On September 19, 2007, claimant William Kelly was injured while descending a stairway in Hawthorne, California. Kelly sued F. H. Paschen, Inc., the general contractor for a construction project on the stairway.
In the ensuing declaratory judgment action, Paschen’s excess carrier, Westchester Fire Insurance Company (Westchester), alleged that Paschen’s primary insurer, Zurich American Insurance Company (Zurich), failed to notify Westchester of the litigation and failed to settle the underlying case within the $1 million primary policy limits. Westchester sought to recover $700,000 it paid on a judgment that exceeded Zurich’s policy limit. Zurich moved to dismiss and to transfer venue.
The court, applying California law, found that California courts have recognized that an excess carrier may claim a right of equitable subrogation to the rights owed by the primary insurer to the insured. Thus, under the doctrine of equitable subrogation, an “excess carrier may maintain an action against the primary carrier for (wrongful) refusal to settle within the latter’s policy limits.”
In denying Zurich’s motion to dismiss, the court determined that the allegations made by Westchester were sufficient to satisfy the 8 elements for equitable subrogation under California law: (a) the insured suffered a loss for which the defendant is liable; (b) the claimed loss was one for which the insurer was not primarily liable; (c) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (d) the insurer has paid the claim of its insured to protect its own interest; (e) the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer; (f) the insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends; (g) justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (h) the insurer’s damages are in a liquidated sum, generally the amount paid to the insured.
The court concluded that Westchester’s allegations supported an inference that Zurich could have settled the claims against Paschen in mediation for $375,000.