Excess Insurer Can Pursue Statutory and Common Law Bad Faith Claims Against Primary Insurer as Assignee of Insured

Applying Rhode Island law, the United States District Court for the District of Rhode Island has held that an excess insurer can maintain a cause of action for bad faith failure to settle against a primary insurer. Columbia Cas. Co. v. Ironshore Spec. Ins. Co., 2016 WL 2930927 (D.R.I. May 19, 2016). In addition, the court held that the enactment of statutory bad faith did not preclude a cause of action for common law bad faith under Rhode Island law and that an excess insurer could bring a statutory bad faith claim against a primary insurer as an assignee of the insured’s rights.

A patient and his wife filed a medical malpractice lawsuit against the insured hospital after the patient suffered severe and permanent brain injury under its care. The hospital tendered the claim to its primary and excess professional liability carriers. The hospital had a $6 million self-insured retention; $15 million in primary coverage; and $11 million in excess coverage. The claimants made a demand for $32 million, the entirety of the self-insured retention and the primary and excess insurance. At the outset of trial, the primary insurer negotiated a high/low settlement agreement with the claimant based on the outcome of the trial against the hospital with a low payment of $15 million and a high payment of $31.5 million. The claimants won at trial, and the primary and excess insurer paid their respective policy limits to fund the $31.5 million due under the high/low agreement. The primary insurer filed a declaratory judgment action against the excess insurer after the excess insurer demanded that the primary insurer reimburse it for the $11 million it paid toward the settlement. The excess insurer filed a counterclaim alleging that the primary insurer had committed common law and statutory bad faith under Rhode Island law for failing to settle the case for the primary insurer’s $15 million limit of liability.

The court held that the excess insurer stated a claim for statutory and common law bad faith and denied the primary insurer’s motion to dismiss the excess insurer’s counterclaim. The court held that the excess insurer stated a claim for common law bad faith because the primary insurer allegedly failed to settle the claim within the primary insurer’s limit of liability. It rejected the primary insurer’s argument that the excess carrier’s common law bad faith claim was foreclosed because the excess carrier consented to the high/low agreement. The court reasoned that the bad faith claim was not foreclosed because the high/low agreement did not result in a settlement within the limit of liability of the primary policy.

The court also held that the excess insurer could pursue the primary insurer for statutory bad faith. Although a primary insurer’s obligations to act in good faith run only to the insured, the court held that Rhode Island law recognizes that an assignee of the insured can pursue a statutory bad faith claim, and the excess insurer obtained a written assignment from the insured of its bad faith claim against the primary insurer. The court also held that the existence of statutory remedies for bad faith did not preclude the excess insurer from also pursuing a common law bad faith claim.

Wiley Executive Summary

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