Continental Casualty Co. v. Reserve Ins. Co.
| Decision Date | 16 January 1976 |
| Docket Number | No. 45111,45111 |
| Parties | CONTINENTAL CASUALTY COMPANY, Appellant, v. RESERVE INSURANCE COMPANY, Respondent. |
| Court | Minnesota Supreme Court |
Syllabus by the Court
1. An excess insurer is subrogated to the insured's rights against a primary insurer for breach of the primary insurer's good-faith duty to settle.
2. A primary insurer is not entitled to a trial and judgment on the merits in the main action before it can be held liable to an excess insurer for breach of its good-faith duty to settle. The primary insurer receives its day in court on the issue of bad faith.
3. A primary insurer charged by an excess insurer with bad-faith failure to settle may assert as a defense that its insured would not have been held liable in the main action.
4. In an action by an excess insurer against a primary insurer for bad-faith failure to settle, bad faith and the liability of the insured in the main action are issues of fact to be submitted to the trier of fact. If the trier of fact finds either no liability or no bad faith, the primary insurer is not liable.
Cousineau, McGuire, Shaughnessy & Anderson, and Harold J. W. Sweet, Minneapolis, for appellant.
Arthur Chapman & McDonough and Lindsay G. Arthur, Jr., Minneapolis, for respondent.
Heard before SHERAN, C.J., and PETERSON, KELLY, YETKA, SCOTT and CHANAK, JJ., and considered and decided by the court en banc.
Plaintiff, Continental Casualty Company (Continental), appeals from a judgment on the pleadings rendered in favor of defendant, Reserve Insurance Company (Reserve). We reverse.
The following facts are stated in the pleadings, which we accept as true: 1 Reserve is the primary insurer for the city of Marshall, Minnesota, for any legal liability which it might incur under the so-called Dram Shop Act, Minn.St. 340.95, with a policy limit of $50,000. Continental is the excess liability insurer for the city with limits of $50,000 to $950,000. Both carriers issued policies covering the city of Marshall for the period September 1, 1971, to September 1, 1972.
As the result of an automobile accident on December 24, 1971, Lucille Christianson was seriously injured, and she and her husband brought suit against one Edward DeLange. He, in turn, brought a third-party action against the city of Marshall claiming the city was liable under the Dram Shop Act for an illegal sale of liquor to him by the municipal liquor store. Trial of the lawsuit commenced on January 30, 1973, with both Reserve and Continental providing defense counsel for the city.
On the second day of the trial, a settlement was reached between the plaintiffs and DeLange's insurers and Continental for $750,000. DeLange's insurance carriers would contribute $550,000, with Continental adding the remaining $200,000. Prior to settlement, Continental demanded that Reserve tender its policy limits, but Reserve refused. Continental then paid the full $200,000 on behalf of the city, reserving its right to pursue Reserve in a later action.
Subsequently, Continental instituted this action against Reserve, alleging that Reserve's failure to contribute its policy limits was a breach of its contract of insurance with the city of Marshall, evidencing bad faith. As damages, Continental sought indemnity for the $50,000 allegedly due from Reserve. Reserve moved for judgment on the pleadings, 2 which the district court granted on the ground that without a prior judicial determination of the city's liability Reserve could not be held liable for refusing to pay any part of its policy limits toward the settlement.
The central issue in this case is whether and under what circumstances an excess insurer who over the objection of the primary insurer, settles a case against the insured prior to trial can recover from the primary insurer the amount of the latter's policy limits.
The threshold question is whether a primary insurer owes any duty to an excess insurer in the settlement negotiation process. It is clear that any liability insurer owes Its insured a duty of good faith in deciding whether to accept or reject a settlement. This duty includes an obligation to view the situation as if there were no policy limits applicable to the claim, and to give equal consideration to the financial exposure of the insured. Lange v. Fidelity & Cas. Co. of New York, 290 Minn. 61, 185 N.W.2d 881 (1971). Breach of this duty by rejecting in bad faith an offer within policy limits subjects the insurer to liability to its insured in the amount of a judgment in excess of those limits. Larson v. Anchor Cas. Co., 249 Minn. 339, 82 N.W.2d 376 (1957); Boerger v. American Gen. Ins. Co., 257 Minn. 72, 100 N.W.2d 133 (1959).
We hold that an excess insurer is subrogated to the insured's rights against a primary insurer for breach of the primary insurer's good-faith duty to settle. See, Peter v. Travelers Ins. Co., 375 F.Supp. 1347 (C.D.Cal.1974). As one commentator has observed, 'In the case of excess coverage, the primary insurer should be held responsible to the excess insurer for improper failure to settle, since the position of the latter is analogous to that of the insured when only one insurer is involved.' R. Keeton, Insurance Law, § 7.8(d). When there is no excess insurer, the insured becomes his own excess insurer, and his single primary insurer owes him a duty of good faith in protecting him from an excess judgment and personal liability. If the insured purchases excess coverage, he in effect substitutes an excess insurer for himself. It follows that the excess insurer should assume the rights as well as the obligations of the insured in that position.
This result is supported by important policy considerations underlying our judicial and liability insurance systems. First, when a primary insurer breaches its good-faith duty to settle within policy limits, it imperils the public and judicial interests in fair and reasonable settlement of lawsuits. 3 If the excess insurer elects to settle in spite of the primary insurer's bad-faith objections, as is alleged in this case, the excess insurer risks losing the policy-limit contributions of the primary insurer and being forced to pay the entire settlement itself, even though the settlement may have been in the overall best interest of the insured. In such a case, the incentives are against settlement. If the excess insurer must pay the entire settlement, he may save at least the amount of the primary insurer's policy limits by going to trial, since the latter would then have to pay the amount of its limits toward the judgment. A primary insurer should not be permitted to obstruct in bad faith the important settlement process.
Second, a contrary result in this case would permit an unfair distribution of losses among insurers. The insured has paid for two distinct types of coverage, undoubtedly at different rates because they involve different amounts and kinds of risks. Primary coverage is designed to cover liability from zero to certain policy limits (in this case $50,000); excess coverage is designed to cover liability only after those initial limits are exhausted. When a primary insurer refuses in bad faith to settle, it forces the excess insurer making a reasonable settlement to cover both primary and excess liability. 4 Thus, the purposes of the different kinds of coverage and their rating structures are thwarted as the excess insurer bears the full loss and fulfills the primary insurer's duty to the insured as well as its own. 5 Whether on insurance-economics principles or general equitable principles, a party should not be made to bear a loss that rightfully belongs to another party. 6
The bulk of the well-reasoned authority from other jurisdictions supports the existence of a duty owed by a primary to an excess carrier. 7 In the leading case of American Fidelity & Cas. Co. v. All American Bus Lines, Inc., 190 F.2d 234 (10 Cir. 1951), certiorari denied, 342 U.S. 851, 72 S.Ct. 79, 96 L.Ed. 642 (1951), an injured party obtained a verdict in excess of primary policy limits after the primary insurer had refused to settle. In an action brought by the excess insurer, the trial court found that the primary insurer had acted in bad faith and ordered judgment against it for its excess liability. The Court of Appeals affirmed, noting that, as between the two insurers, it would be just and equitable for the primary insurer to bear the loss occasioned by its own misconduct. 190 F.2d 238.
But the primary insurer's main contention is that no recovery can be granted the excess insurer because there has been no adjudication of the liability of the insured in this case. It relies chiefly on St. Paul-Mercury Ind. Co. v. Martin, 190 F.2d 455 (10 Cir. 1951), which we regard as distinguishable. In that case, the injured parties offered to settle for an amount which involved payment of $8,500 on a total policy limit of $10,000 by the primary and $1,000 by the excess insurer. The excess insurer demanded that the primary accept the settlement. Instead, the primary commenced a declaratory judgment action, asserting that it was not liable on the policy because the covered automobile was not driven with the permission of the insured. Before that action was tried, however, the primary insurer joined in the settlement, stipulating that it was wise and proper, and further agreed that the action would be tried on the respective liabilities of the primary and excess insurers. The trial court found that the driver was driving with the consent of the insured, and ordered the primary insurer to pay $8,500 and the excess insurer to pay $1,000 toward the settlement. On appeal, the Court of Appeals affirmed. Although the court indicated that in cases of questionable liability the excess insurer cannot legally bludgeon the primary into tendering its policy limits, it did so on the basis that the primary insurer is required to exercise only good faith, not...
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