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Travelers Indemnity Company of Connecticut, et al. v. Arch Specialty Insurance Company

June 11, 2012


The opinion of the court was delivered by: Carolyn K. Delaney United States Magistrate Judge


In this diversity action, originally filed on June 13, 2011, defendant and cross-complainant Arch Specialty Insurance Company ("Arch"), an excess insurer, seeks reimbursement through subrogation of over $20 million that Arch paid to settle an underlying personal injury action, which Arch contends was handled in bad faith by the primary insurers, plaintiffs and cross-defendants Travelers Indemnity Company of Connecticut and Travelers Property Casualty Company of America (collectively, "Travelers").*fn1

Before the court is Arch's motion for a protective order (dkt. no. 31), which came on regularly for hearing on June 6, 2012. Aaron Allan appeared on behalf of Arch and John Brooks appeared on behalf of Travelers. After considering the parties' joint statement and supporting documentation, the arguments of counsel, and the applicable law, the court now issues the following order.


Facts Giving Rise to the Litigation

Travelers issued liability insurance policies to Freeway Transport, Inc. ("Freeway Transport") and its affiliate United Salad Co. ("United Salad") with a combined limit of $2 million dollars for the period of September 1, 2004 through September 1, 2005. Arch issued an excess liability policy to Freeway Transport and United Salad for that same period providing $24 million in excess coverage above the $2 million combined limit of the Travelers policies. During the covered period, on November 24, 2004, a nine-year old girl was severely injured in Northern California when she was tragically run over by her father in a semi-tractor-trailer on a trucking job that had been arranged by Freeway Transport to deliver a load of produce to United Salad in Portland, Oregon. Freeway Transport is a transportation logistics company that apparently owns no trucks of its own. Thus, Freeway Transport had arranged for the girl's father, a licensed interstate trucker, to haul the load.

Subsequently, in 2006, Freeway Transport was sued in Sacramento County Superior Court in a case entitled Malaquias Mejia as guardian ad litem for Diana Yuleidy Loza-Jimenez v. Loza Trucking, et al. (the "Mejia Action"). The Mejia Action sought damages for the injuries suffered by the girl as a result of the November 2004 accident. As the primary insurer, Travelers accepted tender of the defense and appointed counsel to represent Freeway Transport. Because Freeway Transport itself was not negligent in causing the accident, the primary theory of recovery against Freeway Transport in the Mejia Action was vicarious liability based on a non-delegable duty owed by Freeway Transport to the injured girl. Whether Freeway Transport owed such a non-delegable duty in turn depended on whether Freeway Transport was acting as a "common carrier" under applicable law.

The Mejia Action was bifurcated into liability and damages phases. On December 14, 2009, the court concluded the liability phase by ruling that Freeway Transport was acting as a common carrier and thus liable for the girl's injuries. At this point, Arch became actively involved in the Mejia Action and negotiated a "High-Low" agreement pursuant to which a cap of $22.5 million and a floor of $9 million were to be applied to any damages awarded against Freeway Transport in the damages phase. The jury for the damages phase ultimately awarded $24,307,273.56, which was then reduced to $22.5 million pursuant to the High-Low Agreement. Thereafter, Arch paid the $20.5 million of the judgment that exceeded the $2 million combined limit of Travelers's policies.

In the instant federal action, Arch by subrogation seeks reimbursement from Travelers of the $20.5 million it paid on behalf of their mutual insured, Freeway Transport, primarily contending that Travelers, in the course of its defense of the Mejia Action, unreasonably failed to settle that action. The California Supreme Court has recognized the existence of such a claim:

It has been held in California and other jurisdictions that the excess carrier may maintain an action against the primary carrier for wrongful refusal to settle within the latter's policy limits. This rule, however, is based on the theory of equitable subrogation: Since the insured would have been able to recover from the primary carrier for a judgment in excess of policy limits caused by the carrier's wrongful refusal to settle, the excess carrier, who discharged the insured's liability as a result of this tort, stands in the shoes of the insured and should be permitted to assert all claims against the primary carrier which the insured himself could have asserted. Hence, the rule does not rest upon the finding of any separate duty owed to an excess insurance carrier.

Commercial Union Assurance Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 917-18 (1980). An element of an insurer's equitable subrogation claim is that "justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer." Fireman's Fund Ins. Co. v. Maryland Casualty Co., 65 Cal. App. 4th 1279, 1292 (1998).

In particular, Arch here contends that Travelers failed to conduct adequate investigations regarding the facts material to the insured's liability (especially whether Freeway Transport was acting as a common carrier), failed to make reasonable attempts to settle the Mejia Action, failed to inform the insured of Travelers's analysis of the case or the impact of Travelers's decisions on the insured, and put its interests ahead of the insured by exposing the insured to the risk of an excess judgment. By way of example, Arch claims that Travelers allowed to expire a Cal. Civ. Proc. Code § 998 offer ("998 Offer") to settle the Mejia Action for $2 million (which was within the combined limit of the Travelers policies) and failed to notify the insured of the settlement offer. Arch contends that this was unreasonable in light of the serious and permanent nature of the girl's injuries and the potential liability of Freeway Transport.

On its part, Travelers generally contends that its handling of the Mejia Action was reasonable under the circumstances. Pertinent to the instant motion, Travelers asserts that Arch was aware of the risks and exposures facing the insured and never objected to, and in fact agreed with, Travelers's handling of the defense and its decision not to settle the case prior to the liability determination.*fn2

Background Facts Regarding the Discovery Dispute This discovery dispute arises from Travelers's attempt to discover facts supporting a potential defense that Arch should be unable to recover from Travelers because Arch essentially agreed with Travelers's handling of the case. In response to a document request by Travelers and subject to certain objections, Arch agreed to produce "copies of all unprivileged documents that evidence, reflect, or relate to Arch's evaluation of the potential liability of Freeway Transport...and/or potential damages that might be awarded against [Freeway Transport] in the Mejia lawsuit...." (Dkt. No. ...

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