Liquidated Judgment Not Necessary for Equitable Subrogation

California’s Ninth Circuit Court of Appeals finds that the absence of a litigated judgment did not preclude an equitable subrogation claim from being brought by an excess insurer for bad faith failure to settle when the excess insurer actually contributed to the settlement.

In RSUI Indemnity Co. v. Discovery P&C Ins. Co., 649 Fed.Appx. 534 (9th Cir. 2016), the primary insurer unreasonably had refused to pay a settlement demand within policy limits. In order to achieve a settlement, the excess insurer paid a portion of the settlement within its policy limits. The question before the Court was whether an excess insurance company could contribute to the settlement on behalf of the insured, and then sue the primary insurer to recover the amount of the settlement under the theory of equitable subrogation. The Ninth Circuit answered that question in the affirmative.

Interpreting California law, the Ninth Circuit predicted that the California Supreme Court would adopt the rule that had previously been announced by the California Court of Appeals in Fortman v. Safeco Ins. Co., 221 Cal.App.3d 1394, 271 Cal.Rptr. 117 (Cal. Ct. App. 1990). In Fortman, the Court held that an excess insurer’s equitable subrogation claim did not depend on the entry of an excess judgment to prove damages to the insured. Adopting the rule in Fortman, the Court found that the rule promoted the settlement of claims, promoted excess insurers contribution to settlements, and was favorable both to the insured and to claimants. The Court found that the absence of a litigated judgment did not preclude an equitable subrogation action for bad faith failure to settle when the excess insurer actually contributed to the settlement.