In responding to a certified question from the U.S. District Court, the Hawaii Supreme Court determined that an excess carrier can sue the primary carrier for failure to settle a claim in bad faith within primary limits. St. Paul Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 135 Haw. 449 (2015).
St. Paul, the excess carrier, and Liberty Mutual, the primary carrier, issued polices to Pleasant Travel Service, Inc. The primary policy covered up to $1 million.
Pleasant Travel was sued for damages resulting from an accidental death. St. Paul alleged that Liberty Mutual rejected multiple pretrial settlement offers within the $1 million primary policy limit. A trial resulted in a verdict of $4.1 million against Pleasant Travel. The action settled for a confidential amount in excess of the Liberty Mutual policy limit. St. Paul paid the amount in excess.
St. Paul then sued Liberty Mutual, alleging that Liberty Mutual acted in bad faith by rejecting multiple settlement offers within policy limits. Liberty Mutual moved for judgment on the pleadings, arguing St. Paul lacked standing to assert a claim for bad faith and that St. Paul had no claim against Liberty Mutual for equitable subrogation. The result of the motion was a certified question to the Hawaii Supreme Court.
In an opinion by its newest justice, Justice Wilson, the Supreme Court held that St. Paul could bring a cause of action as an excess insurer against Liberty Mutual, the primary insurer, under the doctrine of equitable subrogation. Hawaii had long recognized the doctrine of equitable subrogation as an appropriate remedy when equity so demanded.
Nevertheless, Liberty Mutual argued that St. Paul's claim should be dismissed because St. Paul had not paid a debt or satisfied some liability for which another party was primarily responsible. Liberty Mutual had defended Pleasant Travel against the accidental death claim and paid its policy limits. Accordingly, St. Paul did not pay for Liberty Mutual's liability but discharged its own contractual obligations to Pleasant Travel.
The Court responded by noting that Liberty Mutual, as the primary insurer, had an obligation to Pleasant Travel to pursue settlement. A breach of this duty included an insurer's unreasonable refusal to settle a claim on behalf of the insured.
Liberty Mutual also argued that St. Paul could not subrogate to the rights of Pleasant Travel. Pleasant Travel never faced direct liability for the amount of the verdict in excess of Liberty Mutual's policy limits because any such amount was within St. Paul's liability limit. Equitable subrogation, however, could be applied even without any showing that the insured had suffered any loss. Further, because an insured could recover from a primary insurer that refused reasonable settlement offers, the excess carrier, who discharged the insured's liability, stood in the shoes of the insured and was permitted to assert all claims against the primary carrier which the insured itself could have asserted.
The Hawaii Supreme Court canvassed decisions across the country and noted that the majority of jurisdictions have held that an excess insurer could seek relief from a primary insurer under equitable subrogation.
Finally, the public interest in encouraging reasonable settlement was best served by permitting an excess insurer to seek relief under the doctrine of equitable subrogation.
The St. Paul case nicely dovetails a prior decision by the federal district court, Northfield Ins. Co. v. Hoje Constr., et al., CV No. 05-00362SPK/LEK (D. Haw. Nov. 7 2005). There, the insurer sought a declaratory judgment on coverage obligations, but did not join all of the excess carriers, presumably because diversity jurisdiction would be destroyed. The insured moved to dismiss because all insurers were necessary and indispensable parties for deciding coverage obligations. Judge King agreed and granted the motion. St. Paul confirms the Hawaii Supreme Court's approval of the logic in Northfield and provides further ammunition for an insured bringing all carriers into one action to decide coverage obligations at one time.