5.2.6 Equitable Subrogation

• Jurisdiction: Arizona

In Hartford Accident & Indemnity Co. v. Aetna Casualty & Surety Co.,^[192] the court, reversing prior precedent,^[193] held that the primary carrier owes a duty of good faith and fair dealing to an excess carrier to settle a claim within the primary carrier's policy limits where the equality of consideration rule would require a settlement. The court adopted the theory of equitable subrogation as the linchpin for the primary carrier's duty to the excess carrier. The logic underpinning the doctrine of equitable subrogation is that when an insured purchases excess coverage, she has in effect substituted the excess carrier for herself. Where no excess insurance is available, the insured is, in essence, her own excess insurance carrier and her single primary carrier owes her a duty of good faith to protect her from an excess judgment and personal liability. Under the doctrine of equitable subrogation it follows that the excess carrier should assume the rights as well as the obligations of the insured in that situation. In that regard, the duty of the primary carrier owed to the insured is not fundamentally increased because the primary carrier will be evaluating the claim on the same basis as if there had been no excess coverage available. The duties of the primary carrier are not lessened in any way by the existence of excess liability insurance. When an insurance carrier gives an equality of consideration to the interests of the insured, it must do so without reference to its own policy limits and, in light of Hartford v. Aetna, to the existence of available excess coverage.

In a companion case, Twin City Fire Insurance Co. v. Maricopa Superior Court,^[194] the court amplified its holding in Hartford v. Aetna. The court in Twin City Fire rejected the argument that the primary carrier owes a "direct duty" of good faith and fair dealing to the excess carrier. However, the court left open the question whether a direct duty theory would be embraced by the court under different facts when the excess insurance carrier did not have an adequate remedy by way of equitable subrogation.

The court in Twin City Fire recognized that under the doctrine of equitable subrogation, the excess insurance carrier, as subrogee of the insured, has no greater rights than its insured to pursue a claim against the primary carrier for bad faith. Thus, recovery by the excess carrier may be barred by the wrongful conduct of the insured toward the primary carrier.

Because the primary carrier does not owe a direct duty to the excess carrier, the primary carrier in Twin City Fire did not owe a duty to the excess carrier to learn the excess carrier's identity, and the primary carrier was not required to notify the excess carrier that an offer had been made to settle the claim within the policy limits of the primary carrier's policy.

The court in Hartford v. Aetna indicated that each of the elements of third-party bad faith set forth in the Clearwater decision would also be applicable in determining whether the primary carrier has fulfilled its obligation to the excess carrier. The elements referred to by the supreme court in Clearwater were a restatement of the equality of consideration elements adopted by the court in 1968 in General Accident Fire & Life Assurance Corp. v. Little.^[195]

Application of the seven factors to be considered in a third-party bad faith claim may be...