Title: Steadfast Insurance Co. v. Agricultural Ins. Co

State: oklahoma

Issuer: Oklahoma Supreme Court

Document:

STEADFAST INSURANCE CO. v. AGRICULTURAL INSURANCE CO.2013 OK 63Case Number: 110562Decided: 07/02/2013THE SUPREME COURT OF THE STATE OF OKLAHOMA
NOTICE: THIS OPINION HAS NOT BEEN RELEASED FOR PUBLICATION IN 
THE PERMANENT LAW REPORTS. UNTIL RELEASED, IT IS SUBJECT TO REVISION OR 
WITHDRAWAL. 

STEADFAST INSURANCE COMPANY, 
Plaintiff/Appellee,v.AGRICULTURAL INSURANCE COMPANY, n/k/a GREAT 
AMERICAN ASSURANCE COMPANY, Defendant/Appellant.
FEDERAL CERTIFIED QUESTION
¶0 On April 4, 2012, this Court accepted a certified question of state law 
from the United States Court of Appeals for the Tenth Circuit. A three-judge 
panel of that court seeks an answer to an unsettled question of Oklahoma law 
concerning the application of equitable subrogation. This question arose in a 
dispute between two excess insurers for the Grand River Dam Authority (GRDA). 
The panel inquires whether second-level excess insurer Agricultural Insurance 
Company can invoke equitable subrogation to recover sums it became liable to pay 
as a consequence of an agreement between GRDA and its first-level excess insurer 
Steadfast Insurance Company. GRDA and Steadfast agreed to include losses under a 
Steadfast excess policy that were outside the policy year and which triggered 
Agricultural's second-level excess coverage for that policy year. The panel has 
under review a judgment by the United States District Court that ruled 
Agricultural could not invoke equitable subrogation. The District Court reasoned 
that (1) equitable subrogation is based on rights derived from the insured and 
(2) GRDA (the insured) released all its rights against Steadfast under their 
agreement. The panel notes that there is no Oklahoma case law on this precise 
subject and cases from other jurisdictions are divided on the application of 
equitable subrogation under these circumstances. Upon review, we answer that 
Agricultural can invoke equitable subrogation, notwithstanding GRDA's release of 
Steadfast, but we express no opinion concerning the merits or outcome of such 
claim. 
CERTIFIED QUESTION ANSWERED.
Gerald P. Green, PIERCE, COUCH, HENDRICKSON, BAYSINGER & GREEN, LLP, 
Oklahoma City, Oklahoma, and Tory J. Bishop (pro hac vice), KUTAK ROCK 
LLP, Omaha, Nebraska, for Plaintiff/Appellee,Sarah J. Timberlake, George W. 
Dahnke, ABOWITZ, TIMBERLAKE, DAHNKE & GISINGER, P.C., Oklahoma City, 
Oklahoma, for Defendant/Appellant.
REIF, V.C.J.:
¶1 This case presents a Certified Question of Law submitted by the United 
States Court of Appeals for the Tenth Circuit, pursuant to 20 O.S. 2011, §§ 1601 through 1606. A 
three-judge panel of that court seeks an answer to an unsettled question of 
Oklahoma law concerning the application of equitable subrogation. The panel 
inquires: Whether a second-level excess insurer can assert a claim for equitable 
subrogation against a first-level excess insurer even though the insured has 
agreed with the first-level insurer that the first-level insurer has exhausted 
its coverage limits and thus released the first-level insurer from any further 
obligation under the policy? Upon review, we answer that a second-level excess 
insurer can assert a claim against a first-level excess insurer under the 
circumstances in this case, but express no opinion about the merits or outcome 
of this claim.
¶2 This question arose in a dispute between the first-level excess insurer 
and the second level excess insurer of the Grand River Dam Authority (GRDA). 
Steadfast Insurance Company is GRDA's first-level excess insurer and 
Agricultural Insurance Company is GRDA's second-level excess insurer.
¶3 The certification document contains a detailed statement of the facts that 
underlie the dispute between Steadfast and Agricultural. However, the material 
facts of that dispute are summarized in the introductory paragraph of the 
certification document.
¶4 The introductory paragraph relates that Steadfast issued successive 
insurance policies to provide GRDA first-level excess general liability coverage 
from 1993 through 2002. Agricultural provided GRDA with second-level excess 
liability insurance during this same time period, which was triggered once 
Steadfast had reached its policy limits for a given year.
¶5 Steadfast defended GRDA against a number of flooding claims made from 1993 
through 2002. Although the flooding at issue spanned the entire nine-year period 
of coverage, Steadfast and GRDA agreed that the amounts Steadfast paid on those 
claims would be allocated to one policy - the 1993-1994 Steadfast policy. 
Agricultural has claimed that this agreement to allocate all of the flooding 
claims paid by Steadfast to the 1993-1994 policy wrongfully triggered 
Agricultural's second-level excess coverage for that year.
¶6 Agricultural asserts that the agreement between Steadfast and GRDA shifted 
costs to Agricultural that would have been borne by Steadfast in the absence of 
the Agreement. Agricultural believes it should recover those costs from 
Steadfast by equitable subrogation.
¶7 Steadfast and Agricultural took this dispute to the United States District 
Court for the Northern District of Oklahoma. The U.S. District Court ruled 
Agricultural did not have a viable claim for equitable subrogation against 
Steadfast. The court reasoned that equitable subrogation was not available to 
Agricultural because GRDA had released Steadfast from any further liability on 
the 1993-1994 policy. Steadfast persuaded the court that equitable subrogation 
is based on a right derived from the insured and the release in question 
extinguished all rights GRDA had against Steadfast.
¶8 Agricultural appealed to the United States Court of Appeals for the Tenth 
Circuit. That court examined Oklahoma law concerning equitable subrogation, and 
found no Oklahoma precedent to cover this situation. The court also looked to 
the case law of other jurisdictions and found divergent authority on this point. 
This certification proceeding followed.
¶9 The leading Oklahoma case on equitable subrogation between insurers where 
excess coverage is involved is United States Fidelity & Guaranty Co. v. 
Federated Rural Elec. Ins. Corp., 2001 OK 81, 37 P.3d 825 (hereafter the USF&G case). The 
USF&G case is not directly on point, but it cites approvingly 
Fireman's Fund Ins. Co. v. Maryland Casualty Co., 65 Cal. App. 4th 1279, 
77 Cal. Rptr. 2d 296 (1998). The Fireman's Fund case sets forth the 
derivative right rule applied by the United States District Court and represents 
the line of authority that supports Steadfast's position that Agricultural 
cannot seek equitable subrogation from Steadfast. The case of Sharon Steel 
Corp. v. Aetna Cas. & Sur. Co., 931 P.2d 127 (Utah 1997), represents 
the other view that equitable subrogation can be pursued in spite of a release 
by an insured. This case refused to allow a release given by an insured to bar 
equitable subrogation where the insurer that obtained a release did so with 
notice of the unfair impact on another insurer.
¶10 The USF&G case does state that subrogation is a "derivative 
concept" and "allows an insurer who has paid coverage to stand in the shoes of 
the insured." USF&G, 2001 OK 81, ¶¶ 9-10, 37 P.3d  at 831. However, this 
case also provides that equitable subrogation "does not depend upon a contract 
but arises by implication in equity to prevent an injustice [and] is based on 
the relationship of the parties." Id. at ¶ 9, 37 P.3d  at 831. An earlier 
case similarly provides that equitable subrogation "is a creature of equity, not 
depending upon contract [nor] upon assignment, privity, or strict suretyship." 
Lawyers' Title Guaranty Fund v. Sanders, 1977 OK 210, ¶ 4, 571 P.2d 454, 456. This case also declares "This 
principle is a fluid concept depending upon the particular facts and 
circumstances based on [the] natural justice of placing the burden of bearing a 
loss where it ought to be, and without the form of a rigid rule of 
law." Id.; see also Republic Underwriters Ins. Co. v. Fire 
Ins., 1982 OK 
67, ¶ 6, 655 P.2d 544, 547.
¶11 GRDA's agreement with Steadfast to include losses outside the policy year 
of 1993-1994 and the release of further claims is "the form of a rigid rule of 
law" that cannot ipso facto defeat a claim of equitable subrogation by 
Agricultural. The GRDA/Steadfast agreement and release is just one of the 
relevant facts and circumstances that must be considered in determining the 
"superior equity as between the parties" and placing the burden of bearing a 
loss where it ought to be. Lawyers' Title, 1977 OK 210, ¶ 2, n.1, 571 P.2d  at 455-56. Steadfast's 
notice, if any, of the impact that the settlement and release would have on 
Agricultural's coverage must be considered in balancing the equities.
¶12 Another relevant consideration is whether GRDA's settlement with 
Steadfast, and its effect on Agricultural's coverage, is consistent with GRDA's 
implied duty to deal fairly and in good faith with Agricultural. "The common law 
imposes [an] implied covenant [of good faith and fair dealing] upon all 
contracting parties, that neither party, because of the purposes of the 
contract, will act to injure the parties' reasonable expectations nor impair the 
rights or interests of the other to receive the benefits flowing from their 
contractual relationship." First Nat. Bank and Trust Co. of Vinita v. 
Kissee, 1993 OK 24, 859 P.2d 502, 509. An excess insurer has a reasonable 
economic expectation that it will not be responsible on its policy until the 
insurance at the level lower to the excess insurer has been exhausted in 
accordance with the express provisions and obligations in the insurance 
contract. See USF&G, 2001 OK 81, ¶ 15, 37 P.3d  at 833.
¶13 These considerations lead us to conclude that the derivative right rule 
relied upon by Steadfast and the U.S. District Court is inconsistent with 
Oklahoma's broad view of equitable subrogation. In the case at hand, the 
derivative right rule gives undue emphasis to only one aspect of the 
relationship between GRDA, Steadfast and Agricultural. It represents "a rigid 
rule of law" that would allow GRDA and Steadfast to alter Agricultural's 
reasonable expectation concerning (1) the losses used to measure exhaustion of 
Steadfast's policy and (2) Agricultural's liability on its excess policy. The 
derivative right rule also fails to consider whether Steadfast pursued the GRDA 
settlement and release with notice of potential detriment to, or unfair impact 
upon, Agricultural's excess coverage. In short, there is nothing "equitable" 
about a strict derivative right rule of equitable subrogation and we reject the 
application of this rule to the case at hand.
¶14 Our answer to this certified question of law is limited to declaring 
Oklahoma law and is not intended to direct how the federal courts apply our 
declaration of law in resolving the controversy between the parties. 
Furthermore, we express no opinion about (1) the weight to be given any of the 
facts and evidence relating to Agricultural's claim based on equitable 
subrogation as disclosed in the certifying document, or (2) the ultimate merit 
of this claim.
CERTIFIED QUESTION ANSWERED.
¶15 ALL JUSTICES CONCUR.