Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-04657/USCOURTS-cand-3_06-cv-04657-3/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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States District C

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For the Northern District of California

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 The Court incorporates that order by reference.

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States District C

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For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

CONTINENTAL CASUALTY COMPANY,

Plaintiff,

 v.

TRAVELERS INSURANCE COMPANY, et al.,

Defendants.

 /

No. C 06-4657 SI

ORDER DENYING DEFENDANT

ATLANTIC’S MOTION TO DISMISS

On January 12, 2007, the Court heard argument on defendants’ motions to dismiss. By order

filed January 18, 2007, the Court granted the motion filed by defendant Travelers Insurance Company,

and directed further briefing on the motion filed by defendant Atlantic Mutual Insurance Company. The

Court has reviewed the parties’ supplemental briefing, and for the reasons set forth below, DENIES

Atlantic’s motion to dismiss.

DISCUSSION

In the January 18, 2007 order,1 the Court agreed with plaintiff’s general assertion that an insured

can bring a claim against an insurer for bad faith failure to settle, and that such a claim could be

equitably subrogated. See generally Hamilton v. Maryland Cas. Co., 27 Cal. 4th 718, 731 (2002).

However, the Court was concerned about two potential bars to plaintiff’s claim, and directed further

briefing regarding: (1) whether there was a link between the harm allegedly suffered by the Diocese as

a result of Atlantic’s failure to fully fund the settlement, and the claim for relief asserted by Continental;

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 The primary insurance covered $100,000 per individual, while the excess insurance did not

come into play until $250,000 in claims had been exhausted. Id. at 292.

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and (2) the possibility that the Diocese released Atlantic from all claims related to the Chapin case. 

I. Equitable indemnification claim

With regard to the first issue, plaintiff cites Troost v. DeBoer, 155 Cal. App. 3d 289 (1984). In

Troost, an insured was sued in a personal injury action. Upon being sued, the insured discovered a

$150,000 gap in coverage between his primary and excess insurance.2 The insured then sued the primary

and excess insurers, and an insurance agent. The primary and excess insurers contributed to a $300,000

settlement of the underlying personal injury action, with the primary insurer paying the limit of its policy

($100,000), and the excess insurer funding $200,000, which covered the $150,000 gap in coverage. As

part of the settlement, the insured agreed to dismiss the excess insurer as a defendant and to continue

to pursue the action against the agent for the purpose of recouping the $150,000 paid by the excess

insurer, agreeing to pay the excess insurer any monies recovered. At the trial level, the court entered a

directed verdict in favor of the insured and against the agent.

On appeal, the agent argued that the trial court erred in concluding that the excess insurer was

equitably subrogated to the insured’s claim against the agent. The agent argued that the insured suffered

no loss because the excess insurer, not the insured, paid the $150,000 insurance gap. The Court of

Appeal rejected that argument. “The elements of an equitable subrogation [claim], stated in Patent

Scaffolding, expressly contemplate that ‘the insurer, in whole or in part, has compensated the insured

for the . . . loss.’ Payment by the insurance company does not change the fact [that] a loss has occurred.”

Id at 294 (internal citations omitted). The court stated,

It is not a prerequisite to equitable subrogation that the subrogor suffered actual loss; it

is required only that he would have suffered loss had the subrogee not discharged the

liability or paid the loss. Thus it is that [several cases] all permitted recovery by one

insurance carrier against another on a theory of equitable subrogation without any

showing that the insured had suffered any loss. Thus, we conclude equitable subrogation

is not precluded on the basis that Troost suffered no loss.

Id. at 295. 

Here, Continental alleges that it funded the shortfall in the Chapin settlement, and that Atlantic,

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the primary insurer, did not contribute to the limit of the Atlantic policy. Under Troost and Hamilton,

the Diocese could bring a claim against Atlantic for failure to fund the settlement to the limit of its

policy, even though the Diocese did not suffer a loss by having to fund the shortfall. 

Atlantic does not address Troost in its papers, nor does Atlantic cite any cases which discuss the

specific issue identified in the Court’s January 18, 2007 order. Instead, Atlantic emphasizes the fact that

the total settlement here ($3 million) exceeded Atlantic’s policy limit, and thus if the Diocese had any

claim against its insurers, a significant portion of that claim would be against plaintiff, not Atlantic. This

argument misses the point. Whether the Diocese could bring a claim against Continental is irrelevant

to whether the Diocese could also bring a claim against Atlantic. It is undisputed that Atlantic did not

fund the Chapin settlement to the $1 million policy limit. Instead, Atlantic paid $750,000 toward the

settlement. The handwritten settlement agreement states that Atlantic “represents that it is likely to

obtain authority for another $250,000 for a total of $1,000,000 [and Continental] will pay $250,000 if

Atlantic Mutual fails to pay the last $250,000.” Pl’s Oppo. Ex. 1. Because the Diocese could bring a

claim against Atlantic for failing to fund the settlement to the policy limit, Continental can “stand in the

shoes” of the Diocese and bring such a claim against Atlantic.

II. Release

Atlantic contends that the intent of the reservation language in the handwritten “Settlement

Agreement and Reservation of Rights,” was only to reserve rights to recover reimbursement from the

Diocese for defense and indemnity payments on un-covered claims as provided for in Buss v. Superior

Court, 16 Cal. 4th 35 (1997) and Blue Ridge Ins. Co. v. Jacobsen, 25 Cal.4th 489 (2001). However, that

document states that “all parties otherwise reserve all rights to seek recoupment of all payments pursuant

to [Buss and Blue Ridge] and other legal authority . . . .” Pl’s Oppo. Ex. 1 (emphasis added). “Other

legal authority” could include an insurer’s right to indemnification from another insurer. 

Perhaps in recognition of the fact that the settlement does not expressly release the Diocese’s

claims against Atlantic, Atlantic’s supplemental brief states that Atlantic “will simply reserve its right

to assert this issue as it may be that discovery is required to flush-out this factual issue.” Supp. Brief at

2. Accordingly, based upon the record before the Court, the Court finds that the Diocese did not release

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its claims against Atlantic, and thus plaintiff’s claim is not barred.

CONCLUSION

For the foregoing reasons, the Court hereby DENIES defendant Atlantic’s motion to dismiss.

(Docket No. 17). 

IT IS SO ORDERED.

Dated: February 8, 2007 

SUSAN ILLSTON

United States District Judge

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