Hawaii High Court Adopts Equitable Subrogation in the Primary/Excess Insurance Context

Most jurisdictions have adopted equitable subrogation. Plitt & Plitt, Practical Tools for Handling Insurance Cases, § 7:7 (Thomson Reuters 2011) (Alaska, Arizona, California, Florida, Georgia, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Washington and West Virginia). Only a few states have expressly rejected the doctrine of equitable subrogation (Alabama, Connecticut, Delaware, Idaho, Kentucky and Wisconsin). Under the doctrine of equitable subrogation, an excess liability insurer has the right to assert a claim against a primary insurer for bad faith failure to settle within primary policy limits when an excess judgment is rendered. Practical Tools for Handling Insurance Cases, § 7:7. The logic underpinning the concept of equitable subrogation has been explained as follow:

The logic underpinning the doctrine of “equitable subrogation” is that when an insured purchases excess coverage, he has in effect substituted the excess carrier for himself. Where no excess insurance is available the insured is, in essence, his own excess insurance insurer and the primary insurer owes him a duty of good faith to protect the insured from an excess judgment and personal liability. Under the doctrine of equitable subrogation, it follows that the excess insurer should assume the rights as well as the obligations of the insured in that situation. Therefore, the excess insurer steps into the shoes of the insured. In that regard, the duty the primary insurer owed to the insured is not fundamentally increased because the primary insurer will be evaluating the claim on the same basis as if there had been no excess coverage available. The duties of the primary insurer are not lessened in any way by the existence of excess liability insurance.

Practical Tools for Handling Insurance Cases, § 7:7, p. 7-40.

In St. Paul Fire and Marine Ins. Co. v. Liberty Mut. Ins. Co., 353 P.3d 991 (Hawaii 2015) the Hawaii Supreme Court adopted equitable subrogation in the insurance context, finding that the excess insurer can bring a cause of action against a primary insurer that, in bad faith, fails to settle a claim within the primary policy limits. In this case, the excess insurer, St. Paul, sued the primary insurer, Liberty Mutual. The common insured, Pleasant Travel, was sued for damages resulting from an accidental death. The primary insurer, Liberty Mutual, appointed defense counsel to represent Pleasant Travel. The excess insurer alleged that Liberty Mutual rejected multiple pretrial settlement offers within the primary $1 million limit of coverage. The case proceeded to trial and a jury verdict in the amount of $4.1 million was awarded by the jury. After the verdict was entered the case was settled for a confidential amount in excess of the Liberty Mutual policy limit. St. Paul paid the amount in excess of the primary limit to settle the case. Thereafter, St. Paul brought a lawsuit against Liberty Mutual alleging that Liberty Mutual, as the primary insurer, acted in bad faith by rejecting multiple settlement offers within its policy limits.

Liberty Mutual argued for a narrow interpretation of the doctrine of equitable subrogation. Liberty Mutual argued that it defended Pleasant Travel against the death claim and paid its liability up to the primary policy limit. Therefore, Liberty Mutual claimed that St. Paul did not pay for Liberty Mutual’s liability but “merely discharged its own contractual obligations” to Pleasant Travel.

In response to this argument, the Court acknowledged that while St. Paul had discharged its obligations to the insured, nevertheless Liberty Mutual, as the primary insurer, also had an obligation to the insured to pursue settlement. Previously, the Hawaii courts had ruled that an insurers under Hawaii law owed their insureds a duty of good faith and fair dealing. See, e.g., Best Place Inc. v. Penn Am. Ins. Co., 82 Hawaii 120, 132, 920 P.2d 334, 346 (1996). The courts had also held that a breach of that duty included the insurer’s unreasonable refusal to settle a claim on behalf of the insured. “Even if the ultimate judgment was in excess of the policy limits, the insurer [could] still be liable for the entire amount if its refusal to settle was unreasonable.” Delmonte v. State Farm Fire & Cas. Co., 90 Hawaii 39, 52 n. 9, 975 P.2d 1159, 1172 n. 9 (1999).

In St. Paul, the Hawaii Supreme Court found that applying the doctrine of equitable subrogation in the insurance context permitted an excess insurer to hold the primary insurer to its obligation to the insured. The Hawaii Supreme Court found that a rejection of equitable subrogation would permit primary insurers to chance litigation and choose to gamble with the excess insurer’s money when potential judgments approached the primary insurer’s policy limits, rather than to settle.

In supporting its adoption of equitable subrogation, the Hawaii Supreme Court noted that the majority of jurisdictions to have considered the issue permitted excess insurers to pursue claims against primary insurers under the doctrine of equitable subrogation. The Court also found that adoption of the equitable subrogation doctrine would protect the public interest by enabling excess insurers to litigate bad faith claims against the primary insurer and to seek equitable relief which was consistent with Hawaii’s insurance code. Adoption of equitable subrogation in this context promoted the duty of insurers to accept reasonable settlements.