California Court of Appeals, Second District, Fourth Division
APPEAL
from a judgment of the Superior Court of Los Angeles County
No.BC559203, Rafael A. Ongkeko, Judge.
Clyde
& Co., David Anthony Gabianelli and Marianne G. May for
Plaintiff and Appellant.
Sheppard Mullin Richter & Hampton, Marc Jeremy Feldman
and Peter H. Klee for Defendant and Respondent.
COLLINS, J.
INTRODUCTION
A film
industry worker was seriously injured on a film set. His
employer had two primary insurance policies with
Fireman’s Fund Insurance Company, and an excess
insurance policy with Ace American Insurance Company. The
injured worker sued, Fireman’s Fund defended the case,
and the case eventually settled with the participation of and
contributions from both insurers.
Ace
American then sued Fireman’s Fund for equitable
subrogation, alleging that the injured worker initially
offered to settle his case within the limits of the
Fireman’s Fund policies, and that Fireman’s Fund
unreasonably rejected those settlement offers. Ace American
alleged that as a result, it was required to contribute to
the eventual settlement, which exceeded the limits of the
Fireman’s Fund policies.
The
question before us is whether Ace American has stated viable
causes of action for equitable subrogation and breach of the
duty of good faith and fair dealing, or whether the lack of a
judgment in the employment injury case bars Ace
American’s claims. We find that because Ace American,
the excess insurer, alleged it was required to contribute to
the settlement of the underlying case due to the primary
insurer’s failure to reasonably settle the case within
policy limits, the lack of an excess judgment against the
insured in the underlying case does not bar an action for
equitable subrogation and breach of the duty of good faith
and fair dealing.
Factual
and procedural background
The
facts below are taken from Ace American’s complaint and
first amended complaint. Because the case is on appeal
following a demurrer, we accept the alleged facts as true for
the limited purpose of determining whether Ace American has
stated a viable cause of action. (Stevenson v. Superior
Court (1997) 16 Cal.4th 880, 885.)
The
underlying action
In July
2010, John Franco was working on a film set when a special
effects accident caused him to suffer serious injuries.
Franco’s injuries included pelvic crush injuries, a
broken hip, fractures to both femurs, crush injuries to both
knees, broken tibias and fibulas, broken ribs, a punctured
lung, and soft tissue injuries to his face. Franco alleged
that the incident left him with permanent nerve pain, an eye
injury, urinary and sexual dysfunction, and fear and
depression.
In
April 2011, Franco and his wife sued Warner Brothers
Entertainment, Inc. and related entities for damages and loss
of consortium. Fireman’s Fund provided the Warner
Brothers entities a primary insurance policy with a $2
million limit, and an umbrella insurance policy with a $3
million limit. Ace American provided the Warner Brothers
entities an excess insurance policy with a $50 million limit.
Fireman’s
Fund defended the Warner Brothers entities in the
Francos’ lawsuit. In April and May 2012, the Francos
made settlement demands within the limits of the
Fireman’s Fund policies. According to Ace
American’s complaints, the demands were reasonable and
supported by substantial evidence, but Fireman’s Fund
“failed and/or refused to pay those demands within [the
insurance policies’] limits.” In October 2012,
the Francos settled their lawsuit “for an amount
substantially in excess” of the limits of the
Fireman’s Fund policies. According to Ace American,
Fireman’s Fund “consented to the settlement and
contributed to it”, and Ace American contributed the
amounts in excess of the Fireman’s Fund policies’
limits. Following the settlement, the case was dismissed with
prejudice.
This
action
Ace
American filed an action against Fireman’s Fund for
equitable subrogation and breach of the covenant of good
faith and fair dealing. In the first amended complaint, which
is relevant here, Ace American alleged the facts of the
Franco lawsuit, as stated above. It alleged that the
Francos’ settlement demands within the limits of the
Fireman’s Fund policy were reasonable, and there was a
substantial likelihood that a jury verdict would exceed the
limits of the Fireman’s Fund policies. It alleged that
“Ace American sustained a loss for which
[Fireman’s Fund] is liable because of [Fireman’s
Fund’s] wrongful conduct in failing to settle the
Underlying Action within its policy limits, despite
repeat[ed] opportunities to settle within its limits.”
Ace American also alleged that its policy provided that if
the insured had a right to recover all or part of any payment
Ace American made under the policy, those rights were
transferred to Ace American.
Fireman’s
Fund demurred, arguing that the rights of an excess insurer
such as Ace American derive from the rights of the insured,
Warner Brothers. As such, an excess insurer may only sue for
equitable subrogation if there has been a judgment against
the insured that exceeds the limits of the primary policy.
Because the Franco lawsuit settled and there was no judgment
against Warner Brothers, Fireman’s Fund argued, Ace
American could not sue for equitable subrogation.
Fireman’s Fund relied on RLI Insurance Company v.
CNA Casualty of California (2006) 141 Cal.App.4th 75
(RLI), which stated that an “insured’s
right to recover from the primary insurer hinges upon
‘a judgment in excess of policy limits.’”
(RLI, supra, 141 Cal.App.4th at p. 82, quoting
Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th
718, 725 (Hamilton).) RLI also stated,
“Without an excess judgment, the primary
insurer’s refusal to settle is not actionable.”
(RLI, supra, 141 Cal.App.4th at p. 82.)
Ace
American opposed the demurrer, arguing that a judgment is not
required for an equitable subrogation action by an excess
insurer. Ace American argued that it was irrelevant whether
the underlying action was resolved by a settlement or a
judgment, as long as the insured-and by extension, the excess
insurer-was liable for any amount beyond the limits of the
primary policy as a result of the primary insurer’s bad
faith refusal to settle within policy limits. Ace American
relied in part on Fortman v. Safeco Insurance Co.
(1990) 221 Cal.App.3d 1394 (Fortman), which held
that an excess judgment was not a prerequisite to an
equitable subrogation claim, as long as the excess insurer
demonstrated that it actually paid an amount in excess of the
primary insurer’s policy limits.
The
trial court sustained Fireman Fund’s demurrer without
leave to amend. The court held, “RLI is
directly on point. RLI was clear: Until the judgment
is actually entered, the mere possibility or probability of
an excess judgment does not render the refusal to settle
actionable. Here, there is no dispute a judgment was not
entered. The demurrer is sustained.”
The
trial court entered judgment, and Ace American timely
appealed.
Standard
of review
“We
review de novo the trial court’s order sustaining a
demurrer.” (Cansino v. Bank of America (2014)
224 Cal.App.4th 1462, 1468.) We accept as true all
well-pleaded allegations in the complaint, and treat the
demurrer as admitting all material facts properly pleaded,
but not contentions, deductions or conclusions of fact or
law. (Evans v. City of Berkeley (2006) 38 Cal.4th 1,
6; Serrano v. Priest (1971) 5 Cal.3d 584, 591.)
Discussion
A.
Equitable subrogation and breach of the covenant of good
faith and fair dealing
“‘Primary
coverage is insurance coverage whereby, under the terms of
the policy, liability attaches immediately upon the happening
of the occurrence that gives rise to liability.... [¶]
“Excess” or secondary coverage is coverage
whereby, under the terms of the policy, liability attaches
only after a predetermined amount of primary coverage has
been exhausted.’ [Citation.]”
(Transcontinental Ins. Co. v. Insurance Co. of the State
of ...