Can an excess carrier go ahead and fund an excess primary limits settlement and then assert a claim for bad faith against the primary insurer who previously refused to accept and fund a prior in-limits policy demand? On August 5, a Court of Appeal in Ace American Ins. Co. v. Fireman’s Fund Ins. Co., Case No. B264861 (Cal. Ct. App. Aug. 5, 2016) held that such claims may be asserted by the excess carrier even without an excess judgment—a settlement will do. This is a good development for policyholders, as it will encourage settlements by providing those with claims against carriers more options to resolve their disputes.

The facts of the case are fairly straightforward. The plaintiff in the underlying case was badly injured during a special effects accident on a film set. He sued Warner Brothers, who tendered the defense to its primary carrier Fireman’s Fund, which issued Warner Brothers both a primary and umbrella policy. During the litigation, plaintiff offered to settle multiple times within policy limits of the Fireman’s Fund policies. It was later alleged that Fireman’s Fund “failed and/or refused to pay” those settlement demands. The parties ultimately settled for significantly more than the primary policy, requiring the excess insurer above the Fireman’s Fund Umbrella, Ace American, to fund part of the settlement.

Ace American then secured an assignment of rights from the insured and filed a lawsuit for equitable subrogation and breach of the covenant of good faith and fair dealing against Fireman’s Fund. After all, the only reason it had to pay any part of the settlement was Fireman’s Fund’s refusal to accept the in-limits demand. But this was where the conflicting law came into play. Fireman’s Fund argued on demurrer that without an excess judgment, it could not be sued for bad faith or equitable subrogation.

Before Ace American, there were two decisions within the Second District Court of Appeal that had similar facts, but completely opposite outcomes. Ace American pointed to Fortman v. Safeco Ins. Co. (1990) 221 Cal.App.3d 1394, where the Court held that equitable subrogation claims against a primary insurer could progress even with just a settlement. Fireman’s Fund relied on RLI Ins. Co. v. CNA Casualty of California (2006) 141 Cal.App.75, where the Court held that an excess judgment was required before a suit for equitable subrogation would lie against a primary insurer, relying on earlier California Supreme Court decisions Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, and Isaacson v. California Ins. Guaranty Assn. (1988) 44 Cal.3d 775.

The trial court agreed with Fireman’s Fund and sustained its demurrer without leave to amend, but the Court of Appeal reversed. It was an extensive opinion that analyzed over a dozen opinions in this area, both in and out of California. The Court rejected RLI, finding it misinterpreted the Supreme Court’s holding in Hamilton, where the Court had determined that a stipulated settlement with a covenant not to execute was not binding on the insurer as to damages suffered by an insured as a result of a contract breach. Instead the Ace American court relied on the holding in Fortman, where the court held that a breach of contract and bad faith case is actionable even without an excess judgment, so long as the excess insurer can show it actually paid an amount in excess of the primary insurer’s limits.

There is an evident conflict between the Court of Appeal divisions in the Second Appellate District which perhaps the California Supreme Court might address if this decision is further appealed. We prefer the approach taken by the Ace American court, which allows more options for the insured. In fact, the Court expressly recognized the importance of this ruling to policyholders when it stated, “Moreover, our decision protects insureds, because insurers whose mishandling of settlement offers causes damages will be liable for the losses they cause.” A ruling to the contrary would permit insurers to play fast and loose in early settlement negotiations, forcing the insured or an excess carrier to contribute to a settlement, and then be insulated from a contribution or later breach of contract and bad faith action if the case settles before judgment.