Filed 8/5/16

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

ACE AMERICAN INSURANCE 

COMPANY,

Plaintiff and Appellant,

v.

FIREMAN’S FUND INSURANCE 

COMPANY,

Defendant and Respondent.

 B264861

 (Los Angeles County

 Super. Ct. No.BC559203)

APPEAL from a judgment of the Superior Court of Los Angeles County, Rafael 

A. Ongkeko, Judge. Reversed.

Clyde & Co., David Anthony Gabianelli and Marianne G. May for Plaintiff and 

Appellant.

Sheppard Mullin Richter & Hampton, Marc Jeremy Feldman and Peter H. Klee for 

Defendant and Respondent.
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INTRODUCTION

A film industry worker was seriously injured on a film set. His employer had two 

primary insurance policies with Fireman’s Fund Insurance Company, and an excess 

insurance policy with Ace American Insurance Company. The injured worker sued, 

Fireman’s Fund defended the case, and the case eventually settled with the participation 

of and contributions from both insurers.

Ace American then sued Fireman’s Fund for equitable subrogation, alleging that 

the injured worker initially offered to settle his case within the limits of the Fireman’s 

Fund policies, and that Fireman’s Fund unreasonably rejected those settlement offers. 

Ace American alleged that as a result, it was required to contribute to the eventual 

settlement, which exceeded the limits of the Fireman’s Fund policies.

The question before us is whether Ace American has stated viable causes of action 

for equitable subrogation and breach of the duty of good faith and fair dealing, or whether 

the lack of a judgment in the employment injury case bars Ace American’s claims. We 

find that because Ace American, the excess insurer, alleged it was required to contribute 

to the settlement of the underlying case due to the primary insurer’s failure to reasonably 

settle the case within policy limits, the lack of an excess judgment against the insured in 

the underlying case does not bar an action for equitable subrogation and breach of the 

duty of good faith and fair dealing. 

FACTUAL AND PROCEDURAL BACKGROUND

The facts below are taken from Ace American’s complaint and first amended 

complaint. Because the case is on appeal following a demurrer, we accept the alleged 

facts as true for the limited purpose of determining whether Ace American has stated a 

viable cause of action. (Stevenson v. Superior Court (1997) 16 Cal.4th 880, 885.)

A. The underlying action 

In July 2010, John Franco was working on a film set when a special effects 

accident caused him to suffer serious injuries. Franco’s injuries included pelvic crush 

injuries, a broken hip, fractures to both femurs, crush injuries to both knees, broken tibias 

and fibulas, broken ribs, a punctured lung, and soft tissue injuries to his face. Franco 
3

alleged that the incident left him with permanent nerve pain, an eye injury, urinary and 

sexual dysfunction, and fear and depression. 

In April 2011, Franco and his wife sued Warner Brothers Entertainment, Inc. and 

related entities for damages and loss of consortium. Fireman’s Fund provided the Warner 

Brothers entities a primary insurance policy with a $2 million limit, and an umbrella 

insurance policy with a $3 million limit. Ace American provided the Warner Brothers 

entities an excess insurance policy with a $50 million limit. 

Fireman’s Fund defended the Warner Brothers entities in the Francos’ lawsuit. In 

April and May 2012, the Francos made settlement demands within the limits of the 

Fireman’s Fund policies. According to Ace American’s complaints, the demands were 

reasonable and supported by substantial evidence, but Fireman’s Fund “failed and/or 

refused to pay those demands within [the insurance policies’] limits.” In October 2012, 

the Francos settled their lawsuit “for an amount substantially in excess” of the limits of 

the Fireman’s Fund policies. According to Ace American, Fireman’s Fund “consented to 

the settlement and contributed to it”, and Ace American contributed the amounts in 

excess of the Fireman’s Fund policies’ limits. Following the settlement, the case was 

dismissed with prejudice. 

B. This action 

Ace American filed an action against Fireman’s Fund for equitable subrogation 

and breach of the covenant of good faith and fair dealing. In the first amended complaint, 

which is relevant here, Ace American alleged the facts of the Franco lawsuit, as stated 

above. It alleged that the Francos’ settlement demands within the limits of the Fireman’s 

Fund policy were reasonable, and there was a substantial likelihood that a jury verdict 

would exceed the limits of the Fireman’s Fund policies. It alleged that “Ace American 

sustained a loss for which [Fireman’s Fund] is liable because of [Fireman’s Fund’s] 

wrongful conduct in failing to settle the Underlying Action within its policy limits, 

despite repeat[ed] opportunities to settle within its limits.” Ace American also alleged 

that its policy provided that if the insured had a right to recover all or part of any payment 

Ace American made under the policy, those rights were transferred to Ace American. 
4

Fireman’s Fund demurred, arguing that the rights of an excess insurer such as Ace 

American derive from the rights of the insured, Warner Brothers. As such, an excess 

insurer may only sue for equitable subrogation if there has been a judgment against the 

insured that exceeds the limits of the primary policy. Because the Franco lawsuit settled 

and there was no judgment against Warner Brothers, Fireman’s Fund argued, Ace 

American could not sue for equitable subrogation. Fireman’s Fund relied on RLI 

Insurance Company v. CNA Casualty of California (2006) 141 Cal.App.4th 75 (RLI), 

which stated that an “insured’s right to recover from the primary insurer hinges upon ‘a 

judgment in excess of policy limits.’” (RLI, supra, 141 Cal.App.4th at p. 82, quoting 

Hamilton v. Maryland Casualty Co. (2002) 27 Cal.4th 718, 725 (Hamilton).) RLI also 

stated, “Without an excess judgment, the primary insurer’s refusal to settle is not 

actionable.” (RLI, supra, 141 Cal.App.4th at p. 82.) 

Ace American opposed the demurrer, arguing that a judgment is not required for 

an equitable subrogation action by an excess insurer. Ace American argued that it was 

irrelevant whether the underlying action was resolved by a settlement or a judgment, as 

long as the insured—and by extension, the excess insurer—was liable for any amount 

beyond the limits of the primary policy as a result of the primary insurer’s bad faith 

refusal to settle within policy limits. Ace American relied in part on Fortman v. Safeco 

Insurance Co. (1990) 221 Cal.App.3d 1394 (Fortman), which held that an excess 

judgment was not a prerequisite to an equitable subrogation claim, as long as the excess 

insurer demonstrated that it actually paid an amount in excess of the primary insurer’s 

policy limits. 

The trial court sustained Fireman Fund’s demurrer without leave to amend. The 

court held, “RLI is directly on point. RLI was clear: Until the judgment is actually 

entered, the mere possibility or probability of an excess judgment does not render the 

refusal to settle actionable. Here, there is no dispute a judgment was not entered. The 

demurrer is sustained.” 

The trial court entered judgment, and Ace American timely appealed. 
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STANDARD OF REVIEW

“We review de novo the trial court’s order sustaining a demurrer.” (Cansino v. 

Bank of America (2014) 224 Cal.App.4th 1462, 1468.) We accept as true all wellpleaded allegations in the complaint, and treat the demurrer as admitting all material facts 

properly pleaded, but not contentions, deductions or conclusions of fact or law. (Evans v. 

City of Berkeley (2006) 38 Cal.4th 1, 6; Serrano v. Priest (1971) 5 Cal.3d 584, 591.)

DISCUSSION

A. Equitable subrogation and breach of the covenant of good faith and 

fair dealing

“‘Primary coverage is insurance coverage whereby, under the terms of the policy, 

liability attaches immediately upon the happening of the occurrence that gives rise to 

liability. . . . [¶] “Excess” or secondary coverage is coverage whereby, under the terms 

of the policy, liability attaches only after a predetermined amount of primary coverage 

has been exhausted.’ [Citation.]” (Transcontinental Ins. Co. v. Insurance Co. of the 

State of Pennsylvania (2007) 148 Cal.App.4th 1296, 1304.)1 Here, Fireman’s Fund is the 

primary insurer, and Ace American is the excess insurer.

California recognizes “an implied duty on the part of the insurer to accept 

reasonable settlement demands on [covered] claims within the policy limits.” (Hamilton, 

supra, 27 Cal.4th at p. 724.) “An insurer’s liability for failing to accept a reasonable 

settlement offer ‘is imposed not for a bad faith breach of the contract but for failure to 

meet the duty to accept reasonable settlements, a duty included within the implied 

covenant of good faith and fair dealing.’” (Archdale v. American Internat. Specialty 

Lines Ins. Co. (2007) 154 Cal.App.4th 449, 465-466 (Archdale), quoting Crisci v. 

 

1

In its opposition to Fireman’s Fund’s demurrer, Ace American encouraged the 

court to overrule the demurrer because New York law may apply and “there has been no 

choice of law determination in this case.” Toward the end of its opening brief on appeal, 

Ace American again mentions that “there has been no choice of law determination,” and 

argues it was “premature” for the trial court to sustain the demurrer. Ace American has 

provided no argument or analysis on the choice-of-law issue, and both parties’ analyses 

focus almost exclusively on California law. We therefore apply California law.
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Security Ins. Co. of New Haven, Conn. (1967) 66 Cal.2d 425, 430 (Crisci) (emphasis in 

Archdale).) “An insurer that breaches its duty of reasonable settlement is liable for all the 

insured’s damages proximately caused by the breach, regardless of policy limits.” 

(Hamilton, supra, 27 Cal.4th at p. 725.)

“Subrogation is defined as the substitution of another person in place of the 

creditor or claimant to whose rights he or she succeeds in relation to the debt or claim.” 

(Fireman’s Fund Ins. Co. v. Maryland Cas. Co. (1998) 65 Cal.App.4th 1279, 1291

(Fireman’s Fund v. Maryland).) “Equitable subrogation allows an insurer that paid 

coverage or defense costs to be placed in the insured’s position to pursue a full recovery 

from another insurer who was primarily responsible for the loss.” (Maryland Casualty

Co. v. Nationwide Mutual Ins. Co. (2000) 81 Cal.App.4th 1082, 1088.) “Since the 

insured would have been able to recover from the primary carrier for a judgment in 

excess of policy limits caused by the carrier’s wrongful refusal to settle, the excess 

carrier, who discharged the insured’s liability as a result of this tort, stands in the shoes of 

the insured and should be permitted to assert all claims against the primary carrier which 

the insured himself could have asserted.” (Commercial Union Assurance Companies v. 

Safeway Stores, Inc. (1980) 26 Cal.3d 912, 917-918.) “The subrogated insurer is said to 

‘“stand in the shoes”’ of its insured, because it has no greater rights than the insured and 

is subject to the same defenses assertable against the insured.” (Fireman’s Fund v. 

Maryland, supra, 65 Cal.App.4th at p. 1292.)

The elements of an insurer’s cause of action for equitable subrogation include: 

Ace American has paid the claim of its insured, Warner Brothers, to protect its own 

interest and not as a volunteer; Ace American has suffered damages caused by Fireman’s 

Fund’s act or omission; and Ace American’s damages are in a liquidated sum.2 

(Fireman’s Fund v. Maryland, supra, 65 Cal.App.4th at p. 1292.)

 

2

“The essential elements of an insurer’s cause of action for equitable subrogation 

are as follows: (a) the insured [Warner Brothers] suffered a loss for which the defendant 

[Fireman’s Fund] is liable, either as the wrongdoer whose act or omission caused the loss 

or because the defendant is legally responsible to the insured for the loss caused by the 
7

B. Case law and analysis

1. Fortman and RLI

In this case, we are faced with conflicting decisions from different divisions of this 

district. In Fortman, supra, 221 Cal.App.3d 1394, Division One held that an equitable 

subrogation action could proceed against a primary insurer that initially breached its duty 

to settle a case within policy limits, resulting in a settlement that exceeded policy limits. 

By contrast, in RLI, supra, 141 Cal.App.4th 75, Division Five held that an equitable 

subrogation action could not proceed under the same circumstances. RLI rejected the 

reasoning of Fortman, and held that because the case resulted in a settlement rather than 

an excess judgment against the insured, any equitable subrogation action was barred. We 

discuss both cases below, along with additional cases that guide our determination, and 

conclude that it is appropriate to follow the reasoning of Fortman rather than that of RLI. 

In Fortman, supra, 221 Cal.App.3d 1394, three-year-old Nichole Fortman was 

injured when she fell from a moving Jeep driven by her mother. (Fortman, supra, 221 

Cal.App.3d at p. 1397.) The Jeep was covered with a molded shell that included a door 

handle manufactured by Austin Hardware and Supply, Inc. (Ibid.) Austin had a 

$300,000 primary insurance policy from Safeco Insurance Company of America, and an 

excess insurance policy from U.S. Fire Insurance Company and Industrial Indemnity 

Company. (Ibid.) Before trial, Safeco refused offers to settle the case for $125,000. 

(Ibid.) During trial, Austin settled with Fortman for the full amount of the Safeco policy, 

plus $1,125,000 from U.S. Fire; U.S. Fire assigned its equitable subrogation claim to 

 

wrongdoer; (b) the claimed loss was one for which the insurer [Ace American] was not 

primarily liable; (c) the insurer has compensated the insured in whole or in part for the 

same loss for which the defendant is primarily liable; (d) the insurer has paid the claim of 

its insured to protect its own interest and not as a volunteer; (e) the insured has an 

existing, assignable cause of action against the defendant which the insured could have 

asserted for its own benefit had it not been compensated for its loss by the insurer; (f) the 

insurer has suffered damages caused by the act or omission upon which the liability of 

the defendant depends; (g) justice requires that the loss be entirely shifted from the 

insurer to the defendant, whose equitable position is inferior to that of the insurer; and (h) 

the insurer’s damages are in a liquidated sum, generally the amount paid to the insured. 

[Citations.].” ( Fireman’s Fund v. Maryland, supra, 65 Cal.App.4th at p. 1292.)
8

Fortman. (Ibid.) Trial continued against the manufacturer of the molded shell, and the 

jury was asked to apportion damages among the manufacturer, Fortman’s mother, and 

Austin. (Id. at pp. 1397-1398.) The jury awarded Fortman nearly $24 million, finding 

the mother 75 percent, the shell manufacturer 25 percent, and Austin 0 percent 

responsible. (Id. at p. 1398.)

Fortman brought an equitable subrogation claim. Safeco moved for summary 

judgment, arguing that because the jury found Austin not responsible for Fortman’s 

injuries, equitable subrogation was not available because there had been no judgment 

against the insured in excess of the policy limits. (Fortman, supra, 221 Cal.App.3d at p. 

1398.) The trial court granted the motion, and the Court of Appeal reversed. The court 

said that actions between liability insurers are not based on contract, but instead are based 

on “‘equitable principles designed to accomplish ultimate justice in the bearing of a 

specific burden.’” (Id. at p. 1399, quoting American Auto. Ins. Co. v. Seaboard Sur. Co. 

(1957) 155 Cal.App.2d 192, 196.) 

The court noted that in Fortman’s underlying case, “Safeco repeatedly, and 

allegedly in bad faith, refused settlement offers below its policy limits. Had the case 

been settled for any of those amounts, U.S. Fire would have paid nothing. Instead, U.S. 

Fire actually paid $1,125,000 toward the eventual settlement. If we adopted Safeco’s 

position, U.S. Fire would suffer that loss without a remedy.” (Id. at p. 1401.) Safeco 

argued that allowing an equitable subrogation action to proceed without an excess 

judgment against the insured could encourage collusive settlements, but the court rejected 

that argument: “In the equitable subrogation context before us, the excess insurer must 

show it actually paid an amount in excess of the primary insurer’s policy limits. Courts 

easily could distinguish equitable subrogation cases with facts suggesting a collusive 

settlement from cases like this one in which the excess insurer actually paid a 

settlement.” (Id. at p. 1402.) The court therefore rejected Safeco’s argument that a 

judgment was required before an excess insurer could recover from a primary insurer.

In RLI, Division Two of this district reached a different result. In that case, a 

driver was involved in a traffic accident that caused a victim’s death. (RLI, supra, 141 
9

Cal.App.4th at p. 79.) The driver had a primary insurance policy with a limit of $1 

million, and an excess insurance policy with a limit of $1 million. (Ibid.) The victim’s 

family sued, and offered to settle their claims for $1 million. The primary insurer 

rejected the offer. (Ibid.) One year later, the case settled for $2 million; each insurer paid 

$1 million. (Ibid.) 

The excess insurer then asserted a claim for equitable subrogation against the 

primary insurer. (RLI, supra, 141 Cal.App.4th at p. 79.) The trial court granted the 

primary insurer’s motion for judgment on the pleadings, and the Court of Appeal

affirmed. The court noted that a “claim for equitable subrogation may be pursued against 

a primary insurer that unreasonably refuses to settle a case within its policy limits, 

thereby exposing its insured (or an excess insurer) to liability on the claim.” (Id. at p. 

80.) The court held, however, that when a case resulted in a settlement, rather than a 

judgment, equitable subrogation was not available: “Without an excess judgment, the 

primary insurer’s refusal to settle is not actionable.” (Id. at p. 82.) The court went on to 

say, “The subrogation complaint in this case alleges that the [underlying] lawsuit settled. 

Missing from the complaint is the critical allegation that an excess judgment was entered 

against [the driver] in the [underlying] lawsuit. Because there is not an excess judgment, 

[the driver] suffered no harm, and has no claim to assert against the primary insurer. As a 

result, the excess insurer has no claim to assert against the primary insurer because the 

subrogation rights of the excess insurer are co-equal to and derivative of the rights of the 

insured.” (Ibid.) The court concluded, “The excess insurer cannot sue the primary 

insurer for failure to settle within the limits of the primary insurer’s policy, absent an 

excess judgment against the insured.” (Ibid.)

The RLI court specifically rejected the reasoning of Fortman, saying it was 

“flawed” in three respects. We do not agree with this assessment. First, RLI said that 

Fortman conflicted with Hamilton (RLI, supra, 141 Cal.App.4th at p. 83), a conclusion 

we do not share for reasons discussed in the following section. Second, RLI said 

Fortman followed a rule relevant to equitable contribution rather than equitable 
10

subrogation.3 (Ibid.) Discussing policy, Fortman did discuss principles relating to 

equitable contribution (see Fortman, supra, 221 Cal.App.3d at p. 1399), and RLI is 

correct that such principles are generally inapplicable in equitable subrogation cases. 

(RLI, supra, 141 Cal.App.4th at pp. 83-84.) Although Fortman’s discussion of policy 

may have blurred the line distinguishing these two equitable principles, we do not find 

Fortman’s reasoning and ruling to be unreliable as a result. The Fortman court based its 

decision on established equitable subrogation cases and principles, it fully recognized that 

the insurers were not co-obligors, and did not apply an equitable contribution analysis to 

determine liability. Third, RLI asserted that Fortman improperly relied on Continental 

Casualty Co. v. Royal Ins. Co. (1990) 219 Cal.App.3d 111, in which the primary insurer 

abandoned its defense of the insured. (RLI, supra, 141 Cal.App.4th at p. 84, referencing 

Fortman, supra, 221 Cal.App.3d at pp. 1400-1401.) However, Fortman cited 

Continental Casualty in only a single paragraph, distinguishing equitable subrogation 

from third-party bad faith claims. (Fortman, supra, 221 Cal.App.3d at pp. 1400-1401.) 

We do not find that Fortman’s passing citation to Continental Casualty undermines the 

strength of its main holding: Where an excess insurer can show actual damages as a 

result of the primary insurer’s failure to reasonably settle the case within primary policy 

limits, an excess judgment is not required to establish damages in an equitable 

subrogation case.

2. Hamilton and Isaacson

The RLI court stated, “The Supreme Court makes clear in Hamilton that a 

judgment in excess of the policy must be entered before there can be a claim for breach 

of the primary insurer’s duty to settle. Because Fortman is contrary to the holding in 

Hamilton, we cannot follow Fortman.” (RLI, supra, 141 Cal.App.4th at p. 85.) We 

 

3

“‘Equitable subrogation allows an insurer that paid coverage or defense costs to 

be placed in the insured’s position to pursue a full recovery from another insurer who was 

primarily responsible for the loss. . . .’” [¶] “‘Equitable contribution, on the other hand, 

applies to apportion costs among insurers that share the same level of liability on the 

same risk as to the same insured.’” (Transcontinental Ins. Co. v. Insurance Co. of State 

of Pennsylvania (2007) 148 Cal.App.4th 1296, 1303.) 
11

disagree that Hamilton requires a judgment to be entered before an insured or its assignee 

may recover for bad faith failure to settle within policy limits. Although the 

circumstances in Hamilton were dissimilar to the facts here, the Hamilton opinion, in 

dicta, specifically acknowledged that equitable subrogation could proceed under the 

circumstances of RLI and this case.

Hamilton focused on whether a stipulated judgment against an insured, coupled 

with an agreement not to enforce the judgment, was adequate evidence of damages in a 

breach of contract case. In the underlying action, clients of a dating service sued multiple 

franchises of the service, alleging that confidential conversations had been recorded and 

broadcast without the clients’ permission. (Hamilton, supra, 27 Cal.4th at p. 722.) One 

franchise owner, VLP, was insured by Maryland Casualty Company with two successive 

commercial policies, each with a $1 million limit. (Ibid.) The clients made a settlement 

demand of $1 million to VLP, which Maryland denied. (Id. at p. 723.) Eventually the 

case settled without the participation of Maryland. The franchises agreed to stop 

recording private conversations, discount coupons were offered to class members, and 

some franchises—not including VLP—contributed cash to a settlement fund. (Ibid.) 

VLP agreed to have a stipulated judgment in the amount of $3 million entered against it, 

and it assigned all claims against Maryland to the clients; in return, the clients agreed not 

to execute the judgment against VLP. (Ibid.) 

The plaintiff-clients then sued Maryland for breach of contract. (Hamilton, supra, 

27 Cal.4th at p. 723.) They moved for summary judgment, arguing that “the insurer had 

breached its contractual duties by failing to accept their offer to settle their claims against 

VLP for $1 million and that the $3 million stipulated judgment was presumptive 

evidence, which Maryland had done nothing to rebut, of VLP’s damages from the 

breach.” (Id. at p. 724.) The trial court agreed, and entered judgment in the amount of $3 

million for the plaintiffs. (Ibid.) The Supreme Court presented the question before it and 

its holding as follows: “[I]s the amount of the stipulated judgment presumptively binding 

on the insurer as to the damages suffered by the insured as a result of the alleged contract 

breach? We conclude it is not; a defending insurer cannot be bound to a settlement to 
12

which it has not agreed and in which it has not participated, even where the settlement 

has been approved under Code of Civil Procedure section 877.6.” (Id. at p. 722.) The 

Court added, “[I]n light of the settlement before trial and the covenant not to execute 

against the insured, the stipulated judgment is insufficient to prove that the insured 

suffered any damages from the insurer’s breach of its settlement duty.” (Ibid.)

The Court reasoned, “An insurer that breaches its duty of reasonable settlement is 

liable for all the insured’s damages proximately caused by the breach, regardless of 

policy limits. [Citations.] Where the underlying action has proceeded to trial and a 

judgment in excess of the policy limits has been entered against the insured, the insurer is 

ordinarily liable to its insured for the entire amount of that judgment.” (Hamilton, supra, 

27 Cal.4th at p. 725.) The facts of the case set Hamilton apart from that rule, however: 

“In this case, the underlying action did not proceed to trial. It was terminated by 

settlement, resulting in a stipulated judgment coupled with a covenant not to execute 

against the insured. The question is whether such a stipulated judgment may be treated as 

a presumptive measure of the damages the policyholder has suffered as a result of the 

insurer’s breach of contract.” (Ibid., emphasis in original.) The Court noted a line of 

cases holding that “settlements reached without the consent or participation of the 

defending insurer, and incorporating a covenant not to execute or similar device, are 

entitled to no weight in a later action against the insurer for failure to settle.” (Id. at p. 

726.) It made no difference that the court had approved the settlement, because even 

court approval “cannot transform an agreed judgment that, by covenant, the insured will 

never have to pay, into a determination of the existence and extent of the insured’s 

liability.” (Id. at p. 729.) The court added, “A defending insurer cannot be bound by a 

settlement made without its participation and without any actual commitment on its 

insured’s part to pay the judgment, even where the settlement has been found to be in 

good faith for purposes of section 877.6.” (Id. at p. 730.) The focus of Hamilton, 

therefore, was whether there was sufficient evidence that the insured had suffered actual 

damages—not whether damages came in the form of an excess judgment versus an 

excess settlement.
13

The Hamilton Court also referenced its decision in Isaacson v. California Ins. 

Guarantee Assn. (1988) 44 Cal.3d 775 (Isaacson), and indicated that the holding of 

Isaacson could be applicable in a case such as this one. In that case, two doctors who 

were insured by an insolvent insurance company sought damages from the California 

Insurance Guarantee Association (CIGA) following settlement of a lawsuit relating to a 

series of unsuccessful back surgeries that left a patient in pain. The patient demanded a 

settlement of $1 million, the limit of the doctors’ insurance policy. (Id. at p. 782.) After 

the insurer was determined insolvent and CIGA assumed the doctors’ defense, the patient 

demanded $500,000, the limit of CIGA’s coverage. (Ibid.) CIGA refused to pay more 

than $400,000. (Ibid.) At the mandatory settlement conference before trial, the doctors, 

“at the suggestion of the settlement judge, and with CIGA’s knowledge, agreed to pay 

$100,000 in addition to CIGA’s $400,000 and thus ensure a settlement.” (Id. at pp. 782-

783.) The doctors then sued CIGA to recover the $100,000 they contributed to the 

settlement. 

The Court held that CIGA’s liability was limited to fulfilling its duties as required 

by statute. (Isaacson, supra, 44 Cal.3d at p. 788.) Unlike an insurer, therefore, CIGA 

could not breach of the duty of good faith and fair dealing, because such a duty arises 

only from a contractual relationship, not a statutory one. (Id. at p. 789.) CIGA 

nevertheless had a duty to accept a reasonable settlement offer: “Although CIGA’s 

obligations are imposed by the Guarantee Act, and not by a contractual relationship with 

the insured (or the Unfair Practices Act), we hold that CIGA’s statutory duty to defend 

and pay ‘covered claims’ encompasses a duty to accept a reasonable settlement offer in 

appropriate cases.” (Id. at p. 792.) Thus, “[i]f CIGA fails to accept a reasonable 

settlement offer within its statutory limit, in a case in which a judgment against the 

insured in excess of that limit is likely, it violates its statutory duty to pay and discharge 

‘covered claims.’ It may thereby become liable to the insured for reimbursement if the 

insured expends his own funds to settle, within the statutory limit.” (Ibid.) “In order to 

recover reimbursement from CIGA following its refusal to settle a claim, an insured must 

prove that CIGA breached its duty to settle the case for a reasonable amount.” (Id. at p. 
14

793.) Because liability in the doctors’ case was unclear, however, the Court held that the 

doctors failed to prove that CIGA’s denial of the $500,000 demand was unreasonable. 

(Ibid.)

Although Isaacson addressed CIGA’s statutory duties, the Hamilton opinion 

referenced the implications of Isaacson for cases directly involving insurers: “Isaacson

indicates that when an insured, faced with the insurer’s unreasonable refusal to pay a 

settlement demand within the policy limits and exposed to potential personal liability 

substantially beyond the policy limits, actually contributes payment to conclude the 

settlement (in which the insurer also participates), the insured may recover the amount of 

his or her payment from the insurer in an action for bad faith failure to settle. In those 

circumstances, a bad faith action may be brought by the insured, or the claimant as the 

insured’s assignee, despite the absence of a litigated excess judgment.” (Hamilton, 

supra, 27 Cal.4th at p. 731.) The Court contrasted the facts of Hamilton, where the 

insured neither contributed to the settlement nor risked execution of an excess judgment:

“Where, as here, the insured, without the insurer’s agreement, stipulates to a judgment 

against it in excess of both the policy limits and the previously rejected settlement offer, 

and the stipulated judgment is coupled with a covenant not to execute, the agreed 

judgment cannot fairly be attributed to the insurer’s conduct, even if the insurer’s refusal 

to settle within the policy limits was unreasonable.” (Ibid.) 

Here, the situation is more akin to Isaacson than Hamilton—Ace American 

alleged that Fireman’s Fund unreasonably refused to settle within policy limits, and as a 

result, Ace American (as Warner Brothers’ subrogee) actually contributed to the eventual 

settlement, in which Fireman’s Fund, as the primary insurer, also participated. There was 

no stipulated judgment or agreement not to execute, as in Hamilton. As the opinions in 

Hamilton and Isaacson indicate, this is a situation in which a bad faith action may be 

brought by the insured or the insured’s assignee, “despite the absence of a litigated excess 

judgment.” (Hamilton, supra, 27 Cal.4th at p. 731; see also Smith v. State Farm Mut. 

Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 1114 [“a judgment against the insured (or, if 

we read the Isaacson and Continental Casualty decisions correctly, a payment by the 
15

insured in settlement of a claim) is a condition to the insured’s right to assign to the 

claimant a cause of action for bad faith against the insurer.”].) We therefore reject the 

assertion in RLI, urged here by Fireman’s Fund, that Hamilton requires entry of a 

judgment against the insured before a claim arises for equitable subrogation. 

Fireman’s Fund points to RLI’s reliance on a statement from Hamilton that a 

“pretrial settlement . . . ‘is insufficient to show, even rebuttably, that the insured has been 

injured to any extent by [the primary insurer’s] failure to settle, much less in the amount 

of the stipulated judgment.’” (RLI, supra, 141 Cal.App.4th at p. 82, quoting Hamilton, 

supra, 27 Cal.4th at p. 726.) But Hamilton’s focus was on the sufficiency of evidence of 

actual damages—not on whether the damages arose as a result of a settlement or a 

judgment. In the section RLI quoted, the Hamilton Court already had noted the parties’

covenant not to execute the stipulated judgment, and then stated, “In these circumstances, 

the judgment provides no reliable basis to establish damages resulting from a refusal to 

settle, an essential element of plaintiffs’ cause of action.” (Hamilton, supra, 27 Cal.4th at 

p. 726.) Fireman’s Fund argues that “Hamilton was clear that an excess judgment is an 

essential element of a failure to settle claim.” We disagree. As discussed above, 

Hamilton focused on reliable proof of damages; it did not limit the form of that proof to 

an excess judgment versus an excess settlement.

3. Other California cases

Fireman’s Fund points to a number of other cases stating that an equitable 

subrogation action may not proceed without an excess judgment against the insured. 

Indeed, many cases include language to that effect. (See, e.g., Finkelstein v. 20th 

Century Ins. Co. (1992) 11 Cal.App.4th 926, 929 (Finkelstein) [“It is well established that 

an insurance company is liable to an insured when the insurer unreasonably refuses to 

settle the case within the insured’s policy limits and a ‘judgment’ in excess of those limits 

is ultimately rendered against the insured.”]; Safeco Ins. Co. v. Superior Court (1999) 71 

Cal.App.4th 782, 788 (Safeco) [“A cause of action for bad faith refusal to settle arises 

only after a judgment has been rendered in excess of the policy limits.”]; Wolkowitz v. 

Redland Ins. Co. (2003) 112 Cal.App.4th 154, 162 [“In the Absence of an Excess 
16

Judgment Determining the Fact and Amount of Shamrock’s Liability, Redland Can Have 

No Liability for Alleged Bad Faith Refusal to Accept a Policy Limits Settlement Offer”]; 

Archdale v. American Intern. Specialty Lines Ins. Co., supra, 154 Cal.App.4th at p. 474 

[“No cause of action for breach of contract based on an insurer’s failure to settle a claim 

exists until a judgment in excess of policy limits has been rendered against the 

insured.”].) 

However, “[t]he holding of a decision is limited by the facts of the case being 

decided, notwithstanding the use of overly broad language by the court in stating the 

issue before it or its holding or in its reasoning.” (McGee v. Superior Court (1985) 176 

Cal.App.3d 221, 226; see also PLCM Group v. Drexler (2000) 22 Cal.4th 1084, 1097 

[“[T]he language of an opinion must be construed with reference to the facts presented by 

the case; the positive authority of a decision is coextensive only with such facts.”].) A

closer examination of the cases cited by Fireman’s Fund makes clear that the purpose 

behind the statements requiring a judgment in an underlying lawsuit is simply to ensure 

that a plaintiff has a reliable basis for alleging that damages have resulted from the

insurer’s alleged breach of the duty to settle within policy limits—the same concern 

reflected in Hamilton. As noted above, two required elements for equitable subrogation 

are that the insurer has suffered damages caused by the defendant’s act or omission, and 

“the insurer’s damages are in a liquidated sum, generally the amount paid to the insured.” 

(Fireman’s Fund v. Maryland, supra, 65 Cal.App.4th at p. 1292.) A judgment may

constitute reliable evidence of damages. (See Crisci, supra, 66 Cal.2d at p. 431 [“The 

size of the judgment recovered in the personal injury action when it exceeds the policy 

limits, although not conclusive, furnishes an inference that the value of the claim is the 

equivalent of the amount of the judgment and that acceptance of an offer within those 

limits was the most reasonable method of dealing with the claim.”].) But it does not 

follow that a judgment is the only manner by which an insured or subrogee may prove 

damages resulting from an unreasonable failure to settle within policy limits. (See, e.g., 

Camelot by the Bay Condominium Owners’ Assn. v. Scottsdale Ins. Co. (1994) 27 

Cal.App.4th 33, 48-49 [“[T]here is no explicit requirement for bad faith liability that an 
17

excess judgment is actually suffered by the insured, since the reasonableness analysis of 

settlement decisions is performed in terms of the probability or risk that such a judgment 

may be forthcoming in the future . . . . However, the actual excess judgment, if any, is 

highly relevant in any bad faith damages determination.”].)

For example, RLI relied on Safeco, supra, 71 Cal.App.4th 782, which was similar 

to Hamilton in that it involved a stipulated judgment and an agreement not to execute the 

judgment against the insured. In that case, several teenagers were involved in the death 

of a driver. The driver’s family sued the owners of the home where the teenagers had 

spent the day drinking before the incident that caused the driver’s death; the defendants’

auto insurer and homeowners’ insurer both defended the lawsuit. (Id. at p. 785.) The 

plaintiffs and defendants stipulated to a judgment for $645,000, but the defendants’

homeowners’ insurer, Safeco Insurance Company of America, did not agree to the 

settlement. (Id. at pp. 786, 787.) The auto insurer agreed to pay $145,000, the plaintiffs 

agreed not to execute the remainder of the judgment against the defendants, and the 

defendants assigned their rights under the homeowners’ policy to the plaintiffs. (Ibid.) 

The plaintiffs then sued the homeowners’ insurer, Safeco, seeking the $500,000 limit of 

the homeowners’ policy. Safeco moved for summary judgment, arguing that it had no 

obligation to pay the stipulated judgment. (Ibid.) The trial court denied the motion, and 

Safeco petitioned for a writ in the Court of Appeal.

The court held that because Safeco had provided a defense in the underlying 

litigation, the plaintiffs “had no authority to settle the matter without the consent of 

Safeco,” so “the stipulated judgment between the [homeowners] and the [plaintiffs] is 

unenforceable against Safeco.” (Id. at p. 787.) The court also stated that where “the 

insurer is providing a defense but merely refuses to settle, the insured has no immediate 

remedy. A cause of action for bad faith refusal to settle arises only after a judgment has 

been rendered in excess of the policy limits.” (Id. at p. 788.) This is necessary, the court 

reasoned, because “[u]ntil judgment is actually entered, the mere possibility or 

probability of an excess judgment does not render the refusal to settle actionable.” (Ibid.) 

The court concluded, “Because we find that Safeco was providing a defense to the 
18

[defendants], Safeco was entitled to control the defense and to decide whether to litigate 

the [plaintiffs’] claim. If Safeco’s decision to go to trial had resulted in a verdict above 

the policy limits, then Safeco’s refusal to settle, if found to be unreasonable, could have 

rendered it liable for the full amount of the verdict. But until a litigated excess judgment 

is obtained, Safeco’s refusal to settle is not actionable.” (Id. at p. 789.) 

Therefore, Safeco—like Hamilton—holds that a stipulated judgment entered into 

without the involvement of the insurer, coupled with an agreement not to execute the 

judgment on the insured, is not reliable proof of damages for the insurer’s failure to settle 

within policy limits. Moreover, this case is unlike Safeco or Hamilton because here, 

Fireman’s Fund consented to the excess settlement and contributed to it. This case does 

not present a situation where the parties settled without the insurer’s consent while the 

insurer was actively defending the case, as in Safeco and Hamilton.

4

Fireman’s Fund also cites Wolkowitz, supra, 112 Cal.App.4th 154 in support of its 

argument that a judgment is a required element of a failure-to-settle claim. In Wolkowitz, 

a man installed a “‘lift kit’” on his car and was subsequently injured when he lost control 

of the car; he sued Shamrock Tire, Etc., Inc., the lift kit maker. (Id. at p. 157.) Shamrock 

tendered its defense to its insurer, Redland Insurance Company, and Redland later 

refused an offer to settle the case within policy limits. (Ibid.) Shamrock then declared 

bankruptcy. The bankruptcy trustee and the injured driver reached an agreement that 

“expressly provide[d] that [the driver] had a $26,225,000 claim against the bankruptcy 

estate, and that the claim would be allowed (without objection by the trustee) as a general 

unsecured claim. It further provided that [the driver] would not seek any recovery from 

Shamrock, but would look solely to proceeds to be recovered from Redland.” (Id. at pp. 

 

4 Another case with similar facts is Doser v. Middlesex Mutual Ins. Co. (1980) 101 

Cal.App.3d 883, in which a passenger’s heirs sued the estate of a pilot following a fatal 

small plane crash. The plaintiff heirs and the pilot’s estate, without the involvement of 

the insurer, settled in an amount determined by plaintiffs’ counsel, and the heirs agreed to 

release all claims against the estate. In exchange, the defendant estate assigned the heirs 

its rights to a bad faith action against the insurer. In the heirs’ case against the insurer, 

the Court of Appeal held that the collusive settlement reached without the participation of 

the insurer could not support a damages claim against the insurer. 
19

158-159.) The trustee then sued Redland, alleging bad faith for failure to settle the 

driver’s case within policy limits. (Id. at p. 159.) Redland successfully demurred, and 

the trustee appealed.

The Court of Appeal, relying on Hamilton, stated, “The question here is whether 

the [bankruptcy case] order allowing the claim constitutes a judicial determination of 

Shamrock’s liability that accurately reflects Shamrock’s actual liability to [the injured 

driver] and provides a reliable basis to establish damages proximately caused by 

Redland’s refusal to settle. (Hamilton, supra, 27 Cal.4th at pp. 725–727, 730.) We 

conclude that the clear answer to this question is that it does not.” (Wolkowitz, supra, 

112 Cal.App.4th p. 165.) The court continued, “Quite obviously, the agreement between 

[the driver] and the trustee was not premised on the expectation that Shamrock or the 

bankruptcy estate would ever pay [the driver’s] claim, but rather entirely upon a potential 

recovery from Redland, Shamrock’s insurer, which recovery would be shared in some 

agreed ratio. As with the ‘good faith’ settlement in Hamilton, supra, 27 Cal.4th at page 

730, the bankruptcy court’s order was not a judicial finding that Shamrock was actually 

liable to [the driver] in the agreed amount.” (Wolkowitz, supra, 112 Cal.App.4th at 

p. 165.) The court concluded, “Since, as we have explained, the allowed claim can 

provide no reliable basis to establish damages in any amount, the complaint does not 

properly allege damages resulting from the refusal to settle. We therefore conclude that 

Redland’s demurrer was properly sustained on the ground of a failure to state a cause of 

action.” (Id. at p. 166, emphasis in original.) As in Hamilton, therefore, the focus of 

Wolkowitz was whether the parties’ agreement was sufficient evidence of damages 

arising from a failure to settle. Wolkowitz does not hold that damages must take the form 

of a judgment rather than a settlement. 

Fireman’s Fund also relies on Archdale, supra, 154 Cal.App.4th 449, in which an 

18-wheeler collided with two other vehicles. A driver of one of the vehicles sued the 

truck driver and his employer, who were insured by AIS. (Id. at p. 457.) AIS allegedly 

failed to accept multiple reasonable settlement offers within its $500,000 policy limit. 

(Id. at p. 455.) A jury trial resulted in a judgment of $1,269,000 against the insureds. 
20

(Ibid.) AIS paid $357,500 to the plaintiffs, which constituted the remainder of the policy 

limits after a settlement with another claimant involved in the same accident. (Id. at p. 

458.) The plaintiffs, the truck driver, and driver’s employer then sued AIS for breach of 

contract and breach of the duty of good faith and fair dealing. (Ibid.) The trial court 

granted AIS’s motion for summary judgment based on the statute of limitations, and the 

appeal focused on when the cause of action against AIS accrued, and whether it was 

tolled by events in the underlying litigation.

The Court of Appeal stated, “A breach of the duty to settle within policy limits 

while the action is pending in the trial court presents only the possibility that a judgment 

might be rendered in excess of policy limits. Even if the insurer rejects a settlement offer 

within policy limits, it is not subject to liability if it successfully defends the litigation and 

obtains a complete defense verdict or a judgment is rendered that is below the settlement 

offer or within policy limits. The cause of action arises only upon entry of a judgment in 

excess of policy limits.” (Archdale, supra, 154 Cal.App.4th at p. 474.) The court 

reasoned that “until the judgment is final it cannot be determined with certainty whether, 

and in what amount, the insured has been harmed.” (Id. at p. 478, citing Hamilton, supra, 

27 Cal.4th at pp. 725-728.) The court held that such claims are tolled until any appeal 

following the judgment is complete: “Had AIS prevailed on [its appeal], the judgment 

would have been reversed, and a retrial could have potentially altered the jury’s 

comparative negligence finding so as to reduce the liability of [the defendants] to the 

policy limit, or to a figure below that limit, or to zero.” (Archdale, supra, 154 

Cal.App.4th at p. 478.) The running of a limitations period was therefore tolled until the 

judgment was complete following appeal, to ensure that the amount of damages was

determined and ascertainable. 

Here, Fireman’s Fund cites Wolkowitz and Archdale for the proposition that “a 

judgment is a required element of a failure to settle claim.”5 We do not read Wolkowitz

 

5

Fireman’s Fund also cites Finkelstein, supra, 11 Cal.App.4th 926, saying that the 

“trial court granted the insurer’s motion for summary judgment” based on the fact that the 

underlying claim was resolved by a settlement, rather than a judgment.” In fact, the 
21

or Archdale as supportive of that statement. The issue in each case was whether the 

damages claimed by the plaintiffs were fixed and ascertainable, not whether the 

underlying cases had been litigated to judgment. The same was true in Hamilton, where 

the Court considered whether a stipulated judgment with a covenant not to execute was 

sufficient evidence of damages. The focus of these cases was whether the insured had

incurred measurable damages—not whether those damages had been reduced to a 

judgment.

Fireman’s Fund argues that “a conventional settlement between the parties, which 

is not approved by the court and does not result in even a nominal judgment, does not 

establish the damages required to settle a claim.” It also argues that “[w]ithout a 

judgment, there is nothing to establish whether and to what extent the case was worth 

more than the primary limits.” But whether the settlement will ultimately be sufficient to 

prove Ace American’s damages is not at issue in this appeal.6 Because this case is before 

us following a demurrer, issues of eventual proof are not relevant. “To survive a 

demurrer, the complaint need only allege facts sufficient to state a cause of action; each 

evidentiary fact that might eventually form part of the plaintiff’s proof need not be 

alleged.” (C.A. v. William S. Hart Union High School Dist. (2012) 53 Cal.4th 861, 872.) 

 

underlying action in Finkelstein settled for less than the policy limits, and the Court of 

Appeal held that the possibility of damages for failure to settle “never ripened into an 

actionable event.” (Id. at p. 930.) The court did not hold that the fact of the settlement 

alone barred the claim.

6

Isaacson stated that a settlement may be considered as evidence of damages: 

“[I]f an insurer wrongfully fails to provide coverage or a defense, and the insured then 

settles the claim, the insured is given the benefit of an evidentiary presumption. In a later 

action against the insurer for reimbursement based on a breach of its contractual duty to 

defend the action, a reasonable settlement made by the insured to terminate the 

underlying claim against him may be used as presumptive evidence of the insured’s 

liability on the underlying claim, and the amount of such liability.” (Isaacson, supra, 44 

Cal.3d at p. 791.) Hamilton cautioned that even with court approval under Code of Civil 

Procedure section 877.6, a collusive settlement may not be sufficient evidence of 

damages. (Hamilton, supra, 27 Cal.4th at p. 722.) Thus whether the settlement 

ultimately will constitute sufficient evidence of damages is an issue for the trier of fact. 

Here, for purposes of a demurrer, Ace American has adequately alleged that it was 

damaged because it contributed to the settlement.
22

Ace American has alleged that Fireman’s Fund unreasonably failed to settle the 

Franco action within policy limits, and that as a result, the eventual settlement of that 

case exceeded the policy limits. Ace American therefore has alleged that it was damaged 

in an ascertainable amount as a direct result of Fireman’s Fund’s failure to accept the 

Francos’ reasonable, within-limits settlement offers. We see no persuasive reason to hold 

that either Warner Brothers or its assignee, Ace American, must suffer that loss with no 

remedy simply because the case reached an eventual settlement instead of being litigated 

through trial. Ace American’s alleged damages are clear, liquidated, and certain, and 

Fireman’s Fund participated in reaching the settlement. These facts set this case apart 

from Hamilton, Safeco, and Wolkowitz. As the Fortman court aptly noted, “Courts easily 

[can] distinguish equitable subrogation cases with facts suggesting a collusive settlement 

from cases like this one in which the excess insurer actually paid a settlement.” 

(Fortman, supra, 221 Cal.App.3d at p. 1402.)

4. Non-case authorities

Fireman’s Fund also cites a California practice guide, which opines that “RLI

seems correct and Fortman seems incorrect because Excess Insurer is subrogated to 

Insured’s rights against Primary Insurer (see ¶8:338) . . . and, as long as Primary Insurer 

is defending the action (even under a reservation of rights), Insured has no action for 

unreasonable refusal to settle until an excess judgment has been rendered.” (Croskey et 

al., California Practice Guide, Insurance Litigation, ¶ 8:345.3 [emphasis in original], 

citing Safeco, supra, 71 Cal.App.4th at p. 788, and Hamilton, supra, 27 Cal.4th at p. 

725.) Fireman’s Fund also notes that CACI No. 2334, the jury instruction for bad faith 

refusal to accept a reasonable settlement within policy limits, includes as an element,

“That a monetary judgment was entered against [name of plaintiff] for a sum greater than 

the policy limits.” 

These simple summaries, however, fall short in that they cast the issue in dualistic 

terms: either the insurer settled the case for a reasonable amount within primary policy 

limits, or the case went to trial and ended with an excess judgment against the insured. 

Cases are much more likely to settle than proceed to trial, however. The most recent data 
23

available from the Superior Courts of California show that in 2015, 37,502 cases were 

disposed of following trial, while 135,918 cases were disposed of before trial—thus, 

more than 78 percent of cases were resolved before trial. (See Judicial Counsel of 

California, 2015 Court Statistics Report, p. xv, available at 

http://www.courts.ca.gov/12941.htm.) Even one of the earliest equitable subrogation 

cases, Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, noted that “[i]t is 

common knowledge that a large percentage of the claims covered by insurance are settled 

without litigation and that this is one of the usual methods by which the insured receives 

protection.” (50 Cal.2d at p. 659.) Indeed, California statutes and case law encourage 

multiple settlement offers as a case develops. (See, e.g., T. M. Cobb Co. v. Superior 

Court (1984) 36 Cal.3d 273, 281 [“the policy of encouraging settlements is best 

promoted by making section 998 offers revocable” because a “[p]arty is more likely to 

make an offer pursuant to section 998 if that party knows that the offer may be revised if 

circumstances change or new evidence develops. . . . The more offers that are made, the 

more likely the chance for settlement.”].) To cast the issue in dualistic terms—either a 

reasonable settlement within primary policy limits or a fully litigated excess judgment—

fails to account for cases like this one, where multiple settlement opportunities occur, and 

an unreasonable refusal to settle early in a case may result in measurable damages to the 

insured or excess insurer in the form of a later excess settlement.

5. Non-California cases

Cases from other jurisdictions support our conclusion. The Ninth Circuit, in an 

unpublished decision, recently considered whether an excess settlement could serve as 

the basis for an equitable subrogation action.7 (RSUI Indem. Co. v. Discover P & C Ins. 

Co. (9th Cir., May 3, 2016, No. 14-15825) ___Fed.Appx. ___, 2016 WL 1745119.) The 

court considered the conflict between Fortman and RLI, and concluded that “the rule 

 

7 Unpublished federal opinions have persuasive value, and are not subject to 

California Rules of Court, rule 8.1115, which governs citation to unpublished California 

opinions. (Harris v. Investor’s Business Daily, Inc. (2006) 138 Cal.App.4th 28, 34; 

Haligowski v. Superior Court (2011) 200 Cal.App.4th 983, 990.)
24

announced in Fortman is more likely to be adopted by the California Supreme Court 

because it more faithfully applies California insurance law.” (Id. at p. *2.) The Ninth 

Circuit discussed Hamilton’s distinction between a settlement to which an insured or 

excess insurer contributed, and a collusively inflated settlement or stipulated judgment to 

which an insured or excess insurer did not contribute. The Ninth Circuit noted that 

Fortman recognized this “critical distinction,” and stated that Fortman “applied this 

principle to disputes between contributing excess insurers and primary insurers: when an 

excess insurer, faced with a primary insurer’s unreasonable refusal to pay a settlement 

demand within the policy limits, actually contributes payment to conclude settlement, it 

may state a claim for equitable subrogation despite the absence of a litigated excess 

judgment. [Fortman,] 271 Cal.Rptr. at 119. Fortman’s conclusion is consistent with 

Hamilton and Issacson. The collusive risk that Hamilton wished to avoid is not present 

when an excess insurer contributes to settle a case on behalf of an insured.” (Id. at p. *3.)

The Seventh Circuit, in an opinion by Judge Posner, also relied on Fortman in 

rejecting an argument that a judgment is required in an equitable subrogation action by an 

excess insurer: “Country Mutual [the primary insurer] argues that a breach of the 

insurer’s duty to act in good faith in settlement negotiations is not actionable unless, by 

refusing to settle, the insurer precipitates a trial that results in the entry of a judgment 

against the insured. This is not a ridiculous argument. If the temptation at which the 

duty is aimed is the temptation to gamble with the insured’s money, it is not obviously a 

violation merely to dawdle in settling until the golden moment of opportunity passes. 

But though the case law is sparse, we are pretty confident that the line should not be 

drawn here. Fortman v. Safeco Ins. Co.[, supra,] 221 Cal.App.3d 1394). The basic 

temptation of the insurer comes from the fact that its liability is capped at the policy 

limits, so that it can shift many of the losses of a risky strategy to the insured (or any 

excess insurer). It may dawdle in settling, hoping to drive a harder bargain and knowing 

that if it fails and the case goes to trial and it loses big, still most of the loss will fall on 

the insured or on an excess insurer rather than on itself. The fact that on the eve of trial it 

may throw in the towel because it sees no hope of winning should not excuse it from 
25

having failed to settle earlier on better terms if it would have settled earlier on those terms 

had all the risks of loss lain on itself.” (Twin City Fire Ins. Co. v. Country Mut. Ins. Co. 

(7th Cir. 1994) 23 F.3d 1175, 1181.) We agree with this reasoning. 

In addition, most other jurisdictions that have considered this issue have found that 

an insured or excess insurer that contributes to a settlement can pursue the primary 

insurer for failing to accept reasonable settlements within primary limits. (See, e.g., St. 

Paul Fire & Marine Ins. Co. v. Liberty Mutual Insurance Co. (2015) 135 Haw. 449, 456 

[in a case involving a post-verdict settlement in excess of primary limits, “the public 

interest in encouraging reasonable settlement is best served by permitting an excess 

insurer to seek relief under the doctrine of equitable subrogation”]; Scottsdale Insurance 

Company v. Addison Insurance Company (Mo. 2014) 448 S.W.3d 818, 831-832 [where 

the underlying case settled, “an excess insurer who pays a third-party claim on behalf of 

its insured after a primary insurer refuses in bad faith to settle the claim has a right to 

equitable subrogation to obtain the amount paid from the primary insurer”]; American 

Centennial Ins. Co. v. Canal Ins. Co. (Tex. 1992) 843 S.W.2d 480, 483 [an excess carrier 

may bring an equitable subrogation action against the primary carrier in a case that settles 

in excess of the limits of the primary policy]; Maine Bonding & Cas. Co. v. Centennial 

Ins. Co. (1985) 298 Or. 514, 525 [allowing equitable subrogation by an excess insurer 

following a settlement where the claimant “came to insist upon a higher settlement figure 

than he would have if the claim had been handled more expeditiously”]; Continental Cas. 

Co. v. Reserve Ins. Co. (1976) 307 Minn. 5, 13-14 [holding that a judgment in the 

underlying action is not required in an action by an excess insurer against a primary 

insurer for failure to accept a reasonable settlement offer]; see also Allan D. Windt, 

Insurance Claims and Disputes § 9:2 (6th ed., 2013) [“[A] cause of action for a carrier’s 

breach of its duty to settle should accrue when an excess judgment is entered or an excess 

settlement agreement is entered into, at which time the insured will have been damaged 

by reason of the earlier failure to settle.”].)
26

6. Policy of encouraging settlement

“California’s public policy is to encourage settlement.” (Tower Acton Holdings v.

Los Angeles County Waterworks Dist. No. 37 (2002) 105 Cal.App.4th 590, 602.) 

Fireman’s Fund argues that if California courts follow Fortman rather than RLI, 

settlements will be discouraged because “[p]rimary insurers would be hesitant to 

participate with excess insurers in settlements, for fear of the excess insurers turning 

around and suing them.” However, our holding places no additional duties upon primary 

insurers that they do not ordinarily have. Primary insurers already have the duty to 

accept reasonable settlement offers within policy limits, and liability for resulting 

damages when they breach that duty. Moreover, our decision protects insureds, because 

insurers whose mishandling of settlement offers causes damages will be liable for the 

losses they cause. The RLI rule, on the other hand, leaves insureds without recourse

when primary insurers mishandle reasonable early settlement offers, resulting in later 

excess settlements. Moreover, “when a primary insurer breaches its good-faith duty to 

settle within policy limits, it imperils the public and judicial interests in fair and 

reasonable settlement of lawsuits.” (Continental Cas. Co. v. Reserve Ins. Co. (1976) 307 

Minn. 5, 9.)

In sum, we conclude that in an equitable subrogation action, “an excess insurer 

which has settled and discharged the insured’s liability may recover from the primary 

insurer an amount in excess of the primary insurer’s policy limits if the excess insurer can 

prove the primary insurer’s unreasonable refusal to settle within its policy limits resulted 

in loss to the excess insurer in an amount in excess of the policy limits of the primary 

insurer it would not otherwise have had.” (Northwestern Mut. Ins. Co. v. Farmers’ Ins. 

Group (1978) 76 Cal.App.3d 1031, 1050.) An excess judgment is not a required element 

of a cause of action for equitable subrogation or breach of the duty of good faith and fair 

dealing; where the insured or excess insurer has actually contributed to an excess 

settlement, the plaintiff may allege that the primary insurer’s breach of the duty to accept 

reasonable settlement offers resulted in damages in the form of the excess settlement. 
27

We therefore reverse the judgment sustaining Fireman’s Fund’s demurrer, and remand 

for further proceedings.

DISPOSITION

The judgment is reversed. Ace American shall recover its costs on appeal. 

CERTIFIED FOR PUBLICATION

COLLINS, J.

We concur:

EPSTEIN, P. J.

WILLHITE, J.