Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-89-08059/USCOURTS-ca10-89-08059-0/pdf.json

Parties Involved:
American International Adjustment Company
Not Party
Waylon Cummins
Not Party
First State Insurance Company
Appellant
Robert Ross Hocker
Not Party
New Hampshire Insurance Company
Appellee

Document Text:

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PUBLISH 

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United St@"§ Co12-rt of Appeals 'f enth Circuit 

UNITED STATES COURT OF APPEALS JAN 7 1S91 

FOR THE TENTH CIRCUIT 

ROBERT ROSS HOCKER and WAYLON 

CUMMINS, 

Plaintiffs, 

v. 

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NEW HAMPSHIRE INSURANCE COMPANY, ) 

a New Hampshire corporation, ) 

v. 

Defendant/Cross-Claim 

Defendant/Appellee, 

FIRST STATE INSURANCE COMPANY, 

a Massachusetts corporation, 

Defendant/Cross-Claim 

Plaintiff/Appellant, 

AMERICAN INTERNATIONAL ADJUSTMENT COMPANY, a Delaware 

corporation, 

Defendant. 

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) 

) 

) 

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) 

) 

) 

) 

) 

) 

) 

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) 

) 

ROBERT L HOECKER 

Clerk 

No. 89-8059 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF WYOMING 

(D.C. No. C87-239-B) 

Dirk w. de Roos of Kutak Rock & Campbell, Denver, Colorado (Tana 

K. Simard of Kutak Rock & Campbell; G. G. Greenlee and James R. 

Bell of Murane & Bostwick, Casper, Wyoming, with him on the 

briefs), for Appellant. 

Gregory R. Piche of Holland & Hart, Denver, Colorado (Harry F. 

Buck of Buck & Lewis, Cheyenne, Wyoming, with him on the brief), 

for Appellee. 

Appellate Case: 89-8059 Document: 01019967207 Date Filed: 01/07/1991 Page: 1 
Before McKAY and ANDERSON, Circuit Judges, and BROWN, District 

Judge.1 

McKAY, Circuit Judge. 

This diversity action is an appeal by defendant First State 

Insurance Company, the excess insurance carrier for plaintiffs 

Robert Hocker and Wayne Cummins, from an order dismissing First 

State's crossclaim against defendant New Hampshire Insurance 

Company, plaintiffs' primary insurer. First State appeals the 

district court's interpretation of its contractual obligation to 

drop down and defend the plaintiffs, the court's ruling that First 

State's "unclean hands" bars its equitable subrogation crossclaim, 

and the court's refusal to recognize a direct cause of action 

against New Hampshire independent of equitable principles. 

I. 

Plaintiffs Robert Hocker and Wayne Cummins were employees of 

the John E. Burns Drilling Company. Mr. Hocker worked as a tool 

pusher and Mr. Cummins worked as a drilling superintendent on a 

drilling rig in Wyoming in February 1980. On February 27, 1980, 

Larry Julian, a roughneck employed with Burns Drilling, was 

injured when a chain on the drilling rig broke and struck him in 

the face. 

1 Honorable Wesley E. Brown, United States Senior District 

Judge for the District of Kansas, sitting by designation. 

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At the time of the accident, Burns Drilling and its employees 

were insured by New Hampshire Insurance Company under a general 

liability policy that provided primary coverage in the amount of 

$500,000.00. Burns Drilling and its employees were also insured 

under an umbrella liability policy issued by First State Insurance 

Company for up to $10,000,000.00. 

Four years after the accident Mr. Julian filed Julian v. 

Energy Reserves Group, Inc., Civil No. 56620, in Wyoming State 

District Court. The complaint alleged that defendants Robert 

Hocker, Wayne Cummins and John Burns, president and general manager of Burns Drilling, had caused his injuries through their negligence. 

Burns Drilling had been discharged in bankruptcy at the time 

Mr. Julian filed suit. John Burns forwarded the complaint to John 

Burk, the attorney representing Burns Drilling in bankruptcy proceedings, and assured Messrs. Hocker and Cummins that a defense 

would be provided for them. Unfortunately, as the ensuing events 

unfolded, no defense was ever provided. 

Through a circuitous route, Mr. Burk tendered the defense of 

the Julian suit to New Hampshire and First State. He sent the 

complaint to the Ralph Hamm Insurance Agency which sold the New 

Hampshire policy to Burns Drilling. The Hamm Agency, .in turn, 

gave the documents to New Hampshire's claims adjuster, American 

International Adjustment Company. The Hamm Agency also sent the 

documents to the Wetzel Company, Inc., the surplus lines broker 

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which sold the First State policy to Burns Drilling. Wetzel forwarded the materials to First State and informed them that New 

Hampshire was the primary carrier. 

On March 20, 1984, First State opened a file for the Julian 

claim. T. w. Ross, the First State employee handling the file, 

acknowledged to Wetzel receipt of the complaint but did not contact New Hampshire to inform them that First State was the excess 

insurer. In May 1984, Mr. Ross determined that the excess policy 

was in effect and set up a $5000.00 reserve on the file. However, 

on May 25, 1984, he closed the Julian claim file. He did not 

notify the state court defendants, Messrs. Hocker and Cummins, 

that First State was not providing a defense as the excess carrier. 

New Hampshire, acting through its claims adjuster, American 

International, opened a claim file for the Julian case on 

March 30, 1984. American International's branch manager, Theodore 

C. Freuh, mailed two letters to John Burk (attorney for the bankrupt drilling company) informing him that neither Mr. Hocker nor 

Mr. Cummins were covered under the New Hampshire policy and that 

New Hampshire would not provide either with a defense •. Mr. Burk 

did not believe he represented Messrs. Hocker and Cummins in the 

Julian suit. Consequently, he did not inform them that they were 

not being defended by New Hampshire. Nor did Mr. Freuh contact 

Messrs. Hocker or Cummins directly or First State to inform them 

that New Hampshire would not supply a defense. Although New 

Hampshire retained counsel to represent John Burns personally, 

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neither First State nor New Hampshire arranged fo~ the coemployees' defense. 

Larry Julian made a motion for entry of default against 

Messrs. Hocker and Cummins on August 18, 1986. On May 29, 1987, 

while the entry of default judgment was still pending, Robert 

Hocker and Wayne Cummins filed the present lawsuit, Hocker v. New 

Hampshire Insurance Co., Civil No. 3872, in Wyoming State District 

Court. The complaint alleged that New Hampshire and First State 

had breached their contracts of insurance by refusing to defend 

and indemnify them. Plaintiffs contended that New Hampshire and 

First State had breached the covenants of good faith implied in 

their insurance contracts by failing to properly investigate, 

interpret and evaluate Larry Julian's claim and the New Hampshire 

policy. They also alleged that both carriers breached their 

implied covenants of good faith by failing to notify them of the 

decision not to defend them in the Julian lawsuit. The suit was 

removed to the United States District Court for the District of 

Wyoming on June 25, 1987. 

First State filed a crossclaim against New Hampshire in the 

present lawsuit on August 21, 1987. First State contended that 

its right to defend was prejudiced by New Hampshire's failure to 

notify First State of its decision not to defend Messrs. Hocker 

and Cummins in the Julian suit. The crossclaim sought indemnification alleging that New Hampshire's failure to notify First State 

constituted a breach of the implied covenant of good faith and 

fair dealing owed to First State. It further alleged that New 

Hampshire's actions constituted a failure to exercise reasonable 

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care to protect the relationship existing between the two 

insurers. New Hampshire also asserted a crossclaim against First 

State for implied indemnity. 

On October 27, 1987, Larry Julian moved to dismiss John Burns 

as a defendant in the Julian case, and on November 3, 1987, a 

default judgment was entered against Messrs. Hocker and Cummins in 

the amount of $2,865,568.13 with interest. 

The district court entered an order granting partial summary 

judgment to the plaintiffs in the present lawsuit on April 1, 

1988, finding that New Hampshire and First State had a duty to 

provide a defense in the Julian action. The court held that "New 

Hampshire's duty to defend was triggered by the potential for coverage for plaintiffs under ·the policy issued to Burns Drilling for 

the claims asserted in the Julian complaint." Hocker v. New 

Hampshire Ins. Co., No. C87-239-B, at 18 (D. Wyo. Apr. 1, 1988) 

(Order Granting Plaintiffs' Motion for Partial Summary Judgment 

and Denying Defendants' Motions for Summary Judgment). The district court also held that First State's "duty to defend and 

investigate was triggered when New Hampshire refused to defend, 

inasmuch as the Julian complaint potentially stated a claim with 

[sic] the coverage of the First State policy." Id. at 25 (emphasis in original). 

The jury trial commenced on April 4, 1988. New Hampshire and 

First State moved for a directed verdict on April 8, 1988. The 

district court granted these motions in part as to plaintiffs' 

claims for negligence and punitive damages. However, the district 

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Appellate Case: 89-8059 Document: 01019967207 Date Filed: 01/07/1991 Page: 6 
court adhered to its earlier decision that New Hampshire and First 

State had each breached their contractual duty to defend. 

The case was submitted to the jury on April 13, 1988, but the 

crossclaims of New Hampshire and First State were reserved for the 

district court's determination. The jury returned a verdict 

against the two insurers. It assessed $500,000.00 in damages 

against New Hampshire for breach of its contractual duty to defend 

Messrs. Hocker and Cummins. The jury assessed another $87 5, 00.0. 00 

for breach of its implied covenant of good faith and fair dealing. 

First State was assessed damages in the amount of $2,580,485.00 

for breach of its contractual duty to defend under the excess 

liability policy and $875,000.00 for breach of the covenant of 

good faith and fair dealing. 

These judgments were compromised and settled after trial. 

Robert Hocker, Wayne Cummins and First State agreed to dismissal 

with prejudice of all claims for relief with no admission of liability. 

The district court denied the crossclaims of both insurers. 

It found that First State lacked the "clean hands" necessary to 

assert its equitable subrogation claim because First State had 

breached its implied covenant of good faith and fair dealing. 

"First State had an independent duty to investigate the Julian 

claim, to defend in the event the primary carrier declined, and to 

undertake settlement negotiations on behalf of Hocker and Cummins. 

It failed to do so and cannot now be subrogated to the rights of 

its insureds." Hocker v. New Hampshire Ins. Co., No. C87-239-B, 

at 27 (D. Wyo. Aug. 11, 1988) (Memorandum and Order). 

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The district court also refused to recogniz~ First State's 

direct cause of action against New Hampshire. The court concluded 

that First State had failed to identify a distinct non-equitable 

theory. Hocker v. New Hampshire Ins. Co., No. C87-239-B, at 4 (D. 

Wyo. June 27, 1989) (Order). 

First State now appeals the district court's dismissal of its 

crossclaim against New Hampshire. The appeal presents two separate issues. First, we must interpret the First State umbrella 

liability policy to decide under what circumstances First State 

was obligated to provide a defense for Messrs. Hocker and Cummins 

and whether First State breached that duty. This determination 

will form the basis for our review of the court's ruling that 

First State's crossclaim against New Hampshire is barred due to 

"unclean hands." Second, we must decide whether under Wyoming law 

First State may assert a direct cause of action against New 

Hampshire despite the lack of contractual privity between the two 

insurers. 

II. 

We turn first to First State's contention that it was not 

obligated to "drop down" and defend Messrs. Hocker and Cummins. 

In order to evaluate whether First State's duty to defend was 

triggered, we must interpret the umbrella liability policy. The 

issue of interpreting insurance policy language presents a question of law subject to de novo review by this court. Healy 

Tibbitts Construction Co. v. Insurance Co. of N. Am., 679 F.2d 803 

(9th Cir. 1982). 

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Under Wyoming law, general principles of contract construction are applicable to the interpretation of insurance policies. 

Commercial Union Ins. Co. v. Stamper, 732 P.2d 534, 538-39 (Wyo. 

1987). We begin by examining the policy language itself to give 

effect to the intention of the parties. Id. at 539. The intention of the parties is established from the words of the contract 

as a whole and by reading each provision in light of all the other 

provisions. Bethurem v. Hammett, 736 P.2d 1128, 1136 (Wyo. 1987). 

The one exception to construing insurance policies like other 

contracts is the requirement that ambiguous language is to be liberally construed in favor of the insured. State Farm Fire and 

Casualty Co. v. Paulson, 756 P.2d 764, 765 (Wyo. 1988). An ambiguous contract "is an agreement which is obscure in its meaning, 

because of indefiniteness of expression or because a double meaning is present." Bulis v. Wells, 565 P.2d 487, 490 (Wyo. 1977). 

However, where the terms of the policy are unambiguous, a court 

may not rewrite the parties' contract nor limit the effect of the 

contract as written. Amoco Prod. Co. v. Stauffer Chem. Co. of 

Wyo., 612 P.2d 463, 465 (Wyo. 1980). 

A. 

With these interpretative principles in mind, we turn to the 

policy language at issue. Several of First State's arguments are 

based on its contention that the district court misconstrued 

Insuring Agreement IV.A. That provision states: 

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IV. DEFENSE SETTLEMENT 

A. With respect to any OCCURRENCE not covered, as warranted, by the underlying policies 

listed in Schedule A hereof, whether collectible or not, or not covered by any other 

underlying insurance collectible by the 

INSURED, but covered by the terms and conditions of this policy, except for the RETAINED 

LIMIT stated in Item 3 I B of the Declarations, the Company shall: 

1. defend any suit against the 

insured alleging PERSONAL INJURY, 

PROPERTY DAMAGE, or ADVERTISING 

INJURY or DAMAGE and seeking damages 

therefore, even if such suit is 

groundless, false or fraudulent; but 

the COMPANY may make such investigation, negotiation or settlement of 

any claim or suit as it deems expedient. 

First State argues that its obligation to defend under Insuring Agreement IV.A. is triggered only by an occurrence for which 

it provides enforceable coverage but the underlying New Hampshire 

policy does not. In other words, First State contends that it 

must drop down from its role as excess carrier and defend its 

insureds as the primary insurer for those occurrences for which it 

is providing the only insurance coverage. These occurrences, 

under First State's interpretation, are limited to claims asserted 

against Burns Drilling and certain classes of insureds such as 

real estate agents, stockholders or partners. 2 The district court 

2 First State's policy defines insureds to include those covered 

by the underlying insurance policy. The district court held that 

Messrs. Hocker and Cummins were insureds under New Hampshire's 

primary liability policy. In addition, Definitions E(2), E(4) and 

E(S) of the umbrella policy defines insureds as including partners 

of Burns Drilling, certain officers, directors and stockholders, 

and any person or organization acting as real estate manager of 

Burns Drilling. These individuals are not insureds under the New 

Hampshire policy. 

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held that the underlying New Hampshire policy did provide coverage 

and required New Hampshire to defend Messrs. Hocker and Cummins 

against the Julian claim. Hocker v. New Hampshire Ins. Co., No. 

C87-239-B, at 17-18 (D. Wyo. Aug. 11, 1988) (Memorandum and 

Order). Accordingly, First State asserts that it was not obligated to drop down and defend under the terms of its policy. 

First State points to other policy provisions to support its 

construction. It acknowledges that it was obligated to provide a 

defense for the plaintiffs in Condition I of the policy and argues 

that, by implication, it did not agree to drop down in other circumstances. That obligation is triggered only after New Hampshire 

has paid its $500,000.00 policy limit, not when New Hampshire 

wrongfully declines to defend. Condition I states: 

If underlying insurance applicable in any one 

OCCURRENCE is exhausted by payment of judgment 

or settlement on behalf of the INSURED, the 

COMPANY shall be obligated to assume charge of 

the settlement or defense of any claim or proceeding against the INSURED resulting from the 

same occurrence, but only where this policy 

applies immediately in excess of such underlying insurance, without the intervention of 

excess insurance of another insurer. 

Because New Hampshire had not actually paid its $500,000.00 

policy limit in defending Messrs. Hocker and Cummins in the Julian 

suit, First State contends that its duty to defend was not triggered. 

First State also argues that an additional provision in its 

policy demonstrates that they did not breach their duty to defend. 

Insuring Agreement IV.B. of the umbrella liability policy sets 

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forth that it "shall have no duty to pay defense, investigations, 

settlement or legal expenses" for an occurrence covered by the 

underlying insurance policy. 3 Since the district court held that 

Larry Julian's personal injury claim was covered by New 

Hampshire's policy, First State argues that it had no obligation 

to provide a defense for the plaintiffs. 

The district court rejected First State's interpretation. It 

concluded that "First State's duty to defend was triggered as soon 

as New Hampshire made a decision to deny a defense to" the plaintiffs. Hocker v. New Hampshire Ins. Co., No. C87-239-B, at 18 (D. 

Wyo. Aug. 11, 1988) (Memorandum and Order). The court determined 

that Insuring Agreement IV.A. "created an obligation for First 

State to defend any suit against an insured under the primary policy alleging personal injury if the primary carrier did not 

defend, with what amounts to a deductible of $25,000.00." Id. 4 

3 Insuring Agreement IV.B. states: 

IV. DEFENSE - SETTLEMENT 

B. When underlying insurance, whether 

or not listed in Schedule A, does apply 

to an OCCURRENCE, the COMPANY shall have 

no duty to pay defense, investigations, 

settlement or legal expenses covered by 

such underlying insurance; however, the 

COMPANY shall have the right and opportunity to associate with the INSURED and 

any underlying insurer in the defense and 

control of any claim or suit reasonably 

likely to involve the COMPANY under this 

policy. 

4 The First State insurance policy contained a "retained limit" 

of $25,000.00 that was, in effect, a deductible for that amount. 

Hocker v. New Hampshire Ins. Co., No. C87-239-B, at 18 (D. Wyo. 

Aug. 11, 1988) (Memorandum and Order). 

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In addition, the court stated that both New Hampshire and First 

State had an obligation to defend the plaintiffs "inasmuch as the 

complaint potentially stated a claim within the insurance coverage 

provided." Id. at 17. 

We affirm the district court's ruling. The "not covered, as 

warranted" language of Insuring Agreement IV.A. establishes that 

First State must drop down for occurrences that are, in fact, covered by the underlying insurance policy despite the wrongful 

denial of coverage by New Hampshire. Under First State's reading 

of this provision, it is only obligated to drop down when occurrences are not covered by the underlying insurance but for which 

First State does provide coverage. This interpretation, however, 

fails to give meaning to the "as warranted" language in their 

policy. We must avoid an interpretation that renders contractual 

language meaningless. Wyoming Game and Fish Comm'n v. Mills Co., 

701 P.2d 819, 822 (Wyo. 1985). 

Contrary to First State's construction, the term "as warranted" modifies "not covered." As written, the First State 

policy explicitly addresses the possibility that the primary 

insurer will wrongfully deny coverage for occurrences that it had 

warranted would be covered by its primary policy. The excess 

carrier must then drop down and provide a defense. 5 

5 Other cases have interpreted "not covered." For example, in 

Mission National Insurance Co. v. Duke Transportation Co., Inc., 

792 F.2d 550 (5th Cir. 1986), the court explained that "when an 

excess insurer uses the term 'covered' or 'not covered,' it is 

agreeing to drop down only in the event that the terms of the 

underlying policy do not provide coverage for the occurrence or 

occurrences in question." Id., 792 F.2d at 553. 

Significantly, inclusion of the term "as warranted" modifies 

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( 

First State's argument that Insuring Agreement IV.B. demonstrates that they were not obligated to drop down is unpersuasive. 

Under IV.B., First State has the right to associate with New 

Hampshire when New Hampshire is properly fulfilling its obligation 

to supply the insured with a defense, but is not required to pay 

legal expenses for that defense. 6 This provision, however, does 

not relieve First State of its independent obligation under IV.A. 

to drop down when New Hampshire has wrongfully declined to defend. 

First State's reliance on Insuring Agreement IV.B. to demonstrate 

that it is not obligated to drop down and defend is misplaced. 

In addition, the difference in wording between Insuring 

Agreements IV.A. and IV.B. bolsters our conclusion. As discussed 

above, "not covered, as warranted" in IV.A. addresses occurrences 

for which New Hampshire wrongfully denies coverage despite warranting that coverage would be provided. The contrasting absence 

of "as warranted" in section IV.B. is significant: First State is 

not obligated to pay legal expenses when the underlying coverage 

applies to an occurrence for which New Hampshire is actually supplying a defense. It does not state that First State need not pay 

legal expenses when New Hampshire has wrongfully declined to 

"not covered" and changes First State's obligation; the excess 

carrier agrees to drop down when the terms of the underlying policy warrant that coverage is provided for the occurrence, but the 

primary insurer nevertheless wrongfully denies coverage. 

6 If First State had properly fulfilled its obligation of 

dropping down and defending Messrs. Hocker and Cummins, it would 

be able to maintain a subrogation claim against New Hampshire to 

recoup, among other things, the legal expenses incurred. See 

Insurance Co. of N. Am. v. Medical Protective Co., 768 F.2d 315 

(10th Cir. 1985). 

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defend. Consequently, First State's obligation to drop down in 

IV.A. is unaffected by IV.B. 

Finally, Condition I of the First State policy is consistent 

with our interpretation of Insuring Agreement IV.A. Condition I 

states that First State must provide a defense for its insured 

when the underlying insurance is exhausted by payment of judgment 

or settlement. Unlike IV.A., it does not address the possibility 

that New Hampshire might wrongfully decline to defend. Instead, 

Condition I establishes First State's obligations under the different circumstance of the primary carrier's exhaustion of its 

$500,000.00 policy limit. It does not relieve First State of its 

7 duties under Insuring Agreement IV.A. 

B. 

Case law also demonstrates that First State breached its contractual obligation to defend Messrs. Hocker and Cummins. 

American Motorist Insurance Co. v. Trane Co., 544 F. Supp. 669 

(W.D. Wis. 1982), aff'd, 718 F.2d 842 (7th Cir. 1983), was a 

declaratory judgment action by an excess carrier concerning its 

7 Our conclusion is supported by one of the major treatises on 

insurance law: 

Of course, the insured should not be left without a 

prompt and proper defense and if a primary insurer 

fails to assume the defense, for any reason, the 

excess carrier still has the obligation to provide 

a defense and, to do justice, should be entitled to 

recoup its costs from the primary insurer. 

7C J.A. Appleman, Insurance Law and Practice,§ 4682 at 33 (Rev. 

ed. 1979). 

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duty to defend if the primary carrier wrongfully refused to 

defend. The District Court for the Western District of Wisconsin 

interpreted a policy similar to First State's 8 and stated: 

If the underlying insurer has refused to 

defend, asserting that there is no coverage 

under the substantive provisions of the underlying policy, the excess insurer will have a 

duty to defend, provided there is coverage 

under the excess policy and the claim falls 

within the policy limits of the excess 

insurer. 

Id. at 692. 

Applying the Trane test to the First State policy, the district court held that "where a primary insurer declines to defend 

a third-party action, an excess insurer under a policy containing 

a duty to defend must assume the insured's defense." Hocker v. 

New Hampshire Ins. Co., No. C87-239-B, at 24 (D. Wyo. Aug. 11, 

1988) (Memorandum and Order). First State contends that the district court misapplied the Trane test to the facts here. 

8 The American Motorist policy provided that 

[w]ith respect to any occurrence not covered by (1) 

the underlying policy(ies) listed in Declaration 

7--Schedule of Underlying Insurance, or (2) any 

other underlying insurance available to the insured 

and provided such occurrence is covered by the 

terms and conditions of this policy, •.. the company shall: 

(a) defend any suit seeking damages 

because of personal injury, property damage or advertising liability, even if the 

allegations of such suit are groundless, 

false, or fraudulent, provided (1) the 

company may make such investigation, 

negotiation and settlement of any claim 

or suit as it deems expedient .... 

Trane, 544 F. Supp. at 692. 

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We affirm the district court's holding. First State's argument is based on the erroneous premise that it had no duty to 

defend Messrs. Hocker and Cummins in the Julian case. However, as 

we concluded earlier, First State was obligated to drop down and 

defend under Insuring Agreement IV.A. after New Hampshire wrongfully refused to defend. Given this contractual obligation and 

the fact that Larry Julian's personal injury claim fell within 

First State's policy limits as the excess insurer, First State 

failed to satisfy its duty under Trane. 

The result for the two other excess carriers in Trane does 

not alter our conclusion. First State analogizes itself to St. 

Paul Fire and Marine Insurance Company and American Home Assurance 

Company in Trane. St. Paul had issued a policy under which it had 

no duty to defend the insured. Condition No. 2 of the policy 

stated: "Notice of any accident, which appears likely to involve 

this Policy, shall be given to the Company which at is own option, 

may, but is not required to, participate in the investigation, 

settlement or defense of any claim or suit." Trane at 698 (emphasis added by district court). 

The court held that St. Paul had no duty to defend because of 

the express language of Condition No. 2. Id. at 699. The court 

also held that American Home did not have a duty to defend because 

its excess policy only provided coverage if there was coverage 

under St. Paul's policy. Id. at 700. 

Once again, the fault in First State's argument lies in its 

incorrect interpretation of Insuring Agreement IV.A. Unlike the 

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St. Paul policy, the express language of IV.A. created a contractual obligation for First State to drop down and defend Messrs. 

Hocker and Cummins if New Hampshire wrongfully declined to provide 

a defense. First State's failure to defend is a breach of its 

contractual duty. 

c. 

First State also claims that the district court ruled incor-· 

rectly when it stated that First State had a duty to defend Hocker 

and Cummins "inasmuch as the complaint potentially stated a claim 

within the insurance coverage provided." Hocker v. New Hampshire 

Ins. Co., No. C87-239-B, at 17 (D. Wyo. Aug. 11, 1988) (Memorandum 

and Order). The district court's ruling stems from both its 

interpretation of Insuring Agreement IV.A. and established principles regarding the duty to defend. 

An insurer's duty to defend is broader than its duty to 

indemnify. Western Chain Co. v. American Mut. Liab. Ins. Co., 527 

F.2d 986, 989 (7th Cir. 1975). Because an insurer must defend an 

action if there is the potential of liability under its policy, 

Spruill Motors, Inc. v. Universal Underwriters Insurance, Co., 212 

Kan. 681, 512 P.2d 403, 407 (1973), it has a duty to defend 

actions that may not ultimately result in an obligation to indemnify. See Solo Cup Co. v. Federal Ins. Co., 619 F.2d 1178, 1184 

(7th Cir.), cert. denied, 449 U.S. 1033 (1980). 

First State does not dispute these principles. Instead, its 

claim is based on the mistaken theory that it was not obligated to 

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defend Messrs. Hocker and Cummins once New Hamps~ire wrongfully 

failed to supply a defense. Given our conclusion to the contrary 

regarding First State's contractual obligations, we affirm the 

district court's ruling. 

Our decision today does not alter the principal obligations 

of primary and excess carriers. The premium charged by a primary 

insurer is higher than that of the excess carrier because it is 

obligated to "conduct the investigation, negotiation and defense 

of claims until its limits are exhausted." 7C J.A. Appleman, 

Insurance Law and Practice,§ 4682 at 28 (Rev. ed. 1979). By comparison, an excess insurer's premiums are low because it does not 

assume these primary obligations. Transit Casualty Co. v. Spink 

Corp., 94 Cal. App. 3d 124 1 156 Cal. Rptr. 360, 367 (Cal. Ct. App. 

1979), overruled on other grounds !2y Commercial Union Assurance 

Cos. v. Safeway Stores, Inc., 26 Cal. 3d 912, 164 Cal. Rptr. 709, 

610 P.2d 1038 (Cal. 1980). 

Our ruling that First State had a duty to monitor whether the 

underlying insurer is properly fulfilling its obligations is consistent with its role as excess carrier and its contractual obligation to drop down and defend. Although First State must drop 

down in the unusual circumstance when the primary insurer wrongfully declines to defend, the principal responsibilities of each 

insurer are not changed. Normally, First State will not have to 

conduct the investigation, negotiation and defense of claims 

because the underlying insurer will be properly fulfilling its 

obligations. Moreover, an excess insurer who must drop down will 

not be left to bear the financial burden of providing a defense. 

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It may recover from the defaulting primary carrier the costs 

expended in the defense as well as damages if the primary 

carrier's default was in bad faith. See Insurance Co. of N. Am. 

v. Medical Protective Co., 768 F.2d 315 (10th Cir. 1985) .

9 

III. 

First State also appeals the district court's dismissal of 

its crossclaim against New Hampshire under the doctrine of equitable subrogation. 

In general, subrogation is applied to avoid unjust enrichment 

when one party, other than a volunteer, has discharged an obligation which should have been satisfied by another. Reese v. AMFWhitely, 420 F. Supp. 985, 989 (D. Neb. 1976). It is a device 

whereby a court compels the ultimate payment of an obligation by 

9 To demonstrate that they were not obligated to defend, First 

State cites several cases which hold that the excess carrier is 

not required to drop down when the primary carrier is insolvent. 

See Harville v. Twin City Fire Ins. Co., 885 F.2d 276 (5th Cir. 

1989); Ware v. Carrom Health Care Products, Inc., 727 F. Supp. 300 

(D. Miss. 1989). First, these cases are not in point because they 

construe the contractual obligations of an excess carrier based on 

whether the underlying insurance is "collectible" or "recoverable." Unlike this case, they do not focus on the meaning of "not 

covered, as warranted." 

However, these cases are noteworthy for their policy justifications. In Harville, the Fifth Circuit observed that excess 

insurers would bear the risk of the primary carrier's insolvency 

if they were required to defend when the primary would have done 

so but for its insolvency. Harville, 885 F.2d at 279. The excess 

carrier would be unable to recover its expenses. By contrast, an 

excess carrier that undertakes to drop down when a financially 

healthy primary insurer wrongfully refuses to defend will be able 

to sue the primary insurer to recover its costs. More importantly, the insured will not be left facing a default judgment. 

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the party who in good conscience ought to pay it. Insurance Co. 

of N. Am. v. Medical Protective Co., 768 F.2d 315, 320 (10th Cir. 

1985). 

The district court recognized that the remedy of equitable 

subrogation was available to First State _due to New Hampshire's 

failure to defend the plaintiffs. Hocker v. New Hampshire Ins. 

Co., No. C87-239-B, at 26 (D. Wyo. Aug. 11, 1988) (Memorandum and 

Order). However, the court concluded that First State was guilty 

of bad faith in failing to investigate the Julian claim to determine whether New Hampshire was providing a defense. Id. at 24. 

First State, therefore, lacked the "clean hands" necessary to 

invoke equity. Id. at 25. 

On April 5, 1990, after the district court issued its Order, 

the Supreme Court of Wyoming established the test to determine bad 

faith when an insurer allegedly commits the tort of violating the 

duty of good faith and fair dealing. McCullough v. Golden Rule 

Ins. Co., 789 P.2d 855 (Wyo. 1990). The court, in answering two 

questions certified from the United States Court of Appeals for 

the Tenth Circuit, stated that "the appropriate test to determine 

bad faith is the objective standard whether the validity of the 

denied claim was not fairly debatable. 1110 Id. at 860. The Court 

10 The court considered two questions certified from the Tenth 

Circuit: 

Does an insurance company owe a duty of good faith 

to its policyholders not to unreasonably deny a claim 

for benefits under the policy, the breach of which duty 

gives rise to an independent tort action? 

If such a tort action is permitted, in addition to 

showing that the claim was denied unreasonably and without proper cause, must the policyholder demonstrate that 

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adopted the analysis of Anderson v. Continental Insurance Co., 85 

Wis.2d 675, 271 N.W.2d 368 (Wis. 1978). In Anderson, the Supreme 

Court of Wisconsin stated the requirements for demonstrating a bad 

faith claim: "To show a claim for bad faith, a plaintiff must 

show the absence of a reasonable basis for denying benefits of the 

policy and the defendant's knowledge or reckless disregard of the 

lack of a reasonable basis for denying the claim." Id. at 376. 

The district court reached its conclusion that First State 

acted in bad faith by relying on Western Casualty and Surety Co. 

v. Fowler, 390 P.2d 602 (1964), the principal Wyoming case on 

insurance bad faith prior to the decision in Golden Rule. In 

Western Casualty, the Wyoming Supreme Court·stated that "evidence 

of bad faith is present when the insurer fails to investigate the 

claim properly so as to be able to intelligently assess the probabilities [of success at trial]." Western Casualty, 390 P.2d at 

605. 11 According to the district court, First State acted in bad 

the insurance company intentionally, knowingly, or recklessly denied the claim for benefits? 

Golden Rule, 789 P.2d at 855. 

The court answered "yes" to the first question, but established the "fairly debatable" analysis in answering the second. 

Id. 

11 In Western Casualty the insureds sued their primary insurer, 

Western Casualty and Surety Company, on the ground that it was 

guilty of bad faith refusal to settle after ignoring evidence of 

negligence. The refusal to settle exposed the insureds to liability in excess of the policy limits. Id. at 604. The court concluded that Western Casualty's failure to conduct an adequate 

investigation constituted bad faith. Id. at 605. 

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faith by failing to investigate the Julian claim to determine 

whether New Hampshire was providing a defense. 

Although it is unclear whether First State's failure to 

investigate the Julian claim satisfies the fairly debatable standard articulated in Golden Rule, we need not undertake that analysis in order to affirm the district court's ruling. Even if First 

State's behavior did not rise to the level of bad faith, it is 

nevertheless guilty of "unclean hands." 

First State asserts that New Hampshire should pay First State 

for the damages assessed against it because it was New Hampshire's 

bad faith refusal to defend that allegedly resulted in First 

State's liability. This court will not grant the equitable remedy 

of subrogation in these circumstances. The person asserting the 

right to subrogation must be without fault. Camden Trust Co. v. 

Cramer, 40 A.2d 601, 603 (N.J. App. Ct. 1945); Huey v. Brand, 92 

S.W.2d 505, 507 (Tex. Ct. Civ. App. 1936). Moreover, one of the 

fundamental principles of equity is that "he who seeks equity must 

come into the court with clean hands." Lewis v. State Bd. of 

Control, 699 P.2d 822, 827 (Wyo. 1985). In this case, First State 

breached its contractual duty to drop down and defend Messrs. 

Hocker and Cummins once New Hampshire refused to provide a 

defense. As an incident of this contractual obligation, First 

State was obligated to monitor the Julian claim to find out 

whether New Hampshire was supplying a defense. T. w. Ross, the 

First State employee handling the Julian file, closed the claim 

file without determining whether Messrs. Hocker and Cummins were 

being defended. In addition, although First State knew about New 

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Hampshire's identity as the underlying insurer, it did not tell 

New Hampshire that it was the excess carrier nor did it request 

New Hampshire to give notice if a defense was not forthcoming. 

While this level of misbehavior may not rise to the level of bad 

faith in Golden Rule, First State does not have clean hands due to 

its contractual breach. See Cordis Corp. v. Prooslin, 482 So.2d 

486, 490 (Fla. Dist. Ct. App. 1986); Hardee v. Alexander, 182 s.w. 

57, 60 (Tex. Civ. App. 1915); Newby v. Laurence, 121 N.W. 965 

(Neb. 1909). 

We are not faced with a subrogation claim where, to do justice, New Hampshire ought to pay First State's settlement with 

Messrs. Hocker and Cummins. The jury assessed damages against 

each insurer for breach of contract and for bad faith. Both 

insurers settled. First State paid for their own misconduct, not 

the obligation of New Hampshire. In this situation we will not 

use our equitable powers to require that New Hampshire bear the 

expense of First State's failure to fulfill its own contractual 

duties. Accordingly, we affirm the district court's ruling. 

IV. 

First State also appeals the district court's refusal to recognize a direct cause of action by an excess insurer against a 

primary insurer independent of equitable principles under Wyoming 

law. In effect, First State argues that New Hampshire was guilty 

of more egregious misconduct in refusing to defend Messrs. Hocker 

and Cummins and that it should be allowed to recover according to 

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{ 

the comparative fault of the two insurers. First State refers us 

to several'cases from other jurisdictions that have acknowledged 

such a direct claim despite the lack of contractual privity 

between the two carriers. 

In Transit Casualty Co. v. Spink Corp., 94 Cal. App. 3d 124, 

156 Cal. Rptr. 3560 (Cal. Ct. App. 1979), overruled on other 

grounds !2y: Commercial Union Assurance Cos. v. Safeway Stores, 

Inc., 26 Cal. 3d 912, 164 Cal. Rptr. 709, 610 P.2d 1038 (Cal. 

1980), the insured unreasonably refused to agree to a settlement 

proposal within the limits of the primary policy. As a result, 

the excess insurer was required to pay $175,000.00 to satisfy a 

jury verdict. The excess insurer claimed that both the primary 

insurer and the insured had unreasonably rejected the settlement 

proposal thereby causing the excess carrier to incur increased 

payments. 

Equitable subrogation failed to provide a remedy to the 

excess carrier. Because the rights of the subrogee can rise no 

higher than those of the subrogor, the excess carrier gained nothing from stepping into the shoes of the insured who had acted in 

bad faith in refusing to settle. Id., 156 Cal. Rptr. at 365. 

In recognizing a direct cause of action against the primary 

insurer, the court emphasized the triangular interrelationship 

between insured, primary carrier and excess carrier: 

The buyer of separate primary and excess coverage generally occupies relationships with two (or more) carriers. 

Usually, these have no contractual privity Inter se. 

They are however fully aware of their respective roles 

and of the significant differences in their obligations 

to the insured for which greater or lesser premiums are 

charged. When an accident occurs, they become totally 

aware of each other. When the settlement value of the 

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Id.12 

injury hovers over the upper limit of primary coverage, 

the two carriers face interacting problems of claim 

adjustment, settlement and defense. Each has a choice 

of mutual support or naked self-interest. The law, 

then, would be unrealistic in demanding that either carrier use the policyholder as its stepping stone to the 

assertion of a mutual obligation to each other. Triangular reciprocity is far more rational. 

Spink's direct cause of action between the excess and primary 

insurers, although itself independent of equitable subrogation, is 

nonetheless based on equitable principles. The court acknowledged 

that equitable subrogation was a descendant of historic equity 

practice. Id., 156 Cal. Rptr. at 365. It was used "to achieve a 

just result by clothing a party with a right of recovery when he 

would otherwise be defeated by lack of privity. 11 Id. It was precisely because equitable subrogation failed to achieve "evenhanded 

justice" in these circumstances that the court looked to other 

remedies to achieve a just result. Id. The excess carrier, 

through no fault of its own, was estopped from asserting an equitable subrogation claim because of the unreasonable rejection of a 

settlement offer by the insured/subrogee. Thus, the court's adoption of a direct claim sounding in tort was derived from, and 

expanded upon, the same equitable concerns that motivated adoption 

of an equitable subrogation remedy: the need to look beyond the 

12 In Commercial Union Assurance Cos. v. Safeway Stores, Inc., 

26 Cal. 3d 912, 146 Cal. Rptr. 709, 610 P.2d 1038 (Cal. 1980), the 

California disapproved Spink "insofar as it holds that an 

insured's duty of good faith and fair dealing to his excess carrier compels him to accept a settlement offer or proceed at his 

peril where there is a substantial likelihood that an adverse 

judgment will bring excess insurance into play." Id., 610 P.2d at 

1043 (emphasis added). Thus, the California Supreme Court did not 

overrule the Spink theory of triangular reciprocity. 

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lack of contractual privity between excess and primary insurers in 

order to achieve a fair result. 

The district court, interpreting unsettled Wyoming law, correctly.refused to recognize any direct claim for First State 

against New Hampshire in this case. Equitable subrogation does 

not fail to achieve evenhanded justice in these circumstances. 

Nor does the lack of privity deny First State a remedy. Rather, 

it is First State's own wrongdoing (its breach of its contractual 

duty to defend) and failure to satisfy the requirements of equity 

that prevent it from recovering from New Hampshire. Unlike the 

innocent excess carrier in Spink, First State's unclean hands prevents its assertion of an equitable subrogation claim. Under 

these circumstances, the district court correctly refused to recognize a direct tort cause of action based on equitable principles. 

Two other cases that have recognized a direct cause of action 

are worthy of note. In Hartford Accident & Indemnity Co. v. 

Michigan Mutual Insurance Co., 93 A.D.2d 337, 462 N.Y.S.2d 175 

(N.Y. App. Div. 1983), aff'd, 61 N.Y.2d 569, 475 N.Y.S.2d 267, 463 

N.E.2d 608, the primary carrier failed to implead an injured 

worker's employer in the worker's personal injury suit against the 

employer's parent corporation because the insurer would have been 

liable as the employer's worker's compensation carrier. Consequently, Hartford, the excess insurer, had to contribute more 

toward the settlement after the primary coverage was exhausted. 

Although the court acknowledged that Hartford became the 

equitable subrogee of its insured upon payment under its excess 

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coverage, that theory of recovery was not before the court. 

Instead, the court found that Hartford's direct cause of action 

was the "result of the independent and direct duty" the primary 

carrier owed to Hartford as excess insurer and was "not dependent 

upon equitable principles of subrogation." Hartford, 462 N.Y.S.2d 

at 178. 

First State also cites the decision in Ranger Insurance Co. 

v. Home Indemnity Co., 714 F. Supp. 956 (N.D. Ill. 1989). Ranger 

Insurance Co., the excess insurer, claimed that the primary 

carrier's failure to engage in reasonable settlement negotiations 

rendered Ranger liable for $288,989.00 of a judgment. Although 

Illinois law supported Ranger's equitable subrogation to the 

rights of its insured, Ranger did not base its claim on this 

theory of relief. Instead, Ranger contended that a primary 

carrier owed a direct duty to the excess carrier to attempt to 

settle within the primary coverage ceiling. Id., 714 F. Supp. at 

961. 

Despite the lack of controlling Illinois precedent, the district court found that Illinois would allow an excess insurer to 

bring suit in its own right. The court based its decision on tort 

principles. It found that Illinois law imposes a duty of care 

when two conditions are met: "the alleged tortfeasor could have 

reasonably foreseen that its conduct would injure the plaintiff 

and policy considerations justify placing the risks and the burden 

of care on the defendant." Id. Both conditions were satisfied 

under the circumstances presented. 

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Even if this court was to look to Wyoming tort law and set 

aside equitable principles to fashion a remedy for First State, we 

conclude that Wyoming would not impose a direct duty of care running from the primary carrier to the excess carrier in the circumstances of this case. 

Like Illinois, the imposition of a duty of care under Wyoming 

law requires that the alleged tortfeasor could have reasonably 

foreseen that its conduct would injure the plaintiff. Brubaker v. 

Glenrock Lodge Int'l Order of Odd Fellows, 526 P.2d 52, 58-59 

(Wyo. 1974). In addition, policy considerations must justify 

placing the risks and the burden of care on the defendant. 

Ranger, 714 F. Supp. at 961. 

We do not believe the ·district court erred when it refused to 

recognize a tort cause of action in these circumstances. Even if 

we assumed that it was reasonably foreseeable to New Hampshire 

that there was an excess carrier in this case (a fact not actually 

known to New Hampshire), we conclude that policy concerns do not 

warrant placing the burden of care on New Hampshire to discover 

and notify First State of its refusal to defend Messrs. Hocker and 

Cummins. 

The jury returned verdicts against New Hampshire and First 

State for their respective breaches of contract and good faith. 

First State now seeks to have New Hampshire pay for First State's 

contract breach and bad faith as well as its own. To allow 

recovery for First State would be to excuse, at least in part, 

their breach of contract. First State agreed to drop down and 

defend Messrs. Hocker and Cummins regardless of whether New 

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Hampshire's refusal to defend was willful or negligent. Having 

t failed to perform their contract, First State will not be allowed 

to thrust the consequences of their breach onto New Hampshire, 

particularly where First State knew of the underlying claim yet 

failed to notify New Hampshire of First State's existence. We 

will not relieve First State of its contractual obligations. Nor 

will we grant First State a tort cause of action so that New 

Hampshire may bear the loss occasioned by First State's misconduct. 

In addition, allowing First State to recover from New 

Hampshire will decrease its incentive to fulfill its contractual 

obligation to drop down in the event the primary insurer fails to 

defend. Without the availability of a tort cause of action, an 

excess insurer deciding whether to drop down weighs the possibility the primary incorrectly concluded the insureds were not covered. If the primary's decision is correct and the excess does 

drop down, the excess insurer will be left to pay a judgment 

entered against the insured. 13 If, however, the primary's conclusion is wrong and the excess carrier does not drop down, the 

excess will face a breach of contract judgment and the possibility 

of a judgment for bad faith breach. The decision to drop down, 

therefore, is based on the excess carrier's exposure to the risk 

that it will have to pay these amounts. 

13 Of course, if the primary is wrong and the excess does drop 

down, the excess insurer will be able to recoup, through 

subrogation, a money judgment entered against the insured that the 

excess paid. See Insurance Co. of N. Am. v. Medical Protective 

Co., 768 F.2d 323 (10th Cir. 1985). 

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'1 

If we inject the availability of a tort claim into this equation, the excess carrier's incentive to drop down would decrease 

due to its reduced exposure to the risk of paying damages for 

breach of contract and bad faith. An excess carrier will decide 

whether to drop down based on its exposure to damages for breach 

of contract and bad faith less the amount it could recover from 

the primary through a tort action. When it compares this reduced 

exposure to the possibility that it may have to pay the entire 

judgment if it drops down and the primary correctly decided the 

insureds were not covered, the excess insurer will have less 

incentive to fulfill its contractual duties than it would without 

the availability of a tort claim. We are not persuaded that 

Wyoming would adopt a policy which interferes with the parties' 

contractual relationship by creating new causes of action which 

result in disincentives that thwart the fulfillment of those contractual obligations. 

Wyoming has not yet adopted a direct cause of action for an 

excess insurer against a primary insurer. While it may adopt the 

direct cause of action in some circumstances, we are not persuaded 

that it would use these facts and this context to do so. We do 

not believe that it would create a duty of care that would relieve 

an excess insurer of the consequences of its own contractual 

breach. 14 The district court's interpretation of Wyoming law is 

14 In light of our conclusion that Wyoming would not recognize a 

direct duty of care in the circumstances of this case, we need not 

resolve such difficult questions of whether Wyoming's comparative 

negligence statute would apply to such an action or other problems 

such as the appropriate standards for contributory negligence, 

standards of proof, and presumptions when creating tort duties 

between parties whose relationship stems from their contractual 

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therefore affirmed. 

v. 

To summarize: We hold that First State breached its contractual obligation to drop down and defend plaintiffs Hocker and 

Cummins once New Hampshire wrongfully refused to defend; that 

First State's unclean hands bars its equitable subrogation crossclaim against New Hampshire; and that the district court correctly 

interpreted unsettled Wyoming law in refusing to recognize a 

direct cause of action independent of equitable principles in 

these circumstances. 

AFFIRMED. 

obligations to the insured. 

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