Opinion ID: 1173054
Heading Depth: 1
Heading Rank: 2

Heading: liability of primary insurer to excess insurer

Text: The purchase by an insured of a primary and an excess liability policy does not form a contractual relationship between the primary and the excess carriers. It does link them to the common insured. One thing is clear. The excess policy is written with the existence of the primary policy in mind. Maine's policy in this case, on its declarations page, makes explicit reference to the Centennial primary coverage in a schedule of underlying insurances. Maine's policy provides that its liability is the excess of    the limits of the underlying insurances as set out in the schedule in respect of each occurrence covered by said underlying insurances. Maine's policy also contains this provision: It is a condition of this policy that the policy or policies referred to in the attached `Schedule of Underlying Insurances' shall be maintained in full effect during the currency of this policy   . One result of the primary-excess layers of coverage, such as we have in this case, is this: The excess carrier's obligation to pay begins where the primary insurer's ends  when the limits of the primary policy are exhausted. In this respect, the potential liability of the excess insurer is identical to that of an insured who has no excess coverage. The excess carrier is liable for the amount of any judgment in excess of the primary policy, up to the limits of the excess carrier's coverage. Above that amount, the insured remains liable. The result is that if the primary insurer fails to exercise due care in its handling of a claim pursuant to its obligation to defend, its default may subject the excess insurer to liability beyond the limits of the primary policy just as an insured with no excess policy is subject to personal liability for an amount in excess of the primary policy. Because of the close relationship between the insured, the primary insurer, and the excess insurer, and because of the exposure to liability of the excess insurer arising from the primary insurer's want of due care, it is appropriate that the excess carrier be equitably subrogated to essentially the same rights against the primary insurer as the insured would have if there were no excess coverage. In this context, the term equitable subrogation describes subrogation by operation of law, as opposed to conventional subrogation arising under an express or implied agreement. Subrogation is equitable in origin [4] and enforceable at law. Subrogation is the substitution of another person in place of the creditor to whose rights he succeeds in relation to the debt, and gives to the substitute all of the rights, priorities, remedies, liens and securities of the party for whom he is substituted. It stands upon the same broad principle of natural justice that makes one surety entitled to contribution from another, and is broad enough to cover every instance in which one party is required to pay a debt for which another is primarily answerable, and which, in equity and good conscience, ought to be discharged by the latter. It is a mode which equity adopts to compel the ultimate discharge of a debt by him who in equity and good conscience ought to pay it and relieve him whom none but the creditor could ask to pay, and where one has been compelled to pay a debt which ought to have been paid by another, he is entitled to exercise all of the remedies which the creditor possessed against the other and to indemnity from the fund out of which should have been made the payment which he has made. The right to be subrogated is not dependent upon legal assignment, nor upon contract, agreement, stipulation or privity between the parties to be affected by it; but the party who paid the debt must not be a mere volunteer.    United States F. & G. Co. v. Bramwell, 108 Or. 261, 277, 217 P. 332, 337-38 (1923). The doctrine of equitable subrogation was discussed in American Central Ins. Co. v. Weller, 106 Or. 494, 502, 212 P. 803, 805 (1923), as follows: The doctrine of subrogation has long been an established branch of equity jurisprudence. It does not owe its origin to statute or custom, but it is a creature of courts of equity, having for its basis the doing of complete and perfect justice between the parties without regard to form. It is a doctrine which will be applied or not according to the dictates of equity and good conscience, and consideration of public policy, and will be allowed in all cases where the equities of the case demand it. It rests upon the maxim that no one should be enriched by another's loss and may be invoked wherever justice demands its application, in opposition to the technical rules of law.    In the absence of excess insurance, the insured becomes his own excess insurer. With the purchase of excess insurance, the excess insurer steps into the shoes of the insured as to the potential liability covered by the excess policy. The rationale was stated by the Supreme Court of Minnesota in Continental Casualty Company v. Reserve Insurance Company, 307 Minn. 5, 8-9, 238 N.W.2d 862, 864 (1976): We hold that an excess insurer is subrogated to the insured's rights against a primary insurer for breach of the primary insurer's good-faith duty to settle. See, Peter v. Travelers Ins. Co., 375 F. Supp. 1347 (C.D.Cal. 1974). As one commentator has observed, `In the case of excess coverage, the primary insurer should be held responsible to the excess insurer for improper failure to settle, since the position of the latter is analogous to that of the insured when only one insurer is involved.' R. Keeton, Insurance Law, § 7.8(d). When there is no excess insurer, the insured becomes his own excess insurer, and his single primary insurer owes him a duty of good faith in protecting him from an excess judgment and personal liability. If the insured purchases excess coverage, he in effect substitutes an excess insurer for himself. It follows that the excess insurer should assume the rights as well as the obligations of the insured in that position. [5] Within the context of the instant case, the rule is this: A primary insurer owes an excess insurer essentially the same duty of due diligence in claims handling and settlement negotiating it owes to an insured  due care under all the circumstances. In considering the manner in which it will defend a claim, the primary insurer may consider its own interests, but it must also consider the interests of other parties whose interests are involved, notably, the insured and the excess insurer. Such a rule in no way increases the duty or liability of the primary insurer. Relieving the primary insurer of its duty to diligently defend in those cases in which excess coverage and excess exposure exist may give the primary insurer a disincentive to settle.