Supreme Court of Missouri Reverses Grant of Summary Judgment for Primary Insurer on Insured’s and Excess Insurer’s Bad Faith Claims in En Banc Decision

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Scottsdale Ins. Co. v. Addison Ins. Co., No. SC 93792 (Mo. Dec. 9, 2014).

Supreme Court of Missouri rules in an en banc decision that neither an excess judgment nor a failure to pay policy limits are essential elements of a claim for bad faith refusal to settle and that an excess insurer may recover on such a claim under theories of assignment and conventional or equitable subrogation.

               Plaintiffs Wells Trucking, Inc. and its excess insurer, Scottsdale Insurance Company, filed suit against Wells Trucking’s primary insurer, United Fire & Casualty Company and its wholly-owned subsidiary, Addison Insurance Company (collectively, “United Fire”), alleging that United Fire acted in bad faith in refusing to settle within its policy limits a wrongful death action against Wells Trucking arising out of an automobile accident.  At the time of the accident, Wells Trucking had a primary insurance policy with United Fire that had a $1 million liability limit.  Wells Trucking also had an excess insurance policy with Scottsdale with a $2 million liability limit.  The Scottsdale policy specified that it would not apply unless and until the underlying United Fire policy was exhausted.  It also provided that if Wells Trucking had any rights to recover any payment Scottsdale made under the policy, those rights would be transferred to Scottsdale.

Wells Trucking and Scottsdale alleged that the available information and evidence required United Fire to pay up to its policy limits to settle the wrongful death claim.  Despite numerous opportunities to settle for the policy limits, and demands from Wells Trucking and Scottsdale to do so, United Fire refused.  Eventually, the decedent’s family withdrew their $1 million settlement demand and raised the demand to $3 million.  Thereafter, United Fire agreed to tender the $1 million policy limits toward the $3 million demand.  Following a successful mediation, the suit was ultimately settled for a total of $2 million, with each of United Fire and Scottsdale tendering $1 million.  Wells Trucking assigned to Scottsdale its rights to pursue a bad faith refusal to settle claim against United Fire and agreed to pursue a bad faith failure to settle claim for the benefit of Scottsdale.

Scottsdale asserted four theories allowing it to raise a bad faith refusal to settle claim:  (1) assignment from Wells Trucking; (2) conventional subrogation; (3) equitable subrogation; and (4) a duty of good faith owed directly to Scottsdale.  The trial court entered summary judgment for United Fire, ruling that an excess insurer cannot recover from a primary insurer under a claim of bad faith refusal to settle and that bad faith refusal to settle could not be proven because United Fire paid its policy limits and Wells Trucking did not suffer an excess judgment.  Wells Trucking and Scottsdale appealed, and the case was transferred to the Supreme Court of Missouri, which reversed and remanded for the reasons explained below.

The Supreme Court ruled that an excess judgment is not required to maintain an action against an insurer for bad faith refusal to settle.  The Court described bad faith as “the intentional disregard of the financial interest of the insured in the hope of escaping the responsibility imposed upon the insurer by its policy” (internal quotations omitted) (emphasis in opinion).  The Court explained that the insured’s financial interests “are impacted by an insurer’s breach of duty whether the breach results in an excess judgment or an excess settlement.”  The Court also explained that “an insurer’s obligation to act in good faith when settling a third-party claim is part of what the insured pays for with its premiums . . . [w]hen the insurer refuses to settle, the insured loses the benefit of an important obligation owed by the insurer . . . regardless of whether there is an excess judgment or settlement” (internal quotations omitted). 

Similarly, the Court ruled that a claim for bad faith refusal to settle may proceed even when a claim is ultimately settled for the policy limits.  “An insurer may be liable over and above its policy limits if it acts in bad faith . . . in refusing to settle the claim against its insured within its policy limits when it has a chance to do so” (internal quotations omitted) (emphasis in opinion).  Wells Trucking and Scottsdale claimed that United Fire had multiple opportunities to settle the wrongful death claim for the $1 million policy limits but wrongfully refused to do so.  By the time United Fire agreed to tender the policy limits, the decedent’s family would no longer settle for only $1 million, which required Scottsdale to tender an additional $1 million toward the settlement.  The Court concluded that “United Fire’s mere payment up to the policy limits does not make Wells Trucking whole or put Wells Trucking in the same position as if United Fire had performed its obligations to settle in good faith.”

After ruling that Wells Trucking, as the insured, has a claim against United Fire for bad faith refusal to settle, the remaining question for the Court was whether Scottsdale could also assert such a claim.  The Court found that it could do so under multiple theories.  First, the Court ruled that Scottsdale could pursue a bad faith refusal to settle claim against United Fire under the assignment from Wells Trucking.  The Court explained that although torts “based on contracts of a purely personal nature, such as promises or marriage[,] are not assignable . . . [a]n action . . . aris[ing] from a contract of insurance . . . is not of a purely personal nature” and therefore could be assigned (internal quotations omitted).

Second, the Court ruled that Scottsdale could pursue a bad faith refusal to settle claim against United Fire under a conventional subrogation theory.  Wells Trucking’s policy with Scottsdale contained a provision granting Scottsdale a right to subrogate any recovery by Wells Trucking of payment Scottsdale made under the policy.  Thus, the Court found, “[b]ecause Scottsdale paid $1 million toward the settlement of the wrongful death claim under the policy, it has a right under the policy to recover that amount through Wells Trucking and, therefore, is able to invoke the doctrine of conventional subrogation.”

Third, the Court ruled that in addition to Scottsdale’s right to subrogation under the insurance policy, Scottsdale also had a right to pursue its claim under a theory of equitable subrogation.  “A right to equitable subrogation belongs to one, not a volunteer, who pays another’s debt, to recover the amount paid, which in good [conscience] should be paid by the one primarily responsible for the loss” (internal quotations omitted).  The Court found that good conscience required United Fire to suffer the loss, since allegedly it was United Fire’s bad faith that resulted in Scottsdale’s need to contribute $1 million toward settling the wrongful death claim.  “An insurer’s duty to act in good faith does not simply disappear when a prudent insured has obtained excess coverage.  Regardless of the existence of an excess insurer, a primary insurer should be held liable when it acts in bad faith in refusing to settle within its policy limits.” 

The Court also noted, as other jurisdictions have, that allowing an excess insurer to bring a bad faith refusal to settle claim against a primary insurer discourages primary insurers from “gambling with the excess insurer’s money when potential judgments approach the primary insurer’s policy limits” (internal quotations omitted).  The Court noted, however, that “allowing an excess insurer to bring an action under equitable subrogation does not create a new duty or impose new obligations on the primary insurer; it merely substitutes the excess insurer for the insured.”  The Court concluded that “Scottsdale, as the party that actually paid the loss caused by United Fire’s bad faith, should be equitably subrogated to the rights of Wells Trucking and able to bring a bad faith refusal to settle action in the name of Wells Trucking.”

The Court declined to recognize a cause of action for breach of a primary insurer’s independent duty to settle in good faith to an excess insurer.  “The duty to settle in good faith arises from the insurance contract between the insured and the insurer . . . but there is no contractual relationship between the primary and excess insurers.”  Thus, the Court determined that “[b]ecause this Court finds that a bad faith refusal to settle action may be assigned and that an excess insurer may recover for an insurer’s breach of its duty to the insured under contractual and equitable subrogation, the Court declines to find primary insurers owe a duty directly to excess insurers.”

 

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