(Federal Court of Appeals Certifies Question to Nevada Supreme Court Regarding whether Nevada Law Permits an Excess Insurer to Sue a Primary Carrier Based on Equitable Subrogation for the Primary Carrier's Failure to Settle a Lawsuit Within Primary Limits)
(October 2024) - In North River Ins. Co. v. James River Ins. Co., __ F.4th __(9th Cir. August 28, 2024), the U.S. Court of Appeals for the Ninth Circuit certified the following question to the Nevada Supreme Court:
Under Nevada law, can an excess insurer state a claim for equitable subrogation against a primary insurer where the underlying lawsuit settled within the combined policy limits of the insurers?
The parties' dispute arose out of James River's failure to settle a wrongful death lawsuit involving the murder of Marcus Collins at an apartment complex owned by the insured, Alhambra Place Partnership, LP dba Shelter Island Apartments ("Alhambra Place"). The Estate of Mr. Collins filed a lawsuit against Alhambra Place for negligence and wrongful death (the "Estate lawsuit"). Alhambra Place tendered the defense of the lawsuit to its primary insurer, James River, which agreed to defend it. The James River policy included limits of $1 million. North River Insurance Company ("North River") issued an excess policy above the James River policy affording limits of $10 million.
James River rejected settlement demands within its policy limits and the Estate lawsuit ultimately settled for $5 million with a combined contribution of the James River limits of $1 million and North River's payment of $4 million. Subsequently, North River filed a lawsuit in U.S. District Court in California against James River for equitable subrogation, arguing that it stood in the shoes of the insured, Alhambra Place, and because James River failed to settle the Estate lawsuit within its limits when it had an opportunity to do so, North River was entitled to recover the amount of its contribution to the settlement of the lawsuit, i.e., $4 million.
The District Court granted a motion to dismiss filed by James River in response to the North River lawsuit. The District Court determined that Nevada law applied to the lawsuit. Further, under Nevada law, North River could not maintain an action for equitable subrogation against James River.
In certifying the question of whether Nevada law permitted a claim for equitable subrogation against a primary insurer, the Court of Appeals stated as follows:
In this appeal, we must determine whether a material conflict exists between Nevada and California law, such that a choice-of-law analysis is required. See Washington Mut. Bank, 24 Cal. 4th at 919-20. Federal courts sitting in diversity presumptively apply the choice-of-law rules of the forum state, so California choice-of-law rules would apply here. See First Intercontinental Bank v. Ahn, 798 F.3d 1149, 1153 (9th Cir. 2015).
"The California Supreme Court has indicated that the governmental interest test is 'the appropriate general methodology for resolving choice-of-law questions' in California." Cassirer, 69 F.4th at 560 (quoting McCann v. Foster Wheeler LLC, 48 Cal. 4th 68, 83, 105 Cal. Rptr. 3d 378, 225 P.3d 516 (2010)). Under California's governmental interest test, we first ask whether the relevant law of the two jurisdictions "is the same or different." Chen, 7 Cal. 5th at 867 (cleaned up). If the answer to this first question is that the laws of the two jurisdictions are the same, we do not need to proceed any further, as California law would apply. Washington Mut. Bank, 24 Cal. at 920; see Mazza v. Am. Honda Motor Co., 666 F.3d 581, 591 (9th Cir. 2012), overruled in part on other grounds by Olean Wholesale Grocery Coop, Inc. v. Bumble Bee Foods LLC, 31 F.4th 651 (9th Cir. 2022) (holding that a conflict of law issue "only arises if differences in state law are material, that is, if they make a difference in [the] litigation"). If the answer is that the laws of the two jurisdictions are materially different, then we must proceed with the remainder of the choice-of-law analysis. See Chen, 7 Cal. 5th at 867-68.
Thus, in order to resolve this case, we must determine whether there is a material difference between Nevada and California law. We therefore need to ascertain whether Nevada law permits or prohibits equitable subrogation claims by an excess insurer against a primary insurer when the underlying settlement is within the insurers' combined policy limits. California law permits such claims. See, e.g., Ace Am. Ins. Co. v. Fireman's Fund Ins. Co., 2 Cal. App. 5th 159, 183, 206 Cal. Rptr. 3d 176 (2016); RLI Ins. Co. v. CNA Cas. of California, 141 Cal. App. 4th 75, 80, 45 Cal. Rptr. 3d 667 (2016). Under the current state of Nevada law, it is not clear whether Nevada recognizes a claim for equitable subrogation in these circumstances.
Nevada generally recognizes the doctrine of equitable subrogation. See In re Fontainebleau Las Vegas Holdings, 128 Nev. 556, 572 n.8, 289 P.3d 1199 (2012) ("This court has recognized the doctrine of equitable subrogation in a variety of situations."). And, where Nevada law is less developed on an issue, such as equitable subrogation, Nevada courts have looked to the law of other states, including California. See, e.g., Mort v. United States, 86 F.3d 890, 893 (9th Cir. 1996) ("Where Nevada law is lacking, its courts have looked to the law of other jurisdictions, particularly California, for guidance. In accordance with this practice, we have looked to the law of other states when necessary to supplement Nevada's law on equitable subrogation.") (internal citations omitted); Zurich Am Ins. Co. v. Aspen Specialty Ins. Co., 2021 U.S. Dist. LEXIS 148739, 2021 WL 3489713 at *3 (D. Nev. Aug. 6, 2021) ("[The court] look[s] to California law for guidance because the Supreme Court of Nevada often does that when deciding an issue of first impression.").
The district court determined, however, that Nevada law diverged from California law here. The court concluded that two unpublished decisions from the Nevada Supreme Court prohibited an excess insurer from bringing an equitable subrogation claim against a primary insurer when the underlying settlement fell within the insurers' collective policy limits. The first case, St. Paul Fire & Marine Ins. Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 521 P.3d 418, 2022 Nev. Unpub. LEXIS 863, 2022 WL 17543613 (Nev. 2022), held that an excess insurer could not bring an equitable subrogation claim against another, equal-level excess insurer.
. . .
Importantly, however, these cases were unpublished. Under Nevada Rule of Appellate Procedure 36(c), the Nevada Supreme Court can "decide cases by either published or unpublished disposition." If the court decides not to publish, the "unpublished disposition, while publicly available, does not establish mandatory precedent except in a subsequent stage of a case in which the unpublished disposition was entered, in a related case, or [to establish issue or claim preclusion]." Nev. R. App. P. 36(c)(2) (emphasis added). However, a "party may cite for its persuasive value, if any, an unpublished decision[.]" Nev. R. App. P. 36(c)(3). St. Paul and Aspen are thus not "mandatory precedent" and have no compulsory binding effect on this case.
Additionally, neither case was decided by the full Nevada Supreme Court: St. Paul was decided by a six-justice court, see 2022 Nev. Unpub. LEXIS 863, 2022 WL 17543613 at *5 n.4, and Aspen involved a petition for a writ of mandamus that was decided by a three-justice court, see 528 P.3d 287, 2023 WL 3185274. Further, there are some meaningful differences between those cases and the one here. In the underlying litigation there, the insurers negotiated a settlement after a jury verdict but before any award of punitive damages, whereas here, the underlying case never went to trial. And the present appeal arose from the grant of a Rule 12(b)(6) motion to dismiss, before any discovery was conducted, whereas St. Paul arose from the grant of summary judgment, after the close of discovery.
Left with no clearly controlling precedent, we believe that the Nevada Supreme Court should be the first to determine whether equitable subrogation is permitted between two insurers in this context. Certification is thus appropriate. See Nev. R. App. P. 5(a). We respectfully request that the court answer the question presented in this order.
In summary, if the Nevada Supreme Court finds that a claim for equitable subrogation is permitted under Nevada law, which is in line with California law, the District Court will apply California law and permit North River to prosecute its lawsuit for equitable subrogation against James River based on its failure to settle the Estate lawsuit within its primary policy limits.
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