Chapter 10 - § 10.11 • EXCESS CARRIER MUST PLEAD AND PROVE THAT THE PRIMARY INSURER ACTED IN BAD FAITH IN ORDER TO RECOVER UNDER A THEORY OF EQUITABLE SUBROGATION

• Jurisdiction: Colorado

§ 10.11 • EXCESS CARRIER MUST PLEAD AND PROVE THAT THE PRIMARY INSURER ACTED IN BAD FAITH IN ORDER TO RECOVER UNDER A THEORY OF EQUITABLE SUBROGATION

In Preferred Professional Insurance Co. v. Doctors Co., 2018 COA 49, the court addressed the issue of the right of an excess insurer to recover from a primary insurer that declines to settle a claim against an insured. The court held that if the excess insurer steps in and pays the amount demanded by the injured party, it must plead and prove that the primary insurer acted in bad faith in order to recover under a theory of equitable subrogation. The court reached this conclusion because in such a case, the excess insurer steps "into the shoes of the insured" and since "the insured would have to prove bad faith in an action against his primary insurer based on the insurer's refusal to settle, the excess insurer must also plead and prove such bad faith." Id. at ¶ 2.

The case arose out of a medical malpractice suit filed against Dr. Rupinder Singh. Dr. Singh was insured under a primary liability policy issued by the defendant, The Doctors Company (TDC), with limits of $1,000,000. The policy required Dr. Singh's consent to settle, but TDC retained discretion to settle. Dr. Singh was also insured by the plaintiff, Preferred Professional Insurance Company (PPIC), under an excess liability policy, which had a limit of $1,000,000. The malpractice suit plaintiff offered to settle the case for $1,000,000, an offer which Dr. Singh wished to accept but TDC rejected. With Dr. Singh's assent, PPIC then paid the $1,000,000 settlement. Id. at ¶¶ 6-8.

PPIC then brought an equitable subrogation action against TDC. PPIC argued that its claim for equitable subrogation was governed by the five-factor test set forth in Hicks v. Londre, 125 P.3d 452, 456 (Colo. 2005), but TDC asserted that to recover, PPIC had to prove that TDC acted in bad faith by refusing to settle. The trial court agreed with PPIC and granted summary judgment in its favor. However, the court of appeals agreed with TDC. Id. at ¶¶ 9-10.

Examining "settled Colorado insurance law" the court recognized that "a subrogated insurer has 'no greater rights than the insured'" and that a subrogated insurer's rights "are derivative of the rights of the insured." Id. at ¶¶ 14, 16-17.

The court noted that while "a primary insurer, to the exclusion of the insured, may have complete discretion to accept or reject settlement offers" . . . "in deciding whether to accept a...