California Court of Appeal Determines that Excess Insurer May Sue Primary Insurer for Unreasonable Refusal to Settle

Insureds often have excess liability insurance policies to cover losses that exceed the limits of underlying primary insurance policies. Issues often arise, however, where a primary insurer refuses to settle a case within the limits of the primary policy, thereby implicating the excess policy. In Ace American Insurance Company v. Fireman’s Fund Insurance Company, the 2nd District of the California Court of Appeal addressed the issue of whether an excess insurer could pursue a primary insurer that initially refused to settle a case within the limits of the primary policy where the underlying case was resolved by settlement in excess of the primary policy limits as opposed to a judgment.  This led to a situation in which the settlement demand increased above the primary limits and the excess insurer had to contribute. In the underlying personal injury case, a film industry worker had been injured on a movie set. His employer had primary liability insurance with Fireman’s Fund and an excess insurance policy with Ace. Fireman’s Fund defended the underlying case and the injured worker initially offered to settle the case within the limits of the Fireman’s Fund primary insurance policies. Fireman’s Fund, however, rejected the offer and litigation continued until the case settled above the limits of the Fireman’s Fund policies (thereby implicating the Ace policy). Ace then sued Fireman’s Fund to recover its settlement funds paid under the doctrine of equitable subrogation, contending that Fireman’s Fund’s unreasonable rejection of the initial settlement offer within the limits of Fireman’s Fund’s policies unnecessary forced Ace to contribute to the ultimate settlement.