In RSUI Indemnity Co. v. American States Insurance Co., No. 14-30033, 2014 U.S. App. LEXIS 18407 (5th Cir. Sept. 25, 2014), the Fifth Circuit Court of Appeals held no adjudicated excess judgment is required for an excess insurer to recoup settlement payments from the primary insurer whose alleged bad faith failure to defend the common insured caused the excess settlement.

In the underlying action arising from an automobile collision, counsel retained by the primary carrier, American States Insurance Co. (ASIC), for the insureds allegedly failed to take basic, necessary defensive actions.  This included the failure to depose the plaintiff, her doctors, and a witness; to obtain an independent medical examination of the plaintiff; and to oppose the plaintiff’s motion for summary judgment as to liability. The plaintiff demanded $5 million to settle, which represented the policy limits of the ASIC policy and the RSUI excess policy. American States settled for $1 million. RSUI settled for $2 million.

RSUI then sued American States to recover the settlement payments. RSUI alleged that American States failed to properly investigate and defend the underlying lawsuit, which drove up the settlement value of the case, exposed the insured to personal liability, and forced RSUI to settle. The district court granted American’s motion for summary judgment, reasoning that without an adjudicated excess judgment, there can be no claim for an insurer’s bad faith failure to settle.

The Fifth Circuit reversed and remanded, finding that even in the absence of an adjudicated excess judgment against the insured, an excess carrier may maintain a subrogated bad faith cause of action against the primary carrier to recover settlement payments. The court concluded, “where an excess carrier alleges that a primary insurer in bad faith breached its duty to defend a common insured properly and caused exposure of the insured to an increase in the settlement value of the case above the primary policy limit, which the excess insurer must then satisfy on the insured’s behalf, the excess insurer has a subrogated cause of action against the primary insurer for any payment above what it otherwise would have been required to pay.”

By Sharon Angelino and Brian R. Biggie of Goldberg Segalla