A California appeals court recently sharpened the teeth of insurance companies’ duty to settle [Ace Am. Ins. Co. v. Fireman’s Fund Ins. Co. (2016) 2 Cal. App. 5th 159].  By broadening the situations in which an insurer can be held liable for failing to settle within limits to include cases that never go to verdict or judgment, this ruling protects policyholders from unreasonable insurer decision-making without forcing them into risky trials.  With a clear split among the California Appellate Divisions, this issue is now ripe for Supreme Court review.

On the set of Warner Bros.’ superhero film “Green Lantern,” a stunt gone wrong injured a special effects supervisor, who then sued Warner Bros. Entertainment Inc. and related entities to recover damages for his injuries. Warner Bros. had a $2 million primary policy and $3 million umbrella policy with Fireman’s Fund, and an excess policy of $50 million with Ace American to respond to the accident.

Two years later, although the plaintiffs made several settlement demands that were within the policy limits of the two Fireman’s Fund policies, Fireman’s Fund rejected those settlement overtures. Six months later, the lawsuit settled for “an amount substantially in excess” of the $5 million limits of the two Fireman’s Fund policies.  Ace American contributed to the settlement the amount excess to the Fireman’s Fund policy limits.

Ace American then sued Fireman’s Fund for equitable subrogation and breach of the covenant of good faith and fair dealing (standing in the place of the insured), contending that Fireman’s Fund had wrongfully failed to accept a reasonable settlement demand within its policy limits.

Fireman’s Fund demurred on the ground that an “excess judgment” is required before an excess insurer can sue a primary insurer for failing to settle within policy limits, citing RLI Ins. Co. v. CNA Cas. of California (2006) 141 Cal. App. 4th 75 (Division 2). Fireman’s Fund argued that, because Warner Bros. settled the case, no judgment issued, and therefore Ace American has no right to equitable subrogation.  Ace American, relying on Fortman v. Safeco Ins. Co. (1990) 221 Cal. App. 3d 1394 (Division 1), opposed, but the trial court sustained Fireman’s Fund’s demurrer following the reasoning in RLI.

The Court of Appeals for Division 4 reversed with an extensive 18-page analysis of the issue, including a lengthy discussion into the RLI and Fortman decisions, California Supreme Court cases they rely on, other rulings in California, extra jurisdictional decisions, and treatises weighing in on the issue.  The court concluded that an excess insurer contributing to an excess settlement may assert a claim against a primary carrier for equitable subrogation even if no “excess judgment” has issued.  An “excess judgement” is not a prerequisite to such a claim.

This decision puts greater pressure on a primary carrier to accept a reasonable settlement demand within policy limits, which the court acknowledged met public policy goals. Under this rule, a primary carrier that rejects such a demand will be obligated to cover the excess amount even if the case is resolved by settlement prior to judgment.  However, this is not an unqualified win for policyholders.  With several Appellate Divisions coming to radically different conclusions, this issue is ripe for review by the California Supreme Court.  Fireman’s Fund filed a petition for review on September 13, 2016, which is currently pending.  It’s not clear yet whether this decision will be the one to trigger that review, but we can look forward to this issue landing on the mahogany desks at 350 McAllister Street in the near future.