National Sur. Corp. v. Hartford Cas. Ins. Co., Civil Action No. 3:05-CV-119-S.

• Decision Date: 18 August 2006
• Docket Number: Civil Action No. 3:05-CV-119-S.
• Citation: 445 F.Supp.2d 779
• Parties: NATIONAL SURETY CORPORATION, Plaintiff v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant.
• Court: U.S. District Court — Western District of Kentucky

445 F.Supp.2d 779

NATIONAL SURETY CORPORATION, Plaintiff v. HARTFORD CASUALTY INSURANCE COMPANY, Defendant.

Civil Action No. 3:05-CV-119-S.

United States District Court, W.D. Kentucky, at Louisville.

August 18, 2006.

Barry Miller, Elizabeth S. Feamster, Timothy Armstrong West, Fowler, Measle & Bell, LLP, Lexington, KY, for Plaintiff.

Douglas L. Hoots, Tyler Griffin Smith, Landrum & Shouse, LLP, Lexington, KY, for Defendant.

MEMORANDUM OPINION

SIMPSON, District Judge.

This matter is before the court on the motion to dismiss by the defendant, the Hartford Casualty Insurance Company ("Hartford"). This case involves the plaintiffs claims for breach of contract and for common law bad faith, under theories of conventional and equitable subrogation. For the reasons set forth below, the court will GRANT the defendant's motion to dismiss.

FACTS

Hartford insured Sufix, USA ("Sufix"), a company that manufactured a trimmer head for weed eaters. The plaintiff, National Surety Corporation ("National Surety"), was Sufix's excess carrier. A consumer who suffered an injury while using the weed eater filed suit against Sufix for defective design. The jury awarded the consumer $5,783,815 in damages. Hartford provided the legal defense for Sufix during the trial. Hartford, the primary insurer, paid its $1,000,000 policy limit, leaving National Surety to satisfy the remainder of the judgment. National Surety assumed the legal defense at this point and unsuccessfully appealed the verdict. It then paid the balance of the judgment, including interest. National Surety now seeks reimbursement from Hartford.

National Surety has asserted two claims against Hartford. First, it alleges that Hartford breached its contract with National Surety by failing to perform an adequate investigation, provide competent defense and settle within policy limits. Second, National Surety alleges that Hartford breached its common law duty of good faith owed to Sufix. National Surety asserts both claims as Sufix's subrogee. Hartford has now filed a motion to dismiss all claims against it, arguing that Kentucky law does not recognize an excess carrier's right to proceed against a primary insurer via subrogation.

DISCUSSION

When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the court "must accept all well-pleaded factual allegations of the complaint as true and construe the complaint in the light most favorable to the plaintiff." Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir.2002). The court should grant the motion to dismiss the complaint "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984).

The parties agree that Kentucky case law does not address the specific question presented at bar; namely, whether an excess carrier, as subrogee to its insured, can assert breach of contract and common law bad faith claims against the insured's primary carrier. Regarding such issues of first impression, we are charged with making the "best prediction, even in the absence of direct state court precedent, of what the Kentucky Supreme Court would do if it were confronted with th[e] question." Managed Health Care Assocs., Inc. v. Kethan, 209 F.3d 923, 927 (6th Cir.2000) (citation omitted).

A. Equitable Subrogation

While the Kentucky Supreme Court has not spoken on the precise issue at bar, the Kentucky Court of Appeals refused to recognize the theory of equitable subrogation in a similar situation. See American Continental Ins. Co. v. Weber & Rose, 997 S.W.2d 12 (Ky.1998). The underlying facts of Weber & Rose are similar to those at bar. An individual who was injured on the premises of N.K.C. Hospital, Inc. ("NKC"), filed a negligence action against NKC. The jury returned a verdict of $2,900,000. NKC was self-insured for the first $2,000,000; but its excess insurer, American Continental Insurance Company ("ACIC"), refused to satisfy the remainder of the judgment and filed suit, seeking a declaration that there was no coverage under its policy. Weber & Rose, the law firm which had represented NKC in the underlying tort action, intervened in the subsequent action seeking a declaration that it could not be liable to ACIC for malpractice. ACIC then filed a cross-claim against Weber & Rose, alleging that the firm had committed malpractice.

The trial court granted summary judgment in favor of Weber & Rose and dismissed ACIC's cross-claim. The Kentucky Court of Appeals affirmed. Though it acknowledged "that some courts permit excess insurers to proceed against primary insurers for negligence and bad faith," the Kentucky Court of Appeals was "not persuaded that Kentucky should adopt such a course." Id. at 13. The opinion focused on the courts'"duty to protect and preserve th[e attorney-client] relationship for the benefit of the general public" when it held that "ACIC was not entitled to maintain an action for malpractice against Weber & Rose based upon a theory that ACIC was subrogated to NKC's right to maintain such an action." Id.

The Weber & Rose opinion is the strongest indicator of how the Kentucky courts would rule in the case at bar. In fact, the Weber & Rose court cited two cases relied upon by National Surety in its brief. See Hartford Accident and Indemnity Co. v. Michigan Mutual Ins. Co., 61 N.Y.2d 569, 475 N.Y.S.2d 267, 463 N.E.2d 608 (1984) and Ranger Ins. Co. v. Travelers Indemnity Co., 389 So.2d 272 (Fla.App.1980). Despite the fact that these cases recognize an excess insurer's claim against a primary insurer based upon a theory of equitable subrogation, the Kentucky Court of Appeals adapted an alternative approach.

We predict that the Kentucky courts would apply the same analysis to the situation at bar. The Weber & Rose court reasoned that recognizing the cause of action would, inter alia,. "encourage excess insurers to sue defense attorneys for malpractice whenever they are disgruntled by having to pay within the limits of policies to which they contracted and for which they received premiums." Id. at 14 (quoting American Employers' Ins. Co. v. Medical Protective Co., 165 Mich.App. 657, 419 N.W.2d 447 (Mich.App.1987)).¹ Similarly, recognizing the instant causes of action for breach of contract and bad faith, under a theory of equitable subrogation, would encourage excess insurers to sue primary carriers "whenever they are disgruntled by having to pay within the limits of policies to which they contracted and for which they received premiums." Id.

Both situations threaten the integrity of the settlement process by allowing the excess carriers, who were not involved in those underlying negotiations, to second-guess the judgment of the primary insurer's representatives. Allowing excess carriers to sue counsel for the primary would suggest that counsel owed a duty to represent, not only its client, but a third party. The Kentucky Court of Appeals rejected such an outcome in Weber & Rose. It follows that Kentucky would not recognize a cause of action that expands the duty owed by the primary insurer to, not only its insured, but a third party, particularly when that third party has been paid under a contract for assuming the risk of an excess judgment.

National Surety informs the court that a "majority of jurisdictions allows an excess carrier to sue a primary based on the equitable subrogation doctrine." Defendant's Brief (DN 13), p. 13. An examination of the opinions from these jurisdictions reveals that this "majority rule" is motivated by certain policy-driven concerns. The courts acknowledge that, in recognizing a cause of action under the doctrine of equitable subrogation, they are creating a remedy in favor of excess insurers.² We decline to fashion a remedy for what we perceive as a nonexistent injury. The excess insurers, who have received premiums in exchange for assuming the risk of an excess judgment, have suffered no wrong for which we can justify creating a remedy out of whole cloth. Furthermore, there, are "no shoes" for National Surety "to step into" because Sufix, who has been fully indemnified, has suffered no loss. See also Federal In. Co. v. Travelers Casualty & Surety Co., 843 So.2d 140, 144 (Ala.2002) ("it is also well-settled that a bad-faith-failure-to-settle claim does not exist where the insured is subject to no personal loss from a final judgment").

Our position may best be illustrated by examining the hypothetical situations which have motivated the other jurisdictions to adopt an alternate approach. For instance, in Employers National Ins. Corp. v. General Accident Ins. Co., 857 F.Supp. 549, 551 (S.D.Tex.1994), the court stated:

[I]f an insurer with a policy limit of $1,000,000 believes that there is only a five percent chance that it will win at trial, it might refuse a settlement offer of $950,000 because it would at most be risking $50,000 if a jury found for the plaintiff, even if the verdict was $5,000,000. Because it is the insured's or an excess carrier's money that is at risk above the primary policy's limits, the primary carrier must have a duty to handle the claim with the insured's best interest in mind as well as its own. The least duty would be the level of care one would exercise if the whole liability were for the account of one party.

Id. at 552. This example fails to take into consideration the practical realities facing an insurer during the litigation process. An insurer who has estimated its success potential at trial to be a mere five percent is unlikely to willingly incur the substantial transaction costs of litigation involved in defending a lawsuit it is almost certain to lose.

The Seventh Circuit Court of Appeals also justified its adoption of the "majority approach" by way of an economic hypothetical. See Twin City Fire Ins. Co. v. Country Mutual Ins. Co., 23 F.3d 1175, 1179 (7th Cir.1994):

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