Excess Insurer v. Primary Insurer: Supreme Court of Missouri Recognizes Right of Excess Insurer to Recover from Primary Insurer for Bad Faith Failure to Settle Within Policy Limits

Scottsdale Ins. Co. v. Addison Ins. Co., et al. 2014 WL 6958157 (Mo. banc. December 9, 2014)

In a matter of first impression, the Supreme Court of Missouri, en banc, affirmed a decision by the Missouri Court of Appeals, Western District, holding in Scottsdale Ins. Co. v. Addison Ins. Co., et al., that an excess insurer may recover on a theory of equitable subrogation amounts contributed from an excess policy as a result of a primary insurer’s bad faith failure to settle a claim within policy limits. The underlying personal injury claim arose out of an automobile accident involving a Wells Trucking employee that resulted in the death of the other driver. Wells Trucking had a primary liability policy with United Fire & Casualty Co. ($1,000,000 limit), and an excess policy with Scottsdale Insurance Co. ($2,000,000 limit). The Scottsdale policy specified it would not apply unless and until the underlying United Fire Policy had been exhausted.

The decedent’s family demanded (and Scottsdale requested) United Fire settle for its $1,000,000 policy limits, but United Fire failed to do so. The decedent’s family later increased their settlement demand to $3,000,000. United Fire and Scottsdale participated in mediation with the family, and the family agreed to accept a total settlement payment of $2,000,000, with United Fire and Scottsdale each contributing $1,000,000.

Scottsdale filed suit against United Fire, asserting various theories of recovery, including one for equitable subrogation. ¹ United Fire filed a motion for summary judgment arguing Scottsdale had no right under Missouri law to bring an equitable subrogation claim for an alleged bad faith failure to settle a claim within policy limits. The trial court granted United Fire’s motion and entered judgment in its favor.

On appeal, Scottsdale raised several issues, including that the trial court erred in entering summary judgment because Missouri law should permit an excess insurer to pursue a primary insurer for bad faith failure to settle within the primary policy limits under an equitable subrogation theory. After an opinion by the Court of Appeals, in which the Court of Appeals reversed the trial court’s judgment, and recognized an excess insurer’s ability to recover from a primary insurer for bad faith failure to settle on a theory of equitable subrogation, the case was transferred to the Supreme Court of Missouri.

The Scottsdale Court acknowledged that Missouri courts have recognized the doctrine of equitable subrogation in various contexts dating to the 19th Century. The Court looked to other jurisdictions and found that most jurisdictions have recognized equitable subrogation as a proper claim for an excess insurer to recover from a primary insurer’s wrongful refusal to settle. The Court decided that Missouri should align itself with the majority of jurisdictions on the issue. ² Therefore, the Court reversed the trial court’s judgment and remanded the case.

Before the Court could determine whether the trial court’s legal error necessitated a reversal, however, it had to determine whether United Fire negated any of the essential elements of Scottsdale’s bad faith refusal to settle claim.

The Scottsdale Court set forth three essential elements of the claim: 1) a liability insurer reserves the exclusive right to contest or settle any claim; 2) a liability insurer prohibits the insured from voluntarily assuming any liability or settling any claims without consent; and 3) a liability insurer is guilty of fraud or bad faith in refusing to settle a claim within the limits of the policy.

The Court concluded the trial court erred in ruling that Scottsdale could not establish all of the essential elements of the claim. First, the Court rejected United Fire’s argument that a judgment against the insured for an amount in excess of the policy limits is an essential element of the claim. Requiring an excess judgment would force the insured to go to trial after its insurer wrongfully refuses to settle, instead of permitting the insured to protect itself from further liability by settling. The Court reasoned that allowing a bad faith refusal to settle claim when the insured settles fosters Missouri’s policy of encouraging settlements. Further, 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. When the insurer refuses to settle, the insured loses the benefit of this important obligation, regardless of whether there is an excess judgment or a settlement.

The Court also found that United Fire’s ultimate payment of its policy limits did not negate the essential element of the liability insurer’s bad faith failure to settle within its policy limits. United Fire’s failure to act on the decedent’s family’s earlier settlement demands was in bad faith and caused Wells Trucking to lose its opportunity to fully settle the claim within United Fire’s policy limits. United Fire’s later payment of the policy limits did 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.

This case is significant for primary insurers because it shows mere payment of the primary policy limits may not insulate them from liability for bad faith refusal to settle when a primary insurer had an opportunity to settle the claim within the primary policy limits and failed to do so. The case is significant for excess insurers because it provides precedent for equitable subrogation claims to recoup monies paid to resolve claims that could have been resolved earlier without reaching the excess coverage layer.

¹ This article will focus solely on the equitable subrogation claim and will not address Scottsdale’s alternative theories of liability.
² The Court also noted Scottsdale could properly pursue a bad faith refusal to settle a claim under the theories of assignment and contractual subrogation, but not based on a duty owed directly to Scottsdale.