Excess Insurer Standing in Shoes of Insured for Equitable Subrogation Claim against Primary Insurer Must Prove Bad Faith
A Colorado appeals court has held that Colorado law does not recognize an independent equitable subrogation claim by an excess insurer against a primary insurer to recover a settlement paid by the excess insurer. Preferred Prof’l Ins. Co. v. The Doctors Co., 2018 WL 1633269 (Colo. App. Apr. 5, 2018). Rather, an excess insurer’s rights under such circumstances are derivative of the insured’s rights under the insurance policy, and therefore the excess insurer must prove that the primary insurer acted in bad faith by refusing to settle.
The insured, a doctor, was sued for medical malpractice. During litigation, the plaintiff offered to settle the case for $1 million. The insured’s primary liability insurer declined the offer. The insured’s excess insurer, however, advised the insured to accept the offer and paid the $1 million settlement.
The excess insurer sued the primary insurer for equitable subrogation to recover the settlement payment. The primary insurer argued that the excess insurer’s equitable subrogation claim was derivative of the insured’s rights under the policy, and therefore the excess insurer had to prove that the primary insurer acted in bad faith by refusing to settle. The district court found in favor of the excess insurer without requiring a showing of bad faith.
The appeals court reversed, holding that Colorado law does not recognize an independent claim for equitable subrogation by an excess insurer to recover against a primary insurer. Rather, “Colorado law recognizes equitable subrogation only as a derivative right dependent on the obligations of the insurance contract.” Therefore, the excess insurer stepped into the shoes of the insured, and had to prove that the primary insurer acted “unreasonably under the circumstances.” The court rejected the primary insurer’s contention, however, that the excess insurer also had to prove the insured’s liability in the underlying claim.