THE BOTTOM LINE:
An excess carrier has five viable claims against the primary carrier.
Both a primary and excess insurer contract with a policyholder for coverage, but they do not contract with each other. Despite this lack of privity, when a verdict is rendered that exceeds the primary coverage, what claims can an excess insurer make against the primary insurer in order to avoid coverage?
1. Breach of implied duty of good faith and fair dealing. See, e.g. U.S. Fid. & Guar. Co. v. Tri–State Ins. Co., 285 F.2d 579, 581 (10th Cir.1960) (“An insurance carrier has the duty to use the utmost good faith in its disposition of claims made against its insured. And this duty is not lessened by the existence of excess insurance but is extended to include the excess carrier within the shelter of the obligation.”) However, other courts do not recognize such a duty. See, e.g. Royal Ins. Co. of Am. v. Caliber One Indem. Co., 465 F. 3d 614, 618 (5th Cir. 2006). Nebraska has not yet ruled on this precise issue, although it has adopted the tort claim of bad faith against an insurer. Hadenfeldt v. State Farm Mut. Auto. Ins. Co., 195 Neb. 578, 586, 239 N.W.2d 499, 504 (1976) (“Bad faith implies dishonesty, fraud and concealment. To constitute bad faith, there must be something more than a mere showing of inadvertence or honest mistake of judgment.”).
2. Equitable subrogation. Equitable subrogation prevents unjust enrichment by requiring those who benefited from another paying their debt to ultimately pay it themselves. The rule, as applied in the insurance context, allows an insurer to sue a third party for injuries that the third party caused to the insured, when the insurer compensated the insured for those injuries. See, e.g. Scottsdale Ins. Co. v. Addison Ins. Co., WD75963, 2013 WL 5458918 (Mo. Ct. App. Oct. 1, 2013), reh’g and/or transfer denied (Oct. 29, 2013)(“Although not all jurisdictions agree, the vast majority of jurisdictions have recognized an excess insurer’s right to recover for a primary insurer’s bad faith failure to settle on a theory of equitable subrogation.”). Nebraska has not yet ruled on this precise issue.
3. Negligence for failing to accept settlement offers at or near policy limits. See, e.g. W. Am. Ins. Co. v. RLI Ins. Co., 698 F.3d 1069, 1074 (8th Cir. 2012) (applying Mo. law and finding that an insurer “in defending and settling claims against its insured, owes to the insured the duty not only to act in good faith but also to act without negligence.”) and Nat’l Sur. Corp. v. Hartford Cas. Ins. Co., 493 F.3d 752, 756 (6th Cir. 2007). The tort arises out of an implied duty to act in a manner that protects another’s financial interests. Nebraska has not yet ruled on this precise issue.
4. Breach of the State’s Unfair Claims Settlement Practices Act. See, Neb. Rev. Stat. §44-1540. This claim would be brought in subrogation, as if standing in the shoes of the insured. Nebraska has not yet ruled on this precise issue as it would apply to excess insurers.
5. Breach of the State’s Dept. of Insurance Rules and Regulations relating to unfair claims settlement. See e.g., Neb. Rev. Stat. §60-210 et seq. This claim would be brought in subrogation, as if standing in the shoes of the insured. Nebraska has not yet ruled on this precise issue as it would apply to excess insurers.
TWO NOTABLE CAVEATS
1. None of these claims are available to an excess insurer with unclean hands. See, e.g. Phico Ins. Co., Inc. v. Aetna Cas. & Sur. Co. of Am., 93 F. Supp. 2d 982, 994 (S.D. Ind. 2000) (an excess insurer has “a corresponding duty to speak up” if it views the primary insurer’s defense to be “inadequate” and the “acquiescence” of the primary insurer’s defense will constitute waiver of any right to object to that defense).
2. Under certain state’s common law, an excess insurer cannot recover on a bad faith type claim unless it actually made a demand on the primary insurer to settle. See, e.g. Am. Guarantee & Liab. Ins. Co. v. U.S. Fid. & Guar. Co., 668 F.3d 991, 1002 (8th Cir. 2012) (applying Missouri law). Missouri recognizes two exceptions to this general rule. One exception is when the insurer denies coverage and refuses to defend. The second exception is when the insured is not informed by the insurer of settlement offers.