The Arizona Court of Appeals recently issued a memorandum that provided a great refresher of the doctrine of equitable subrogation in Arizona. In Navigators Insurance Company v. First Mercury Insurance Company, No. 1 CA-CV 19-0744 (October 6, 2020), the Court of Appeals ruled that to preclude an excess insurer from pursuing damages from the primary insurer because the insured is not personally liable would undercut the doctrine of equitable subrogation.
In the underlying matter, plaintiff was seriously injured and permanently impaired when one of the insured gym’s stair climbers malfunctioned. Plaintiff sued the gym for premises liability and negligence. Plaintiff claimed the injury prevented him from returning to his job as a probation officer, seeking $175,000 in medical expenses and approximately $3 million in non-economic damages. Plaintiff and his wife also sued for loss of consortium damages.
First Mercury was the gym’s primary insurer. It provided coverage for the first $2 million of any verdict or settlement above the gym’s $250,000 self-insured retention amount. As the excess carrier, Navigators provided an additional $2 million in coverage.
With liability against the gym, plaintiff’s damages were the focus of the case. First Mercury weighed settlement opportunities at various times during the course of the litigation. Its worst case figures ranged from $900,000 18 months before trial to $4.2 million a month before trial. First Mercury believed the verdict would not exceed $1.3 million.
Settlement negotiations continued during trial. At one point, plaintiff reduced his demand from $2 million to $1.5 million. In response, First Mercury increased its offer from $800,000 to $1.1 million. The gym and Navigators urged First Mercury to settle the case. First Mercury, however, did not increase its offer, despite having previously approved settlement up to $1.25 million.
After hearing the evidence, the jury returned a unanimous verdict awarding plaintiff $3.95 million. The evidence at trial established the gym’s liability. Testimony conceded the gym had not maintained the stair climber according to the manufacturer’s guidelines. The jury did not find the gym’s damages arguments convincing.
With the verdict exceeding First Mercury’s policy limits, Navigators assumed control and settled the case for $3 million. After the settlement, Navigators sued First Mercury under the doctrine of equitable subrogation for breaching its duty to negotiate in good faith. Navigators claimed the $1 million settlement it paid to plaintiff plus interest, attorneys’ fees and costs.
Navigators’ claim against First Mercury was based on the fact it was the excess coverage that shifted the risk of loss from the gym and could sue First Mercury for failing to negotiate in good faith on the gym’s behalf. Specifically, First Mercury’s failure to settle a claim which should have been settled was a breach of the duty of good faith and would have exposed the gym to liability but for Navigators’ excess coverage. First Mercury countered with the argument that its only duty was to the gym. It also argued it had properly investigated and evaluated plaintiff’s claim, which discharged its duty to the gym. Additionally, since the gym did not experience any harm, Navigators had no claim. A unanimous jury awarded Navigators $1 million. First Mercury appealed the finding.
On appeal, First Mercury argued Arizona law does not recognize Navigators’ equitable subrogation claim. Relying upon the holding in Hartford Accident & Indem. Co. v. Aetna Cas. & Sur. Co., 164 Ariz. 286 (1990), the Court of Appeals disagreed with First Mercury. In Hartford, the Arizona Supreme Court recognized an excess insurer’s action for breach of good faith against a primary insurer whose settlement tactics led to an excess judgment.
Akin to the facts and holding in Hartford, the Court of Appeals held Navigators had the right to step into the gym’s shoes and hold First Mercury accountable for failing to negotiate in good faith. In Arizona, an excess insurer who pays an excess judgment due to a primary insurer’s bad faith failure to settle within policy limits of the primary insurer is subrogated the rights of the insured.
As to First Mercury’s argument it was not liable to Navigators due to the gym’s lack of damages, the Court of Appeals disagreed. In Arizona, an excess insurer has no greater rights than its insured. However, this does not preclude an excess insurer from asserting a bad faith claim against the primary insurer, even if the insured had no such claim.
First Mercury also argued Navigators could not sit on the sidelines and then later assert an unexpected jury verdict rendered the primary insurance carrier liable for bad faith. The Court of Appeals disagreed. According to the Court of Appeals and review of Arizona law, Navigators had no duty “to evaluate [the] settlement offer, to participate in the defense, or to act at all” until First Mercury tendered its policy limits, which did not happen. Twin City Fire Ins. Co. v. Burke, 204 Ariz. 251, 256 (2003).
The Court of Appeals determined First Mercury failed its good faith duty to give equal consideration to the interest of the gym, which turns on whether First Mercury would have settled for $1.5 million if it was responsible for losses beyond the $2 million policy.
TM Takeaway: In cases involving multiple insurance layers and high exposure, it is important to make sure your defense counsel is giving you a thorough and complete evaluation of the case. This will allow you to make an informed decision when it comes to settlement and avoid a potential equitable subrogation claim.