Ace Am. Ins. Co. v. Fireman's Fund Ins. Co.

2 Cal.App.5th 159

206 Cal.Rptr.3d 176

ACE AMERICAN INSURANCE COMPANY, Plaintiff and Appellant

v.FIREMAN'S FUND INSURANCE COMPANY, Defendant and Respondent.

B264861

Court of Appeal, Second District, Division 4, California.

Filed August 5, 2016

Clyde & Co., David Anthony Gabianelli, San Francisco, and Marianne G. May for Plaintiff and Appellant.

Sheppard Mullin Richter & Hampton, Marc Jeremy Feldman and Peter H. Klee, San Diego, for Defendant and Respondent.

COLLINS, J.

INTRODUCTION

A film industry worker was seriously injured on a film set. 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.

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.

The question before us 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. We find 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.

FACTUAL AND PROCEDURAL BACKGROUND

The facts below are taken from Ace American's complaint and first amended complaint. Because the case is on appeal following a demurrer, we accept the alleged facts as true for the limited purpose of determining whether Ace American has stated a viable cause of action. (Stevenson v. Superior Court (1997) 16 Cal.4th 880, 885, 66 Cal.Rptr.2d 888, 941 P.2d 1157.)

A. The underlying action

In July 2010, 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. Franco alleged that the incident left him with permanent nerve pain, an eye injury, urinary and sexual dysfunction, and fear and depression.

In April 2011, Franco and his wife sued Warner Brothers Entertainment, Inc. and related entities for damages and loss of consortium. Fireman's Fund provided the Warner Brothers entities a primary insurance policy with a $2 million limit, and an umbrella insurance policy with a $3 million limit. Ace American provided the Warner Brothers entities an excess insurance policy with a $50 million limit.

Fireman's Fund defended the Warner Brothers entities in the Francos' lawsuit. In April and May 2012, 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.” In October 2012, 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.

B. This action

Ace American filed an action against Fireman's Fund for equitable subrogation and breach of the covenant of good faith and fair dealing. In the first amended complaint, which is relevant here, Ace American alleged the facts of the Franco lawsuit, as stated above. It alleged that the Francos' settlement demands within the limits of the Fireman's Fund policy were reasonable, and there was a substantial likelihood that a jury verdict would exceed the limits of the Fireman's Fund policies. It alleged that “Ace American sustained a loss for which [Fireman's Fund] is liable because of [Fireman's Fund's] wrongful conduct in failing to settle the Underlying Action within its policy limits, despite repeat[ed] opportunities to settle within its limits.” Ace American also alleged that its policy provided that if the insured had a right to recover all or part of any payment Ace American made under the policy, those rights were transferred to Ace American.

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. Fireman's Fund relied on RLI Insurance Company v. CNA Casualty of California (2006) 141 Cal.App.4th 75, 45 Cal.Rptr.3d 667 (RLI ), which stated that an “insured's right to recover from the primary insurer hinges upon ‘a judgment in excess of policy limits.’ ” (RLI, supra , 141 Cal.App.4th at p. 82, 45 Cal.Rptr.3d 667, quoting Hamilton v. Maryland Casualty Co . (2002) 27 Cal.4th 718, 725, 117 Cal.Rptr.2d 318, 41 P.3d 128 (Hamilton ).) RLI also stated, “Without an excess judgment, the primary insurer's refusal to settle is not actionable.” (RLI, supra , 141 Cal.App.4th at p. 82, 45 Cal.Rptr.3d 667.)

Ace American opposed the demurrer, arguing that a judgment is not required for an equitable subrogation action by an excess insurer. Ace American argued that it was irrelevant whether the underlying action was resolved by a settlement or a judgment, as long as the insured—and by extension, the excess insurer—was liable for any amount beyond the limits of the primary policy as a result of the primary insurer's bad faith refusal to settle within policy limits. Ace American relied in part on Fortman v. Safeco Insurance Co . (1990) 221 Cal.App.3d 1394, 271 Cal.Rptr. 117 (Fortman ), which held that an excess judgment was not a prerequisite to an equitable subrogation claim, as long as the excess insurer demonstrated that it actually paid an amount in excess of the primary insurer's policy limits.

The trial court sustained Fireman Fund's demurrer without leave to amend. The court held, “RLI is directly on point. RLI was clear: Until the judgment is actually entered, the mere possibility or probability of an excess judgment does not render the refusal to settle actionable. Here, there is no dispute a judgment was not entered. The demurrer is sustained.”

The trial court entered judgment, and Ace American timely appealed.

STANDARD OF REVIEW

“We review de novo the trial court's order sustaining a demurrer.” (Cansino v. Bank of America (2014) 224 Cal.App.4th 1462, 1468, 169 Cal.Rptr.3d 619.) We accept as true all well-pleaded allegations in the complaint, and treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. (Evans v. City of Berkeley (2006) 38 Cal.4th 1, 6, 40 Cal.Rptr.3d 205, 129 P.3d 394 ; Serrano v. Priest (1971) 5 Cal.3d 584, 591, 96 Cal.Rptr. 601, 487 P.2d 1241.)

DISCUSSION

A. Equitable subrogation and breach of the covenant of good faith and fair dealing

“ ‘Primary coverage is insurance coverage whereby, under the terms of the policy, liability attaches immediately upon the happening of the occurrence that gives rise to liability.... [¶] “Excess” or secondary coverage is coverage whereby, under the terms of the policy, liability attaches only after a predetermined amount of primary coverage has been exhausted.’ [Citation.]” (Transcontinental Ins. Co. v. Insurance Co. of the State of Pennsylvania (2007) 148 Cal.App.4th 1296, 1304, 56 Cal.Rptr.3d 491.)¹ Here, Fireman's Fund is the primary insurer, and Ace American is the excess insurer.

California recognizes “an implied duty on the part of the insurer to accept reasonable settlement demands on [covered] claims within the policy limits.” (Hamilton, supra, 27 Cal.4th at p. 724, 117 Cal.Rptr.2d 318, 41 P.3d 128.) “An insurer's liability for failing to accept a reasonable settlement offer ‘is imposed not for a bad faith breach of the contract but for failure to meet the duty to accept reasonable settlements, a duty included within the implied covenant of good faith and fair dealing .’ ” (Archdale v. American Internat. Specialty Lines Ins. Co . (2007) 154 Cal.App.4th 449, 465–466, 64 Cal.Rptr.3d 632 (Archdale ), quoting Crisci v. Security Ins. Co. of New Haven, Conn . (1967) 66 Cal.2d 425, 430, 58 Cal.Rptr. 13, 426 P.2d 173 (Crisci ) (emphasis in Archdale ).) “An insurer that breaches its duty of reasonable settlement is liable for all the insured's damages proximately caused by the breach, regardless of policy limits.” (Hamilton, supra, 27 Cal.4th at p. 725, 117 Cal.Rptr.2d 318, 41 P.3d 128.)

“Subrogation is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt or claim.” (Fireman's Fund Ins. Co. v. Maryland Cas. Co . (1998) 65 Cal.App.4th 1279, 1291, 77 Cal.Rptr.2d 296 (Fireman's Fund v. Maryland ).) “Equitable subrogation allows an insurer that paid coverage or defense costs to be placed in the insured's position to pursue a full recovery from another insurer who was...