INSURANCE BAD FAITH RE EXCESS VS. PRIMARY: National Surety Corp. v. Hartford Cas. Ins. Co. (6TH CIR. 7/30/2007)

National Surety Corp. v. Hartford Cas. Ins. Co. 07a0287p.06
    Western District of Kentucky at Louisville July 30, 2007

INSURANCE: EXCESS INSURER’S RECOURSE AGAIN PRIMARY INSURER FAILURE TO SETTLE WITHIN LIMITS

ROGERS, Circuit Judge. When a primary insurer against tort liability refuses to settle and then loses at trial for amounts greater than its coverage limits, what recourse does an excess insurer have against the primary insurer? This case involves the issue of whether, under Kentucky law, an excess insurer can recover against a primary insurer pursuant to the doctrine of equitable subrogation, either for the primary insurer’s failure in good faith to settle a claim or for the primary insurer’s failure to investigate whether an insured has other insurance.

The excess insurer in this case, National Surety Corporation, argues that the primary insurer, Hartford Casualty Insurance Company, acted in bad faith by failing to settle a tort claim against their mutual insured, Sufix U.S.A., and thereby exposed Sufix to excess liability.1 National Surety seeks to step into Sufix’s shoes, pursuant to the doctrine of equitable subrogation, to assert this bad-faith claim. National Surety also seeks to assert a claim against Hartford for Hartford’s failure to discover that Sufix was insured by National Surety. The district court held that National Surety did not have a cause of action under Kentucky law, and accordingly granted Hartford’s motion to dismiss.

We reverse the district court’s order because the Supreme Court of Kentucky would likely recognize a cause of action in this case. Kentucky law already permits an insured to sue a primary insurer for bad faith failure to settle a claim. Kentucky law also recognizes the doctrine of equitable subrogation, which permits an insurance company to “step into the shoes” of the insured and recover what the insured would have been able to recover against a tortfeasor. Combining these two principles to allow an excess insurer to recover from a primary insurer is a logical extension of these principles and furthers Kentucky’s policy goals of encouraging fair and reasonable settlements and preventing third parties from profiting from an insured’s insurance coverage. However, the district court’s order properly dismissed National Surety’s failure-to-investigate claim because an insured does not have a cause of action under Kentucky law against its insurer for failing to discover an insured’s other sources of insurance.

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