Insurance Update – Excess Insurer’s Right To Assert Claim Against Primary Insurer

In St. Paul Fire & Marine Ins. Co., the Hawai`i Supreme Court addressed the following certified question from the United States District Court, District of Hawai`i:

May an excess liability insurer bring a cause of action, under the doctrine of equitable subrogation to the rights of the insured, against a primary liability insurer for failure to settle a claim against the mutual insured within the limits of the primary liability policy, when the primary insurer has paid its policy limit toward settlement?

The Supreme Court modified the question slightly and held that an excess insurer may bring an equitable subrogation claim against a primary liability insurer which is bad faith fails to settle within the primary policy’s policy limits, when the primary insurer has paid it limits toward settlement.

St. Paul and Liberty Mutual insured Pleasant Travel Service, Inc. (“Pleasant Travel”).  Liberty Mutual underwrote a primary liability policy for Pleasant Travel with limits of $1 million.  St. Paul was the excess insurer.

Pleasant Travel was sued for damages in connection with an accidental death.  St. Paul alleged that Liberty Mutual rejected multiple settlement offers within the $1 million primary policy limit.  At trial, a $4.1 million verdict was entered against Pleasant Travel.  St. Paul alleged that thereafter, the case was settled for an amount beyond Liberty Mutual’s $1 million policy limit, with St. Paul paying the excess.

St. Paul sued Liberty Mutual , alleging that Liberty Mutual acted in bad faith in rejecting the pretrial settlement offers within Liberty Mutual’s policy limits.  The Supreme Court stated three reasons for its holding in favor of the excess insurer.

First, Hawai`i courts broadly apply the doctrine of equitable subrogation “to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter.”  The Supreme Court noted that if excess insurers could not assert equitable subrogation claims under the circumstances of the case, the primary insurers would be able to “gamble” with the excess insurers’ money.  In such cases, primary insurers could unreasonably risk going to trial because they would know that their maximum exposure is their policy limits.

Second, the Supreme Court concluded that the majority of other states allow excess insurers to pursue equitable subrogation claims against primary insurers.

Third, allowing equitable subrogation claims protects the public interest by (1) upholding the Hawai`i Insurance Code’s requirement that the business of insurance requires all persons to “be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters.”  HRS, §431:1-102 (2005) and (2) promoting the duty of insurers “to accept reasonable settlements.”

St. Paul specifically addressed a relatively narrow situation involving an equitable subrogation claim asserted by an excess insurer against a primary insurer.  However, the broader principles of the case are useful to all insureds in emphasizing and reiterating that an insurer’s duty of good faith and fair dealing requires it “to accept reasonable settlements” and to refrain from “gambling” with other people’s money.