Excess Insurance Company Subrogation Rights
Texas recognizes three types of subrogation rights: (1) contractual; (2) equitable; and (3) statutory. Colony Ins. Co. v. Peachtree Const., Ltd. 647 F.3d 248, 256 (5th Cir. 2011); citing Fortis Benefits v. Cantu, 234 S.W.3d 642, 648 (Tex. 2007). In disputes between insurance companies, the focus is on contractual or equitable subrogation. Colony at 256-57.
- Contractual Subrogation.
Contractual subrogation is “created by an agreement or contract that grants the right to pursue reimbursement from a third party in exchange for payment of a loss.” Id.; citing Mid-Continent Ins. Co. v. Liberty Mut. Ins. Co., 236 S.W.3d 765 (Tex. 2007). If an excess or umbrella policy does not contain a subrogation provision, it typically will expressly incorporate all “terms, conditions, agreements, exclusions and definitions as the ‘Underlying Insurance.’” The “Underlying Insurance” often will contain a subrogation provision, and the wording should be analyzed carefully for applicability. Commonly, a primary CGL policy will include a transfer of rights provision substantially similar to the following provision, which is contained in the ISO CG 00 01 07 98 base form:
SECTION IV – COMMERCIAL GENERAL LIABILITY CONDITIONS
. . . .
8. Transfer Of Rights Of Recovery Against Others To Us
If the insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring “suit” or transfer those rights to us and help us enforce them.
Liberty policy, CG 00 01 07 98, p. 12. If incorporated by the terms of the excess or umbrella policy, the excess or umbrella insurance policy will then have a contractual right of subrogation with respect to any drop down payment made or other payment made that the excess or umbrella insurance company determines is reasonable, which may be based on many different circumstances including, without limitation, coverage issues being raised by the underlying primary insurance company.
- Equitable Subrogation.
A right of equitable subrogation exists under Texas law when one party establishes “that it involuntarily paid a debt primarily owed by another which in equity should have been paid by the other party.” Colony at 256, citing Mid-Continent, 236 S.W.3d at 774; Frymire Eng’g Co. v. Jomar Int’l, Ltd., 259 S.W.3d 140-142, 144-146 (Tex. 2008).
In Texas, an excess insurance company may have a right of equitable subrogation against a primary insurance company, and this right extends to amounts the excess carrier has to pay to settle the claim when the claim is mishandled by the primary carrier. American Centennial Ins. Co. v. Canal Ins. Co., 843 S.W.2d 480 (1992). Notably, any such payments made by an excess carrier are “presumptively involuntary for subrogation purposes. Colony at 256 (emphasis added). “An insurer who pays a third-party claim against its insured is not a volunteer if the payment is made in good faith and under a reasonable belief that the payment is necessary to its protection.” Id. (emphasis added), citing Keck, Mahin & Cate v. Nat’l Union Fire Ins. Co. of Pittsburgh, 20 S.W.3d 692, 702-03 (Tex. 2000).
American Centennial involved the following layers of insurance: (1) $100,000 issued by Canal Insurance Company; (2) $1 million excess of the Canal policy issued by First State Insurance Company; and (3) $4 million excess of the First State policy issued by American Centennial. Due to alleged mishandling by the defense trial counsel, the carriers had to pay $3.7 million to settle the claim. American Centennial, 843 S.W.2d at 481. Defense counsel was retained by Canal, the primary carrier. Id. The court allowed the excess carriers to pursue an equitable subrogation claim against the primary carrier and the defense counsel based on allegations that the case was mishandled, and the mishandling required the case to be settled in the amount of $3.7 million. Id.
In addition, an excess insurance company has a right of equitable subrogation against a primary insurance company when the primary fails to accept a reasonable settlement demand within the primary’s limits. See, e.g., American Empire Surplus Lines Ins. Co. v. Occidental Fire & Cas. of North Carolina, 2015 WL 4496699 (S.D. Tex. 2015). In American Empire, the excess carrier contended that the primary carrier had a reasonable opportunity to settle the case within its policy limits, “but failed to do so.” Id. at *1. Because the ultimate settlement required payment from the excess carrier over the primary carrier’s limits, the excess carrier sought reimbursement from the primary carrier on the theory of equitable subrogation. The court held that when a reasonable settlement offer is rejected by the primary carrier, and the excess carrier is later required to pay money that it otherwise would not have had to pay, the excess carrier has a right of subrogation against the primary carrier for the amount paid. In reaching this conclusion, the court expressly noted the Fifth Circuit opinion of RSUI Indem. Co. v. Am. States Ins. Co., 768 F.3d 374, 381-82 (5th Cir. 2014)(applying Louisiana law). In this regard, the court noted that the obligations to settle are “materially indistinguishable” from those under Louisiana law, and applied the resulting rule that the payment of settlement money from the excess carrier in a settlement is enough, and that an “adjudicated judgment” is not required. Id. at *2. Importantly, the court further stated:
The Court agrees that, in this situation, [the primary insurance company] raises a distinction without a difference that threatens the public policy in favor of settlements by requiring an excess carrier to litigate to final judgment any dispute that cannot be settled by the primary policy limits because of a primary carrier’s failure to accept a Stowers demand [demand within primary policy limits that meets the requirements under Texas law]. Such a requirement places all insurance carriers at risk of paying more than would have been necessary if the claim could have been settled. The excess carrier is at risk of paying more on a judgment and the primary carrier is at risk of paying more as a result of a Stowers action to recover the amount of the excess judgment. Such a risk is not justified by any competing policy concerns.
Id. at *3 (emphasis added).
Furthermore, an excess carrier may drop down and issue payment in order to settle a claim and expressly dispute that it has the obligation to do so. In Royal Ins. Co. of America v. Caliber One Indem. Co., 465 F.3d 614 (5th Cir. 2006), three years of insurance policies were at issue, and many arguments were made with respect to the number of occurrences and the applicable trigger of coverage. Royal Insurance Company wrote an excess policy for one year of the coverage, excess of a primary insurance policy with limits of $1 million issued by Caliber One Indemnity Company. Id. at 616. The claim ultimately settled, with Caliber One contributing $800,000, Hartford (the primary insurance company for the other two years at issue) contributing $200,000, and Royal (excess of Caliber One only) contributing $1 million. Id. Royal made this payment “under protest, asserting that it would attempt to recover that amount from the primary carriers.” Id. The Court held that the underlying primary insurer, Caliber One, was required to exhaust its $1 million primary limit before the excess carrier, Royal, was obligated to pay, holding that Royal had a right of reimbursement based on the theory of equitable subrogation. Id.
The cases often provide various policy reasons behind equitable subrogation in this context, the key of which is to "encourage fair and reasonable settlement of lawsuits." American Centennial, 843 S.W.2d at 482. Moreover, "[i]f the excess carrier had no remedy, the primary insurer would have less incentive to settle within the policy limits." Id. at 483. In addition, "allowing the excess insurers to enforce the primary insurer's duty to settle in good faith serves the public and judicial interests in fair and reasonable settlements of lawsuits by discouraging primary carriers from 'gambling' with the excess carrier's money when potential judgments approach the primary insurer's policy limits." Id. In American Centennial, the Texas Supreme Court further clarified that the primary insurer has clear duties to protect the interests of the insured, and that due to this, the insured "has little incentive to enforce the primary carrier's duties" but "the excess carrier should be permitted to do so through equitable subrogation." Id. The court also specifically noted that “[d]efense counsel must be particularly sensitive to the varying interests of the insured and the insurer which produce complex and often conflicting relationships”, and upheld the long-standing rule that even though the insurance company pays the defense counsel fees, the defense counsel “owes the insured the same type of unqualified loyalty as if he had been originally employed by the insured.” Id., citing Employers Casualty Co. v. Tilley, 496 S.W.2d 552, 558 (Tex. 1973).
- Payment by An Insured Can Fund a Limits Gap.
In the event that an excess or umbrella insurance company does not agree to drop down and pay any remainder of a gap in primary limits that a primary carrier is not willing to fund, for whatever reason, an insured should be advised to consider funding the gap amount between what the primary insurance company is willing to pay and the required primary amount in order to trigger the excess policy for settlement purposes. By doing so, the exposure amount of the loss can be limited and controlled, rather than rolling the dice in the underlying case and forcing it to trial. Many arguments can be made, hinging on technical wordings of excess policies. However, because the expected threshold amount of underlying required limits are met, regardless of the source of payment, the excess or umbrella policy should be triggered. Before making such payment, however, an insured is also advised to obtain in writing from the excess or umbrella carrier that any such payment made by the insured will be considered by the excess or umbrella insurance company as payment of the underlying primary limits.
This issue was addressed in Plantation Pipe Line Co. v. Highlands Ins. Co., 444 S.W.3d 307 (Tex. App. – Eastland, 2014, pet. denied). Plantation Pipe involved several layers of insurance coverage: (1) self-insured to $100,000; (2) American $1 million excess of $100,000; (3) Cal Union $3 million excess of $1 million; (4) Lumbermens $8 million excess of $3 million; and (5) Highlands $18 million excess of $8 million. Id. at 308. The case involved a leak in an underground gasoline pipeline, and gasoline contamination, remediation and clean-up as a result. Although the carriers disputed coverage, they ultimately paid amounts as follows: (1) American paid $750,000; (2) Cal Union paid $1 million; and (3) Lumbermens paid $2.8 million. Id. Plantation agreed to pay the difference between the underlying settlement amounts and the underlying policy limits. Id. Highlands took the position that due to the exhaustion clause in its policy, the attachment amount must be paid solely by the insurers. Id. at 313. The court determined that due to the wording of the policies in question, and because the combined payments of the insured as well as the underlying insurers met the attachment point of $8 million, the excess carrier policy was triggered. Id.
In reaching this conclusion, the court noted specific terms of the Highlands policy. It also noted the common “Maintenance Clause” provision, which requires an insured to maintain the amount of primary limits as stated in the policy. In this regard, the court held that “[u]nder this provision [the Maintenance Clause], it would not matter whether the underlying policies were even effective – much less the source of the payment for the loss – the Highlands [excess] policy would still attach, but not until its attachment point of $8 million was reached.” Id. ; see also, e.g., Emscor Mfg., Inc. v. Alliance Ins. Group, 879 F.W.2d 894 (Tex. App. – Houston [14th Dist.] 1994, writ denied) (holding that to meet the underlying limit in a situation in which the primary carrier became insolvent, an insured must actually make payment in an amount equal to the specified primary limit, and an execution of a letter of guaranty for payment or promise to pay is not sufficient).
It is important to note that an opposite result was reached in Citigroup, Inc. v. Federal Insurance Co., 649 F.3d 367, 370-73 (5th Cir. 2011). The Citigroup case is often cited, but the facts are different. In Citigroup, the insured settled with its primary carrier for $15 million, which was less than the primary limit of $50 million. Id. at 314. The court, after reviewing specific policy language, concluded that the excess insurance language was not ambiguous and required exhaustion of the $50 million in primary limits before the excess would be triggered. Arguments were made that due to ambiguities in the exhaustion language, payment of the full amount of $50 million in underlying insurance was not required, but the court declined to follow this reasoning.
- Excess or Umbrella Insurance Company Buys the Rights of the Insured.
With respect to equitable subrogation rights, an excess carrier can assert any and all rights that an insured would have as against the primary carrier. So, to the extent an excess or umbrella insurance company considers dropping down to pay, it becomes important for the excess or umbrella insurance company to understand fully what the issues have been, if any, with the underlying primary insurance company.