A primary liability carrier usually owes no duty to excess insurers, even though those insurers bear the cost of excess judgments. If the primary insurer acts improperly, then, in most states, the excess carrier may pursue an equitable subrogation claim— but only to assert breaches of duty to the insured. One recent action threatened to extend that duty, posing the question of whether an insurer with knowledge of an excess policy must help its insured “benefit” from that coverage. The court did not resolve the question, but there are other signs that the rights of excess insurers might be growing.
The issue grew out of an injury caused by a weed trimmer manufactured by Sufix, Inc. Sufix had $1 million in liability coverage from Hartford Casualty Insurance Company and $10 million in excess coverage from National Surety Corporation. Hartford engaged in pretrial negotiations and mediation with the injured plaintiff, but, a few weeks before the trial, it rejected a demand for the policy limit. Hartford notified Sufix that it faced a potential excess judgment, but neither Hartford nor Sufix gave notice of these developments to National Surety. A few weeks later, a jury returned an award of $5.8 million.
National Surety sued Hartford for bad faith in the Western District of Kentucky. Among other things, it sought to hold Hartford responsible for the insured’s failure to provide timely notice of the possible excess judgment. It originally asserted that Hartford, as primary insurer, had breached a duty to investigate whether the insured had excess insurance. The Sixth Circuit rejected that claim in 2007, finding that such a duty would incorrectly “presume a direct obligation … to the excess insurer.” On remand, National Surety argued that Hartford actually knew that Sufix had an excess policy, “yet failed to use this information to benefit Sufix.”
National Surety did not spell out how it thought Hartford should have “used” that information, but only one possibility presents itself: Hartford could “benefit” Sufix by advising it to get its excess carrier involved in the defense. National Surety argued, in other words, that Hartford might be liable, because its insured failed to give notice under a policy issued by another company.
In October 2012, in National Surety Corp. v. Hartford Casualty Ins. Co., the Sixth Circuit rejected that argument and granted summary judgment. It did so on the ground that National Surety had failed to establish an element of bad faith under Kentucky law: “consciousness of wrongdoing or reckless disregard.” The Court did not rule out the possibility that, under different circumstances (or in a different state), a primary insurer might be liable for an insured’s breach of an excess policy.
Also in October, in Great American E & S Ins. Co. v. Quintairos, Prieto, Wood & Boyer, the Supreme Court of Mississippi held that an excess insurer could bring a subrogation action against the lawyers that represented its insured, but it could not assert a direct claim for malpractice, because it was not a client. But in Ace American Ins. Co. v. Sandberg, Phoenix & Von Gontard, the Southern District of Illinois refused to dismiss a similar malpractice claim, on the ground that an excess policy that provides coverage above a self-insured retention might give the insurer the same rights as a primary carrier.
In short, the job of defining the rights of an excess carrier has not yet been completed.