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Insurer Gets More Than It Bargains For: Excess Insurer Recovers Because Of Primary Insurer’s Bad Faith Refusal To Settle

October 20, 2013

On October 1, 2013, the Missouri Court of Appeals, Western District, handed down its decision in Scottsdale Insurance Company  v. Addison Insurance Company (WD 75963).  It was the first time a court in Missouri was asked to address the question whether an excess insurer could recover from a primary insurer where the excess insurer was required to contribute to settle a claim when the primary insurer allegedly acted in bad faith by failing to settle the claim within its policy limits.

Earlier in the case, the trial court had entered summary judgment in favor of the primary insurer, Addison Insurance Company and United Fire & Casualty Company, on all counts pled by Scottsdale and the insured Wells Trucking.  Each count sought recovery of the amount Scottsdale had paid to help settle a lawsuit filed against Wells Trucking.  The Western District reversed the trial court’s decision and held that an excess insurer can recover the amount it contributed toward settlement from the primary insurer on a theory of equitable subrogation when the primary insurer has committed bad faith in failing to settle a claim within the primary insurer’s policy limits.

Before the plaintiffs in the underlying case were aware of the excess policy they demanded the $1 million limits available from the Addison/UFC policy.  The demand for limits was refused.  After being made aware of the excess policy the plaintiff in the underlying case again demanded limits available from the Addison/UFC policy.  Both the insured and Scottsdale demanded Addison/UFC settle the claim for their policy limits of $1 million.  Addison/UFC again refused to settle.

Prior to mediation the demand went from $1 million to $3 million.  At mediation the case was settled for $2 million with each carrier contributing $1 million.  Scottsdale expressly reserved its right to pursue Addison/UFC for bad faith failure to settle and obtained a written assignment of Wells’ bad faith claim.

Scottsdale filed a 7 count petition against Addison/UFC.  Addison/UFC filed a motion for summary judgment on all 7 counts.  The trial court granted summary judgment on all 7 counts.  Although there were a number of procedural issues that formed the basis for the court’s ruling it ultimately concluded as a matter of law that Wells could not establish two essential elements of a claim for bad faith, Missouri does not permit the assignment of a bad faith claim, there is no duty of good faith between an excess and primary insurer, Missouri does not permit an excess insurer to bring a lawsuit for bad faith against a primary insurer, an excess insurer is not a third-party beneficiary to a contract of insurance between a primary insurer,  and the insured and Scottsdale failed to state a claim for prima facie tort.

On appeal Scottsdale made a number of arguments but the one the Western District found persuasive was that Missouri should recognize an excess insurer’s right to pursue a primary insurer for bad faith failure to settle based on the legal theory of equitable subrogation.  The Western District found that in a bad faith situation, under equitable subrogation principles, the excess insurer is not enforcing a duty it is owed, but rather it is seeking to recover the amounts the primary carrier would have been required to pay its insured but for the excess insurer paying the tab.  The Western District did not believe it legally consistent to allow a primary insurer to benefit from its insured’s foresight to protect its assets by purchasing excess coverage.

Once again it should be stressed that in Missouri when an insurer makes the decision not to settle a case within limits it is running the risk of exposing itself to a claim for bad faith.  The pool of those who can recover for a primary insurer’s bad faith failure to settle has just gotten deeper.

Steve Coronado

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From → Case Notes, Insurance

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