John Franco was working on a film set when a special effects accident caused him to suffer serious injuries. Franco’s injuries included pelvic crush injuries, a broken hip, fractures to both femurs, crush injuries to both knees, broken tibias and fibulas, broken ribs, a punctured lung, and soft tissue injuries to his face.
His employer had two primary insurance policies with Fireman’s Fund Insurance Company, and an excess insurance policy with Ace American Insurance Company. The injured worker sued, Fireman’s Fund defended the case, and the case eventually settled with the participation of and contributions from both insurers.
Fireman’s Fund defended the Warner Brothers entities in the Francos’ lawsuit. The Francos made settlement demands within the limits of the Fireman’s Fund policies. According to Ace American’s complaints, the demands were reasonable and supported by substantial evidence, but Fireman’s Fund “failed and/or refused to pay those demands within [the insurance policies’] limits.” Ultimately the Francos settled their lawsuit – for an amount substantially in excess” of the limits of the Fireman’s Fund policies. According to Ace American, Fireman’s Fund “consented to the settlement and contributed to it”, and Ace American contributed the amounts in excess of the Fireman’s Fund policies’ limits. Following the settlement, the case was dismissed with prejudice.
Ace American then sued Fireman’s Fund for equitable subrogation, alleging that the injured worker initially offered to settle his case within the limits of the Fireman’s Fund policies, and that Fireman’s Fund unreasonably rejected those settlement offers. Ace American alleged that as a result, it was required to contribute to the eventual settlement, which exceeded the limits of the Fireman’s Fund policies.
Fireman’s Fund demurred, arguing that the rights of an excess insurer such as Ace American derive from the rights of the insured, Warner Brothers. As such, an excess insurer may only sue for equitable subrogation if there has been a judgment against the insured that exceeds the limits of the primary policy. Because the Franco lawsuit settled and there was no judgment against Warner Brothers, Fireman’s Fund argued, Ace American could not sue for equitable subrogation. The trial court sustained the demurrer without leave to amend and dismissed the case, and Ace American appealed.
On appeal the question presented is whether Ace American has stated viable causes of action for equitable subrogation and breach of the duty of good faith and fair dealing, or whether the lack of a judgment in the employment injury case bars Ace American’s claims. The court of appeal reversed the dismissal in the published case of Ace American Insurance v Firemans Fund.
There are conflicting decisions from different divisions of the Second District court of appeal on this issue. In Fortman, supra, 221 Cal.App.3d 1394, Division One held that an equitable subrogation action could proceed against a primary insurer that initially breached its duty to settle a case within policy limits, resulting in a settlement that exceeded policy limits. By contrast, in RLI, supra, 141 Cal.App.4th 75, Division Five held that an equitable subrogation action could not proceed under the same circumstances.
The question is whether Ace American has stated viable causes of action for equitable subrogation and breach of the duty of good faith and fair dealing, or whether the lack of a judgment in the employment injury case bars Ace American’s claims.
This division of the Second District Court of Appeal found that because Ace American, the excess insurer, alleged it was required to contribute to the settlement of the underlying case due to the primary insurer’s failure to reasonably settle the case within policy limits, the lack of an excess judgment against the insured in the underlying case does not bar an action for equitable subrogation and breach of the duty of good faith and fair dealing.