In KnightBrook Ins. Co. v. Payless Car Rental Sys., Inc., 2018 WL 1958661 (9th Cir. Apr. 26, 2018), the Ninth Circuit Court of Appeals affirmed the District of Arizona’s dismissal of a bad faith claim that was premised on KnightBrook Insurance Company's decision to seek equitable indemnification from its insured, Payless Car Rental Systems, Inc.
KnightBrook's equitable indemnity claim arose out of Payless's alleged negligence in failing to ensure that its rental car customer, who would eventually be involved in a serious accident, either declined or elected and paid for Supplemental Liability Insurance ("SLI") when signing his rental car agreement with Payless. After the accident, the driver sought confirmation from KnightBrook that SLI coverage would be provided and KnightBrook informed him that because he did not pay for the coverage at the time of the rental, he was not covered for the accident, notwithstanding any representations that Payless's desk agent might have made to the contrary. The driver was eventually sued by the injured parties, the McGills, but was able to settle by, in part, assigning to them his negligence, breach of contract, and bad faith claims against Payless and KnightBrook. The McGills, in turn, sued Payless and KnightBrook. KnightBrook, recognizing the risk of litigation because of Payless’s desk agent's alleged sloppiness, asked Payless to contribute 50% toward the McGills' demand of $970,000 to settle. Payless declined this invitation, despite KnightBrook's warnings that it would pursue indemnity claims against Payless if it did not contribute. Faced with substantial liability and no contribution from Payless, KnightBrook elected to pay the McGills the full $970,000 demand to resolve their case. As part of the settlement, the McGills assigned their rights in their negligence and breach of contract actions to KnightBrook.
As promised, KnightBrook pursued the McGills' action against Payless, attempting to recover its $970,000 settlement payment on a theory of equitable indemnity or restitution (i.e., the theory of "you got us into this mess"). Payless, in turn, asserted a bad faith counterclaim against KnightBrook. The Ninth Circuit affirmed the Arizona district court’s holding that KnightBrook had not breached its duties of "equal consideration, fairness, or honesty" to Payless by acquiring and prosecuting the McGills' action against Payless. KnightBrook believed that Payless truly had bungled the rental car agreement execution with the Payless customer, causing KnightBrook to foot the whole bill to settle the McGills’ claim.
The Ninth Circuit, in affirming the Arizona district court's decision to dismiss Payless’s counterclaim, reasoned that KnightBrook was not acting in bad faith because it only sought to recover the exact amount it paid in settlement. Notably, KnightBrook was not acting in bad faith because, rather than trying to avoid paying for its own culpable conduct, KnightBrook sought to "make itself whole for a loss it reasonably believed the insured had caused." Though a complicated case procedurally, this decision provides a meaningful data point for circumstances in which an insurer may seek indemnification from its insured after the insurer settles with an underlying plaintiff. Here, by not seeking to recover more than the actual settlement, and by giving the insured a chance to do the right thing, KnightBrook was able to move past a potentially troublesome bad faith counterclaim.
