Pressure on Primary Insurers – Missouri Supreme Court Rules on Excess Insurer’s Right to Pursue Primary That Failed to Settle Within Primary’s Limits

Cody S. Moon

January 7, 2015

As 2014 ended, the Missouri Supreme Court issued a unanimous decision that has implications for primary and excess insurers when a primary insurer has an opportunity to settle a claim within policy limits and does not do so, and the claim settles for more than the primary insurer’s limits. Where the primary insurer’s failure to settle was in “bad faith,” the Missouri Supreme Court has held that an excess insurer can pursue the primary insurer on several theories including by assignment of the insured’s bad faith claim, and under theories of contractual subrogation and equitable subrogation. Scottsdale Ins. Co., et al. v. Addison Ins. Co., et al., No. SC93792 (Mo. 2014) (en banc). (Case attached.) The case does not address whether the failure to settle in this situation was in bad faith but, importantly, establishes that an excess judgment is not required for a bad faith claim, and sets forth the legal basis upon which an excess insurer can pursue the primary insurer to get back its contribution towards the settlement.

The dispute arose following a death from a trucking accident. The decedent’s family gave the primary insurer several opportunities prior to and after litigation was filed to settle for the primary policy’s $1 million liability limits. The decedent’s family eventually withdrew the $1 million settlement demand, raised their demand to $3 million, and refused to settle for $1 million. The case eventually settled for $2 million, with the primary insurer paying $1 million and the excess insurer paying $1 million. 

The excess insurer thereafter obtained an assignment of the insured’s bad faith claim against the primary insurer and sued the primary insurer to obtain the $1 million the excess insurer had contributed to the settlement on the basis of the assignment, and on contractual subrogation and equitable subrogation grounds. The excess insurer also alleged that the primary insurer had an independent duty to settle in good faith that it owed to the excess insurer. Summary judgment was granted to the primary insurer on the basis that the excess insurer would be unable to prove the elements of its causes of action, including because there was no judgment in excess of policy limits.

The Missouri Supreme Court reversed and remanded the case for further proceedings and in doing so made these rulings. Missouri’s highest court held that a primary insurer’s duty to act in good faith when settling a third party claim means that when the insurer refuses to settle within policy limits, the insured suffers a loss regardless of whether the amounts in excess of the primary‘s policy limits are in the form of an excess judgment or are paid in settlement by the insured or an excess insurer. Thus, an excess judgment is not required in order for there to be a basis for suing for bad faith failure to settle. The Court noted that this holding (and its other rulings) were consistent with many other states around the country. The Court also noted that the primary insurer eventually contribution of its policy limits to the settlement, did not negate the primary insurer’s liability if its earlier refusal to settle was in bad faith. 

Further, the Missouri Supreme Court held the excess insurer can pursue a claim against the primary insurer for damages for bad faith failure to settle under several theories. In particular, the Court ruled that an insured’s bad faith claim against its primary insurer is assignable to the excess insurer. The Court also held that the claim could be pursued on the basis of contractual subrogation and equitable subrogation. Even though the insured is not liable for the excess amount, the excess insurer paid amounts above the primary policy’s limits because contractually obligated to do so. The Court noted that a primary insurer’s duty to settle does not disappear simply because the insured purchased excess coverage. However, the Supreme Court refused to hold that the primary insurer has an independent duty owed to the excess insurer to settle the claim, since the duty to settle arises out of the contract between the insured and primary insurer.

If you would like to discuss potential ramifications or practical effects of the Missouri Supreme Court’s opinion, please contact us.