Citing the Hawaii Supreme Court's decision in St. Paul Fire & Marine Ins. Co. v. Liberty Mut. Ins. Co., 135 Haw. 449, 353 P.3d 991 (2015), the California Court of Appeal determined that the excess carrier could pursue an equitable subrogation action alleging that the primary insurers' unreasonable failure to settle within policy limits resulted in a settlement exceeding policy limits, thereby damaging the excess carrier. Ace Am. Ins. Co. v. Fireman's Fund Ins. Co., 2016 Cal. App. LEXIS 647 (Cal. Ct. App. Aug 5, 2016).
John Franco suffered serious injury in a special effects accident while working on a film set. He and his wife sued Warner Brothers Entertainment, Inc. and related entities. Fireman's Fund provided primary insurance with a $2 million limit, and an umbrella policy with a $3 million limit. Ace American provided the Warner Brothers entities an excess policy with a $50 million limit.
Fireman's Fund defended the Warner Brothers entities. Franco made settlement demands within the limits of Fireman's Fund's policies. Fireman's Fund refused such demands. Subsequently, Franco settled the lawsuit for an amount substantially in excess of policy limits. Fireman's Fund consented to the settlement and contributed to it. Ace American funded the amounts in excess of Fireman's Fund's policies' limits.
Ace American then filed suit against Fireman's Fund for equitable subrogation and breach of the covenant of good faith and fair dealing. Fireman's Fund demurred. Fireman's Fund argued an excess insurer could only sue for equitable subrogation if there was a judgment against the insured that exceeded the limits of the primary policy. Because the Franco lawsuit had settled and there was no judgment against Warner Brothers, Fireman's Fund argued, Ace American could not sue for equitable subrogation.
The California Court of Appeal noted that an insurer's cause of action for equitable subrogation included the following: Ace American had paid the claim of the insured, Warner Brothers, to protect its own interest and not as a volunteer; Ace American suffered damages caused by Fireman's Fund's act or omission; and Ace American's damages were in a liquidated sum. The appellate court found no reason to hold that either Warner Brothers or its assignee, Ace American, must suffer a loss due to Fireman's Fund's failure to reach a reasonable settlement with no remedy simply because the case settled instead of being litigated through trial. Ace American's alleged damages were clear, liquidated, and certain.
The court noted that most other jurisdictions that had considered the issue found that an insured or excess insurer that contributes to a settlement can pursue the primary insurer for failing to accept reasonable settlement within primary limits. The court cited the Hawaii Supreme Court's St. Paul decision, noting the case involved a post-verdict settlement in excess of primary limits. The Hawaii Supreme Court stated "the public interest in encouraging reasonable settlement is best serviced by permitting an excess insurer to seek relief under the doctrine of equitable subrogation." St. Paul, 135 Haw. at 456.
Therefore, the court reversed the judgment sustaining Fireman's Fund's demurrer, and remanded the case for further proceedings.