Preferred Prof'l Ins. Co. v. Doctors Co.

• Decision Date: 05 April 2018
• Docket Number: Court of Appeals No. 17CA0405
• Citation: 419 P.3d 1020
• Parties: PREFERRED PROFESSIONAL INSURANCE COMPANY, Plaintiff-Appellee, v. THE DOCTORS COMPANY, Defendant-Appellant.
• Court: Colorado Court of Appeals

419 P.3d 1020

PREFERRED PROFESSIONAL INSURANCE COMPANY, Plaintiff-Appellee,

v.THE DOCTORS COMPANY, Defendant-Appellant.

Court of Appeals No. 17CA0405

Colorado Court of Appeals, Div. IV.

Announced April 5, 2018

Rehearing Denied May 3, 2018

Sweetbaum Sands Anderson, P.C., Jon F. Sands, Marilyn S. Chappell, Denver, Colorado, for Plaintiff-Appellee

Taylor Anderson, LLP, Kyle P. Seedorf, John M. Roche, Lauren E. Rhinehart, Denver, Colorado, for Defendant-Appellant

Opinion by JUDGE DAVIDSON^*

¶ 1 Suppose that an injured party sues a person who has both primary and excess insurance covering the claim. The injured party offers to settle for an amount within the primary coverage limit. The primary insurer exercises its contractual, discretionary right not to accept the settlement. But the excess insurer, perhaps spooked by the prospect of a judgment exceeding the primary coverage limit, pays the settlement demanded by the injured party. When the excess insurer sues the primary insurer to recover the amount paid in settlement, claiming that the primary insurer should have accepted the settlement offer, what sort of claim may the excess insurer assert? And must the excess insurer plead and prove that the primary insurer acted in bad faith in declining to settle?

¶ 2 We hold that an excess insurer in this situation must proceed on a theory of equitable subrogation premised on the rights of the insured under his contract with the primary insurer—that is, the excess insurer must step into the shoes of the insured. It follows that, under Colorado law, because the insured would have to prove bad faith in an action against his primary insurer based on the insurer's refusal to settle, the excess insurer must also plead and prove such bad faith.

¶ 3 The facts of this case match those of our hypothetical. Preferred Professional Insurance Company (PPIC) is the excess insurer that paid the settlement. The Doctors Company (TDC) is the primary insurer that declined to settle. But while PPIC purported to bring a claim of equitable subrogation against TDC, it disavowed any intent to proceed on the legal theory that it stands in the insured's shoes. And it did not plead or attempt to show that TDC acted in bad faith. Instead, PPIC's theory is that general equitable principles allow it to recover from TDC apart from any rights of the insured under his contract with TDC, and that it need not plead or prove that TDC acted in bad faith.

¶ 4 The district court accepted PPIC's theory and granted summary judgment in its favor. But we conclude that PPIC's theory of recovery is not viable under Colorado law. So we reverse the summary judgment and remand the case to the district court for entry of judgment in TDC's favor.

I. Background

¶ 5 The undisputed facts establish that the parties both held separate professional liability policies for the same insured, Dr. Rupinder Singh. A medical malpractice suit was filed against Dr. Singh and other parties.

¶ 6 TDC defended Dr. Singh in the suit as required by its primary liability policy. The policy provided coverage up to a limit of $1 million. TDC's policy required Dr. Singh's consent before accepting any settlement offers, but TDC retained the discretion whether to accept or reject any such offers.

¶ 7 PPIC's insurance policy was an "excess policy," which would cover any losses that exceeded TDC's $1 million coverage up to an additional $1 million. As an excess insurer, PPIC did not have any duty to defend Dr. Singh in the suit.

¶ 8 The plaintiff in the medical malpractice suit offered to settle the case with Dr. Singh for $1 million. Dr. Singh conveyed his desire to accept the settlement offer to both insurers, but TDC declined the plaintiff's offer. PPIC told Dr. Singh he should accept, and it paid the $1 million settlement.

¶ 9 PPIC filed a claim for equitable subrogation, seeking payment of the $1 million from TDC. Both parties filed summary judgment motions. In its motion, PPIC argued that the applicable standard for recovery under equitable subrogation is a five-factor test set forth in Hicks v. Londre , 125 P.3d 452, 456 (Colo. 2005). TDC responded that in order to recover under equitable subrogation, PPIC was required to prove that TDC refused to settle in bad faith. In reply, PPIC argued that its claim for equitable subrogation was "not premised on the assertion that it has stepped into the shoes of its insured, Dr. Singh, through its payment of the settlement," and that it was "not required to establish [bad faith]" to recover, relying exclusively on Unigard Mutual Insurance Co. v. Mission Insurance Co. , 907 P.2d 94, 99 (Colo. App. 1994), and Hicks . The district court applied the Hicks factors and found in PPIC's favor without addressing TDC's argument concerning the need to show bad faith.

¶ 10 On appeal, TDC contends that the district court erred as a matter of law. TDC asserts that, under well-established Colorado insurance law, an equitable subrogation claim brought by an excess insurer against the primary insurer to recover the amount paid in settlement can only be derivative ("standing in the shoes") of the insured's rights. Consequently, TDC argues, PPIC's refusal to plead and present evidence that TDC acted in bad faith in declining to settle, under the circumstances here, requires dismissal of PPIC's claim. We agree with TDC.

II. Standard of Review

¶ 11 We review an appeal of a summary judgment de novo. Edwards v. Bank of Am., N.A. , 2016 COA 121, ¶ 13, 382 P.3d 1272. Summary judgment is a drastic remedy that should be granted only when the pleadings and the supporting documents demonstrate that no genuine issue of material fact exists and that the moving party is legally entitled to judgment. W. Elk Ranch, L.L.C. v. United States , 65 P.3d 479, 481 (Colo. 2002). The moving party carries the burden to establish the lack of a genuine issue of fact. Any doubts in that regard must be resolved against the moving party. Bankr. Estate of Morris v. COPIC Ins. Co. , 192 P.3d 519, 523 (Colo. App. 2008).

¶ 12 An appellate court may "independently review the question of whether the doctrine of equitable subrogation applies to the circumstances." Hicks , 125 P.3d at 455.

III. Issue Preservation

¶ 13 As a threshold matter, we address and reject PPIC's argument that TDC did not properly preserve this issue in the district court. TDC argued in opposing PPIC's motion for summary judgment that PPIC was pursuing a novel theory of recovery in the primary/excess insurance coverage context that should be rejected, and that the Hicks test has never been applied in this setting to allow an excess carrier to usurp the primary insurer's role without a showing that the primary insurer acted in bad faith. TDC cited several bad faith failure to settle cases, including some arising in the insurance context between excess and primary insurers. So, while the words "step into the shoes of the insured" do not appear in TDC's response, we conclude that the district court was alerted to the issue.

IV. Analysis

¶ 14 From settled Colorado insurance law, we conclude that an excess carrier asserting an equitable subrogation claim against a primary carrier for failing to settle must plead and prove that the primary insurer's settlement decisions were made in bad faith. Without such an allegation, the claim is not legally viable.

A. In the Context of Colorado Insurance Law, the Claim of Equitable Subrogation Is Identified As Derivative of the Rights of the Insured

¶ 15 Subrogation is "a creature of equity having for its purpose the working out of an equitable adjustment between the parties by securing the ultimate discharge of a debt by the person who in equity and good conscience ought to pay it." In re Estate of Boyd , 972 P.2d 1075, 1077 (Colo. App. 1998) (quoting United Sec. Ins. Co. v. Sciarrota , 885 P.2d 273, 277 (Colo. App. 1994) ); see Cedar Lane Invs. v. Am. Roofing Supply of Colo. Springs, Inc. , 919 P.2d 879, 884 (Colo. App. 1996) (Equitable subrogation arises "because it is imposed by courts to prevent unjust enrichment." (quoting 1 Dan B. Dobbs, Law of Remedies § 4.3(4), at 606 (2d ed. 1993) ) ).

¶ 16 In insurance cases, equitable subrogation is often used as a loss-shifting mechanism, dependent on the rights, obligations, and duties between the parties as set forth in the insurance policy. Thus, a subrogated insurer has "no greater rights than the insured, for one cannot acquire by subrogation what another, whose rights he or she claims, did not have." Am. Family Mut. Ins. Co. v. DeWitt , 218 P.3d 318, 323 (Colo. 2009) (citation omitted); see Bainbridge, Inc. v. Travelers Cas. Co. of Conn. , 159 P.3d 748, 751 (Colo. App. 2006) ("[T]here must first exist a valid claim, right, or debt in order for another to become subrogated to it."); Union Ins. Co. v. RCA Corp. , 724 P.2d 80, 82 (Colo. App. 1986) ("The claim of a subrogee insurance carrier is derivative of the claim of its subrogor insured. Subrogation merely alters the beneficial ownership of the claim, not its identity, and gives the insuror the right to prosecute against responsible third parties whatever rights its insured possesses against them."), overruled on other grounds by Mile Hi Concrete, Inc. v. Matz , 842 P.2d 198, 206 n.17 (Colo. 1992).

¶ 17 In the insurance context, regardless of how an insurer obtains ownership of subrogation rights (viz., under contract with the insured or through principles of equity), they are derivative of the rights of the insured. "Once an insurance company enjoys those rights, [it] ‘stand[s] in the shoes of the insured’ for all legal purposes and may pursue any rights held by the insured subrogor." DeWitt , 218 P.3d at 323 ; see Cotter Corp. v. Am. Empire Surplus Lines Ins. Co. , 90 P.3d 814, 834 (Colo. 2004) (by subrogation, a party who discharges another's debt "stands in the shoes" of the subrogor); United Fire Grp. ex rel. Metamorphosis Salon v. Powers Elec., Inc. , 240 P.3d 569, 573 (Colo. App. 2010) (same); Bainbridge ,...