal.App.3d 1031, 1050.) An excess judgment is not a required element of a cause of action for equitable subrogation or breach of the duty of good faith and fair dealing; where the insured or excess insurer has actually contributed to an excess settlement, the plaintiff may allege that the primary insurer's breach of the duty to accept reasonable settlement offers resulted in damages in the form of the excess settlement. We therefore reverse the judgment sustaining Fireman's Fund's demurrer, and remand for further proceedings.

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