In RSUI Indemnity Company v. American States Insurance Company, -- F.3d --, 2014 WL 4783390 (5th Cir. Sept. 25, 2014), the United States Court of Appeals for the Fifth Circuit held that an excess insurer (RSUI) could maintain a subrogation cause of action under Louisiana law against a primary insurer (American States) for alleged bad faith failure to adequately defend the insured despite the fact that there was no adjudicated excess judgment in the underlying suit. In so holding, the court reversed the district court’s grant of summary judgment for the primary insurer finding that where the excess insurer alleged that the primary carrier’s failure to defend led to an increased settlement exposure for the excess carrier, the excess carrier could maintain a subrogated cause of action against the primary insurer for any payment above what it otherwise would have been required to pay.
The case arose after a motor vehicle accident in which the driver allegedly at fault was working for Ameraseal, LLC. at the time of the accident. Ameraseal was covered by a $1 million primary liability policy with American States, and a $4 million excess policy with RSUI. In June 2011, the victim of the accident filed suit against Ameraseal and the driver (collectively the insured), and American States undertook the defense. American States did not inform RSUI of the suit until December of 2011.
The original defense counsel appointed by American States apparently believed that Ameraseal’s exposure was no more than $500,000 – an amount well within American States’ primary policy limits. During discovery the defense counsel did not depose the plaintiff, her doctors, or potential witnesses who later claimed that the victim was at least partly at fault for speeding and failing to try and avoid the accident, or obtain an independent medical evaluation of the plaintiff. Defense counsel also failed to oppose plaintiff’s motion for partial summary judgment on liability, which was granted.
After the court granted partial summary judgment on liability, American States notified RSUI of the suit and retained new defense counsel. The newly-appointed defense counsel’s analysis of Ameraseal’s potential liability indicated that the settlement value of the claim was well in excess of American States’ $1 million primary policy and that it could exceed the full $4 million limits of RSUI’s excess policy. Thereafter, in response to a $5 million settlement demand from plaintiff, American States paid its entire $1 million primary policy limits in exchange for a release of American States and an agreement from plaintiff not to seek damages directly from the insured in excess of the $4 million limit of the RSUI policy. In turn, RSUI settled with the plaintiff for $2 million and secured a full release.
RSUI then filed suit against American States, “alleging a claim based on American’s bad faith failure to defend the insured properly in the underlying suit.” Id. at *2. RSUI’s “theory was that American’s failure to investigate and take appropriate defensive actions drove up the settlement value of the case, exposed the insured to additional liability, and left RSUI with no choice but to reach a settlement . . . that was excess to the primary policy limit.” Id. American States moved for summary judgment, which the district court granted on the “reasoning that the absence of an adjudicated excess judgment as to damages was dispositive and barred RSUI’s claim.” Id. RSUI appealed. The Fifth Circuit considered “the purely legal question [of] whether, in the absence of an adjudicated excess judgment . . . [an excess carrier] may maintain its subrogated bad faith claim against the primary insurer to recover monies it paid in settlement of claims . . . above the primary policy limit.” Id. at *3.
The Fifth Circuit recognized that a primary carrier can be responsible for damages beyond its coverage layer that arise “‘as a direct consequence of [the primary insurer’s] bad faith failure to perform’” Id. at *4 (quoting Great Southwest Fire Ins. Co. v. CAN Ins. Cos., 557 So2d 966 (La. 1990)). The Fifth Circuit also emphasized that an insurer’s duty to defend is separate and broader than an insurer’s duty to settle, and that under either requirement the insurer is obligated to “protect its insured from excess liability.” Id. at *3 (citations omitted).
Thus, the Fifth Circuit rejected the district court’s finding that “there can be no claim for bad faithfailure to settle unless damages have been determined in an adjudicated excess judgment against the insured.” Id. at *4 (emphasis added) and found that the cases relied on by the district court were distinguishable “insofar as they lack a nexus between the primary insurers’ alleged bad faith . . . and resulting exposure to excess liability.” Id. Instead, the circuit court held that “it is clear that an excess insurer may, through subrogation, assert claims against a primary insurer to ‘recover from the primary insurer for acts which make the excess insurer’s contract and liability more burdensome’” Id. at *6 (quoting Great Southwest, 557 So.2d at 971). Applying this standard the Fifth Circuit reversed the district court, and remanded for a determination of RSUI’s bad faith claim on the merits.
This case is significant because it recognizes a primary insurer’s duty to excess carriers to effectively manage the defense of their common insured to avoid excess liability and confirms the Fifth Circuit’s adherence to what it described as “the general principle” that
[a]n insurer whose bad faith causes an excess judgment or necessitates an excess settlement is primarily liable to the insured on that account, and the excess insurer is entitled upon discharging the insured’s obligations, to assert the insured’s rights against the primary insurer.
Id. (quoting William T. Barker & Ronald D. Kent, New Appleman Insurance Bad Faith Litigation§ 2.09 (2d ed. 2014)(emphasis added)).