Two businessmen divide in parts the profit between themselvesRecently, in ACE American Ins. Co. v. Fireman’s Fund Ins. Co., 16 C.D.O.S. 8430, the California Court of Appeal (Second District) addressed a split between divisions of that district regarding whether, as a matter of law, an excess insurer could sue a primary for subrogation where a settlement within primary limits was rejected and the excess paid as part of a settlement beyond the primary limits.  In that case, the underlying plaintiff was injured while working on a film set.

After the primary insurer rejected settlement offers within its limits, the matter was settled in an amount in excess of the primary insurer’s limits, to which both the primary insurer and the excess insurer contributed.  The excess insurer sued the primary insurer for subrogation and breach of the implied warranty of good faith and fair dealing.  The trial court granted the primary insurer’s demurrer on the ground that a judgment in excess of limits was required for a subrogation claim.

On appeal, the court addressed a split in decisions on this issue.  In Fortman v. Safeco Ins. Co., 221 Cal. App. 3d 1394 (1990), the court allowed an equitable subrogation action by the excess against the primary so long as the excess paid an amount in excess of the primary limits. In contrast, in RLI Ins. Co. v. CNA Casualty of California, 141 Cal. App. 4th 75 (2006), the court found a judgment necessary for an excess insurer’s subrogation action against a primary.  The court here disagreed with RLI’s rejection of Fortman, finding the latter to be in accord with dicta in the California Supreme Court’s decision in Hamilton v. Maryland Casualty Co., 27 Cal. 4th 718 (2002).

Applying the above reasoning, the court rejected the argument that, under Hamilton, a judgment was required as a matter of law, reversing the trial court’s granting of a demurrer on the ground that subrogation claim of excess insurer against the primary insurer could not proceed as a matter of law. The Court of Appeal distinguished several California cases on their facts and concluded that most other jurisdictions had similarly allowed such actions in the absence of judgments and that such a result did not run afoul of the public policy to encourage settlements.