Hartford Acc. & Indem. Co. v. Aetna Cas. & Sur. Co.

• Decision Date: 29 May 1990
• Docket Number: No. CV-89-0101-T,CV-89-0101-T
• Citation: 792 P.2d 749,164 Ariz. 286
• Parties: HARTFORD ACCIDENT & INDEMNITY COMPANY, Plaintiff/Appellant, v. AETNA CASUALTY & SURETY COMPANY, Defendant/Appellee. /AP.
• Court: Arizona Supreme Court

Page 749

792 P.2d 749

164 Ariz. 286

HARTFORD ACCIDENT & INDEMNITY COMPANY, Plaintiff/Appellant, v. AETNA CASUALTY & SURETY COMPANY, Defendant/Appellee.

No. CV-89-0101-T/AP.

Supreme Court of Arizona In Banc.

May 29, 1990.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears by John H. Westover, Phoenix, and Peter Akmajian, Tucson, Vermeire, Turley & Ryan, P.C. by Christopher J. Bork, Phoenix, for plaintiff/appellant.

Black, Robertshaw, Copple & Pozgay, P.C. by Richard A. Black, and Rake Copple Downey & Black P.C. by Philip C. Thorpe, Phoenix, for defendant/appellee.

CAMERON, Justice

I. JURISDICTION

Hartford Accident & Indemnity Company petitioned this court for transfer from the court of appeals pursuant to Rule 19(a)(1), 17B A.R.S. Civil Appellate Procedure Rules, claiming that Universal Underwriters Ins. Co. v. Dairyland Mut. Ins. Co., 102 Ariz. 518, 433 P.2d 966 (1967), a decision of this court, should be overruled. We granted the petition due to confusion in this area of the law, and because an issue of statewide interest is presented. We have jurisdiction under Ariz. Const. art. 6, § 5(3) and A.R.S. § 12-120.24.

II. ISSUE

We decide only one question on appeal:

May an excess insurance carrier, under the doctrine of equitable subrogation, assert a claim against a primary insurance carrier for bad faith failure to settle within primary policy limits?

III. FACTS

Jamie Hart was insured under an automobile liability policy issued by Aetna Casualty & Surety Company (Aetna) with a policy limit of $25,000. Hartford Accident & Indemnity Company (Hartford) provided Hart with excess coverage through a policy issued to Hart's employer, Wendy's International, Inc. The Hartford policy covered Wendy's employees driving their own automobiles in the course of their employment.

In May 1985, Hart was involved in an automobile accident with Bradley Harris while Hart was on an errand in the scope and course of her employment. The accident was reported to Aetna, the primary insurer, and a claims file was opened with a personal injury reserve of $2,500 set on the case. After an investigation, Aetna claims representative Erin Lewers determined that Hart failed to yield the right-of-way to Harris and that Aetna therefore should provide coverage.

Prior to trial Harris made several settlement offers. The first of these occurred in November 1985, and was for $10,491.75. Aetna rejected this settlement offer and offered $1,200, then $1,500, both of which were rejected by Harris. Sometime prior to June 1986, Harris offered to settle for $2,500, then for $2,100. However, both offers were withdrawn before being accepted.

In February 1986, Aetna informed a Wendy's staff attorney that the claim appeared to be worth less than the primary policy limits and that Aetna would let the attorney know if it appeared excess exposure would result. No further communication concerning the claim occurred between Aetna, Wendy's and Hartford until judgment was entered in Harris v. Hart. (Brief for Appellant at 13.)

In June 1986, the attorney Aetna hired to defend Hart advised Aetna that, in his opinion, the verdict potential in the case was between $5,000 and $10,000. On June 18, Aetna's claim representative valued Harris's claim at $2,000. On 31 July 1986, Aetna's claim representative made a note to increase the reserve on the file to $6,000.

In August 1986, Aetna offered Harris $3,500 to settle the case. Harris counter-offered for $10,000. On 30 September 1986, Aetna raised the offer to $4,200 after an orthopedic surgeon retained by Aetna to evaluate Harris's condition reported that Harris had a 5% permanent impairment due to injury of the left lateral femoral cutaneous nerve.

A second evaluation of Harris indicated he had a current orthopedic problem with associated pain. Hart's attorney then reported to Aetna that, in his opinion, the verdict potential was between $10,000 and $20,000.

On 13 November 1986, a final review of the file was completed before trial. Aetna then valued the claim at $6,000. This value could not be changed without approval of a claims manager in Denver.

Prior to trial, the trial court estimated that a fair settlement value for the case was $15,000 and asked the parties if they would settle for that amount. Harris was willing to settle, but Aetna would not approve the higher amount.

The jury awarded Harris $140,000 in damages to cover any future surgery expenses, and to assure him sufficient funds if he ever lost his job because of his injuries. Harris agreed to accept $100,000 in satisfaction of the judgment while the case was on appeal. Hartford paid $37,500 and Aetna paid $62,500, with an agreement that their contributions would not prejudice their rights in this matter.

On 5 May 1987, Hartford filed this action against Aetna, alleging that Aetna acted in bad faith by failing to accept settlement offers within Aetna policy limits. Pursuant to A.R.S. § 12-1831 Hartford requested a declaratory judgment that, under the theory of equitable subrogation, Aetna was obligated to pay the entire amount of the excess judgment. Aetna counterclaimed, seeking a declaration that Hartford was responsible for all but the first $25,000 of the judgment.

The trial court granted summary judgment in favor of Aetna. Implicit in the court's ruling was the finding that Universal barred Hartford's claim for equitable subrogation. Hartford appealed to the court of appeals and then sought a transfer to this court.

IV. DISCUSSION

We view the facts in a light most favorable to Hartford, the party against whom summary judgment was granted. United Services Auto. Ass'n v. Morris, 154 Ariz. 113, 114, 741 P.2d 246, 247 (1987); Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 448, 675 P.2d 703, 708 (1983). We assume that, if a duty of good faith is owed from the primary carrier to the excess carrier, Hartford established a prima facie case that Aetna breached its implied duty of good faith by refusing offers of settlement within policy limits. See Brisco v. Meritplan Ins. Co., 132 Ariz. 72, 643 P.2d 1042 (App.1982).

1. Equitable Subrogation

It is settled law in Arizona, based on a covenant of good faith and fair dealing, that an insurance company owes its insured a duty of good faith in deciding whether to accept or reject settlement offers. Arizona Prop. & Cas. Ins. Guar. Fund v. Helme, 153 Ariz. 129, 137, 735 P.2d 451, 459 (1987); City of Glendale v. Farmers Ins. Exchange, 126 Ariz. 118, 120, 613 P.2d 278, 280 (1980); Farmers Ins. Exchange v. Henderson, 82 Ariz. 335, 338-39, 313 P.2d 404, 406 (1957). In the third party context, ¹ this duty of good faith requires an insurer to give equal consideration to the protection of the insured's as well as its own interests. Henderson, 82 Ariz. at 338, 313 P.2d at 406. If an insurance company fails to settle, and does so in bad faith, it is liable to the insured for the full amount of the judgment. Id. at 341, 313 P.2d at 408. This rule is recognized, in part, because the insurer exercises control over the litigation.

A number of jurisdictions have expanded the duty of good faith by recognizing a duty to an excess insurance company by the primary insurance company. In fact, many states confronted with the issue have allowed an excess insurer to pursue a claim against a primary insurer for breach of good faith. ² Most of these courts have adopted the theory of equitable subrogation, whereby the excess insurer steps into the shoes of the insured. The theory behind equitable subrogation is that, by purchasing excess coverage, an insured in effect substitutes the excess insurer for himself. A minority of courts have found that the primary insurer owes a direct duty of good faith to the excess insurer. ³

One reason courts have recognized a cause of action for equitable subrogation is to encourage fair and reasonable settlements of lawsuits. In Northwestern Mutual Ins. Co. v. Farmers Ins. Group, a California Appeals Court stated:

[I]n addition to protecting the insured, the rule imposing liability on an insurer for failure to effect reasonable settlement within its policy limits serves the important public policy of encouraging settlement of legal controversies. Thus, enforcement of the primary insurer's duty to settle in good faith by equitably subrogating the excess insurer to the rights of the insured is fully warranted by public policy notwithstanding imposition of the duty may have been primarily for the benefit of the insured in the first instance.

76 Cal.App.3d 1031, 1050-51, 143 Cal.Rptr. 415, 427 (1978); see also Ranger Ins. Co. v. Travelers Indem. Co., 389 So.2d 272, 275 (Fla.Dist.Ct.App.1980). A primary insurer has less incentive to settle within policy limits if an excess insurer is available to cover any amount over the primary insurer's liability limits. We believe this disincentive to settle will lead to increased insurance and litigation costs. As stated by the Michigan Supreme Court:

[A]llowing the excess insurer to enforce the primary insurer's duty to settle in good faith serves the public and judicial interests in fair and reasonable settlement of lawsuits by discouraging primary carriers from "gambling" with the excess carrier's money when potential judgments approach the primary insurer's policy limits. Finally, the public interest in avoiding unnecessarily high insurance premiums is served by recognizing such a cause of action because, where the excess insurer is required to cover both primary and excess liability as a result of the primary insurer's breach of the duty to settle in good faith, policy rating structures are distorted, rendered uncertain, and made more expensive.

Commercial Union Ins. Co. v. Medical Protective Co., 426 Mich. 109, 119, 393 N.W.2d 479, 483 (1986) (citations omitted); see also Peter v. Travelers Ins. Co., 375 F.Supp. 1347, 1350-51 (C.D.Cal.1974) ("If the primary carrier is relieved of its duty to accept reasonable offers by the...