Showing of Bad Faith Required to Tap Primary Insurer for Equitable Subrogation Claim by Excess Insurer

An excess insurer is required to plead and prove that the primary insurer’s refusal to accept an offer was made in bad faith according to the Colorado Court of Appeals.

In Preferred Professional Insurance Company v. The Doctors Company, the plaintiff in the medical malpractice suit offered to settle the case for $1 million. The insured told both insurers he wanted to accept the settlement offer, but TDC, the primary insurer, turned it down. PPIC, the excess insurer, told the insured he should accept, and it paid the $1 million settlement. As a result, PPIC then filed a claim seeking payment of the $1 million from TDC. PPIC insisted it was pursuing what was called an “independent equitable claim,” in which it only needed to prove that it equitably should have been paid by TDC.

The Court held “an excess insurer in this situation must proceed on a theory of equitable subrogation premised on the rights of the insured under his contract with the primary insurer—that is, the excess insurer must step into the shoes of the insured.” Under Colorado law, because the insured would have to prove bad faith in an action against the primary insurer based on the insurer’s refusal to settle, the excess insurer must also plead and prove such bad faith. As a result, the Court remanded the case back to the district court to enter summary judgement in TDC’s favor.

Please click here to download a copy of the Court’s decision.

If you have any questions, please contact Lauren Harvey at lnh@mccollumlaw.com.

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