In Scottsdale Insurance Co. v. Addison Insurance Co., No. SC93792, 2014 Mo. LEXIS 335 (Mo. Dec. 9, 2014), the Supreme Court of Missouri reversed the trial court’s grant of summary judgment in favor of United Fire & Casualty Company (United Fire) with regard to the bad faith refusal to settle claim asserted by Wells Trucking, Inc. (Wells Trucking) and Scottsdale Insurance Company (Scottsdale).
The underlying dispute arose from an automobile collision involving a truck driver employed by Wells Trucking that resulted in the death of another motorist. Wells Trucking had a primary insurance policy with United Fire that had a limit of $1 million and an excess policy with Scottsdale that had a limit of $2 million.
After the fatal collision, the decedent’s surviving family members entered into negotiations with United Fire to settle any claims against Wells Trucking. Wells Trucking and Scottsdale allege that United Fire, in its negotiations with the decedent’s family, breached its good faith obligations in its refusal to settle. Scottsdale and Wells Trucking further allege the decedent’s family filed a wrongful death suit due to United Fire’s bad faith failure to settle the claim within its policy limits. After the filing of the wrongful death suit, Scottsdale and Wells Trucking allege that United Fire continued to refuse to settle in bad faith, even refusing a settlement demand of $1 million. The decedent’s family then raised the demand to $3 million. Eventually, United Fire tendered its policy limit of $1 million towards the decedent’s family; however, Scottsdale also had to pay $1 million to settle the case.
After Wells Trucking assigned its right to pursue a bad faith refusal to settle claim to Scottsdale, Wells Trucking and Scottsdale filed suit against United Fire. Scottsdale raised five theories upon which it could bring the bad faith refusal to settle claim: (1) assignment, (2) conventional subrogation, (3) equitable subrogation, (4) breach of the direct duty of good faith owed by a primary carrier to an excess carrier, and (5) third-party beneficiary. United Fire moved for summary judgment as to all counts and further asserted that Wells Trucking and Scottsdale could not establish all the elements of bad faith refusal to settle claim. The trial court granted United Fire’s motion.
On appeal, the Supreme Court rejected the trial court’s conclusion that United Fire negated the essential elements of a bad faith refusal to settle claim. In particular, United Fire argued that Missouri law required an excess judgment for the bad faith claim to be actionable. The Court disagreed because damage occurs when the insurer does not act in good faith, thereby depriving the insured of an important obligation owed by the insurer.
Further, the Court held that Scottsdale could pursue its bad faith refusal to settle claim under the theories of assignment, conventional subrogation, and equitable subrogation. With regard to the assignment by Wells Trucking, the court concluded it was proper since Missouri law allows for the assignment of non-personal torts (e.g., personal injuries, contracts of purely personal nature like marriage). Therefore, since a bad faith refusal to settle claim is based on a tort arising from an insurance contract, it is assignable.
Also, under conventional subrogation, the court stated that the language in the Scottsdale policy clearly granted a right of subrogation to Scottsdale. The court recognized that nothing in the relationship between primary insurer, insured, and excess insurer precluded the application of conventional subrogation.
Last, equitable subrogation was available to Scottsdale. The court observed that equitable subrogation had previously been used by excess insurers in Missouri in order to “recover from a primary insurer a portion of the insured’s settlement that the primary insurer was obligated to pay under its policy.” The court stated that the right of equitable subrogation is available to one who is obligated (i.e., not a volunteer) to pay another’s debts and who seeks to recover the amount paid, which in good conscience should be paid by the one primarily responsible. In this instance, the court held that Scottsdale was obligated to pay Wells Trucking on the basis of its insurance policy, and good conscience required United Fire be the party to suffer the loss since the excess settlement amount was a result of its bad faith.
However, the court determined that United Fire owed no direct duty to Scottsdale to settle in good faith. A direct duty to settle in good faith arises from an insurance contract between insurer and insured and since there is no contractual relationship between excess and primary insurers, there can be no direct duty. The fifth alternative based upon a third-party beneficiary theory was not pursued on appeal.
This decision is significant for excess carriers in that it provides them a roadmap in pursuing remedies against primary carriers that are not eager to settle claims with potential excess exposure.