A California appeals court recently sharpened the teeth of
insurance companies' duty to settle [Ace Am. Ins. Co. v. Fireman's Fund Ins.
Co. (2016) 2 Cal. App. 5th 159]. By broadening the
situations in which an insurer can be held liable for failing to
settle within limits to include cases that never go to verdict or
judgment, this ruling protects policyholders from unreasonable
insurer decision-making without forcing them into risky trials.
With a clear split among the California Appellate Divisions, this
issue is now ripe for Supreme Court review.
On the set of Warner Bros.' superhero film "Green Lantern," a stunt gone wrong injured
a special effects supervisor, who then sued Warner Bros.
Entertainment Inc. and related entities to recover damages for his
injuries. Warner Bros. had a $2 million primary policy and $3
million umbrella policy with Fireman's Fund, and an excess
policy of $50 million with Ace American to respond to the
Two years later, although the plaintiffs made several settlement
demands that were within the policy limits of the two Fireman's
Fund policies, Fireman's Fund rejected those settlement
overtures. Six months later, the lawsuit settled for "an
amount substantially in excess" of the $5 million limits of
the two Fireman's Fund policies. Ace American contributed to
the settlement the amount excess to the Fireman's Fund policy
Ace American then sued Fireman's Fund for equitable
subrogation and breach of the covenant of good faith and fair
dealing (standing in the place of the insured), contending that
Fireman's Fund had wrongfully failed to accept a reasonable
settlement demand within its policy limits.
Fireman's Fund demurred on the ground that an "excess
judgment" is required before an excess insurer can sue a
primary insurer for failing to settle within policy limits, citing
RLI Ins. Co. v. CNA Cas. of California (2006) 141 Cal.
App. 4th 75 (Division 2). Fireman's Fund argued that, because
Warner Bros. settled the case, no judgment issued, and therefore
Ace American has no right to equitable subrogation. Ace American,
relying on Fortman v. Safeco Ins. Co. (1990) 221 Cal. App.
3d 1394 (Division 1), opposed, but the trial court sustained
Fireman's Fund's demurrer following the reasoning in
The Court of Appeals for Division 4 reversed with an extensive
18-page analysis of the issue, including a lengthy discussion into
the RLI and Fortman decisions, California Supreme
Court cases they rely on, other rulings in California, extra
jurisdictional decisions, and treatises weighing in on the issue.
The court concluded that an excess insurer contributing to an
excess settlement may assert a claim against a primary carrier for
equitable subrogation even if no "excess judgment" has
issued. An "excess judgement" is not a prerequisite to
such a claim.
This decision puts greater pressure on a primary carrier to
accept a reasonable settlement demand within policy limits, which
the court acknowledged met public policy goals. Under this rule, a
primary carrier that rejects such a demand will be obligated to
cover the excess amount even if the case is resolved by settlement
prior to judgment. However, this is not an unqualified win for
policyholders. With several Appellate Divisions coming to radically
different conclusions, this issue is ripe for review by the
California Supreme Court. Fireman's Fund filed a petition for
review on September 13, 2016, which is currently pending. It's
not clear yet whether this decision will be the one to trigger that
review, but we can look forward to this issue landing on the
mahogany desks at 350 McAllister Street in the near future.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
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