Equitable Subrogation Requires Subrogee to Stand in the Shoes of the Insured
In Preferred Professional Insurance Company v. The Doctors Company, 2018 COA 49, Court of Appeals No. 17CA0405, Colorado Court of Appeals (April 5, 2018), because the insured would have to prove bad faith in an action against his primary insurer based on the insurer’s refusal to settle, the primary insurer argued that the excess insurer must also plead and prove such bad faith. The court surmised:
“Suppose that an injured party sues a person who has both primary and excess insurance covering the claim. The injured party offers to settle for an amount within the primary coverage limit. The primary insurer exercises its contractual, discretionary right not to accept the settlement. But the excess insurer, perhaps spooked by the prospect of a judgment exceeding the primary coverage limit, pays the settlement demanded by the injured party. When the excess insurer sues the primary insurer to recover the amount paid in settlement, claiming that the primary insurer should have accepted the settlement offer, what sort of claim may the excess insurer assert? And must the excess insurer plead and prove that the primary insurer acted in bad faith in declining to settle?”
Preferred Professional Insurance Company (PPIC) is the excess insurer that paid the settlement. The Doctors Company (TDC) is the primary insurer that declined to settle. But while PPIC purported to bring a claim of equitable subrogation against TDC, it disavowed any intent to proceed on the legal theory that it stands in the insured’s shoes. And it did not plead or attempt to show that TDC acted in bad faith. Instead, PPIC’s theory is that general equitable principles allow it to recover from TDC apart from any rights of the insured under his contract with TDC, and that it need not plead or prove that TDC acted in bad faith.
The district court accepted PPIC’s theory and granted summary judgment in its favor.
The undisputed facts establish that the parties both held separate professional liability policies for the same insured, Dr. Rupinder Singh. A medical malpractice suit was filed against Dr. Singh and other parties.
TDC defended Dr. Singh in the suit as required by its primary liability policy. The policy provided coverage up to a limit of $1 million. TDC’s policy required Dr. Singh’s consent before accepting any settlement offers, but TDC retained the discretion whether to accept or reject any such offers.
PPIC’s insurance policy was an “excess policy,” which would cover any losses that exceeded TDC’s $1 million coverage up to an additional $1 million. As an excess insurer, PPIC did not have any duty to defend Dr. Singh in the suit.
The plaintiff in the medical malpractice suit offered to settle the case with Dr. Singh for $1 million. Dr. Singh conveyed his desire to accept the settlement offer to both insurers, but TDC declined the plaintiff’s offer. PPIC told Dr. Singh he should accept, and it paid the $1 million settlement.
On appeal, TDC contended that the district court erred as a matter of law. TDC asserted that, under well-established Colorado insurance law, an equitable subrogation claim brought by an excess insurer against the primary insurer to recover the amount paid in settlement can only be derivative of the insured’s rights.
Subrogation is a creature of equity having for its purpose the working out of an equitable adjustment between the parties by securing the ultimate discharge of a debt by the person who in equity and good conscience ought to pay it. Equitable subrogation arises because it is imposed by courts to prevent unjust enrichment.
In insurance cases, equitable subrogation is often used as a loss-shifting mechanism, dependent on the rights, obligations, and duties between the parties as set forth in the insurance policy. Thus, a subrogated insurer has no greater rights than the insured, for one cannot acquire by subrogation what another, whose rights he or she claims, did not have.
Under the terms of an insurance policy, a primary insurer, to the exclusion of the insured, may have complete discretion to accept or reject settlement offers. However, in deciding whether to accept a settlement offer, the insurer must give at least as much consideration to the insured’s interests as it does to its own.
If Dr. Singh had a contractual right to bring a tort claim against TDC for breach of the insurance contract for alleged bad faith failure to settle. In that claim, Dr. Singh would be required to prove that TDC acted in bad faith.
Conversely, Dr. Singh could not recover against TDC for any liability he suffered if TDC’s settlement decisions were shown to have been objectively reasonable. A primary insurer does not guarantee that its decision as to settlement will end advantageously, but it owes to its insured the duty to exercise an honest discretion at the risk of liability beyond its policy limits. Premising liability on an insurer’s negligence for failure to settle reasonably reflects the quasi-fiduciary relationship that exists between the insurer and the insured by virtue of the insurance contract, which necessarily imposes a correlative duty on the part of the insurance company to ascertain all facts in making a decision to settle.
It has often been said that the equitable doctrine of subrogation places the subrogee in the precise position of the one to whose rights and disabilities he is subrogated. Based on this principle the excess insurer and subrogee stands in the same place as the insured.
Whether derivatively based or not, an equitable subrogation claim allows for recovery only against obligated parties. Conversely, equity will not impose on someone an obligation not otherwise required by law. Equitable subrogation is not an unchecked principle of conscience that allows recovery whenever it seems fair or right to make the defendant pay for the subrogor’s losses that defendant is not legally obligated to pay.
PPIC presented no good reason for ignoring the parties’ rights under the insurance contract. To the contrary, if PPIC were allowed to seek recovery without a showing that TDC acted in bad faith in ordinary circumstances such as alleged here, an excess carrier could accept a pretrial settlement offer within the primary insurer’s policy limits, knowing it could collect reimbursement from the primary carrier for whatever settlement amount it, as the “equitable subrogee,” paid. This outcome would occur regardless of whether the primary carrier had fulfilled its contractual duty to its insured to make settlement decisions reasonably and in good faith.
Were the Court of Appeal to accept PPIC’s argument that equitable subrogation applies where the excess insurer shows merely that it “had a reasonable, good faith belief that it should make the payment to settle the claim,” the Court of Appeal would subvert a primary insurer’s contractual right to control the insured’s case by effectively giving control of settlement decisions to the excess insurer. That would incentivize excess carriers to settle claims within primary policy limits without regard to damages or liability, and with no risk to them.
Without an assertion that TDC acted in bad faith, PPIC’s equitable subrogation claim is not legally viable. Therefore, because PPIC’s claim for recovery is not supported by law, the Court of Appeal reversed the district court’s order granting summary judgment for PPIC and remanded the case for entry of judgment of dismissal in TDC’s favor.
An excess insurer does not want the obligation of the primary insurer to defend the insured. It only wants to become involved if the exposure faced by the insured exceeds the primary limits. In this case the offer was for the primary limit that the primary did not want to accept. The excess, without evidence that the refusal was in bad faith, paid out its limit and then sued the primary insurer without cause. The Court of Appeal refused to subvert the primary insurer’s rights to control defense and settlement.
© 2018 – Barry Zalma
This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States. The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.
Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and email@example.com.
Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.
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