Opinion ID: 1654990
Heading Depth: 2
Heading Rank: 1

Heading: Duty of Good Faith Regarding Settlement

Text: The issue whether a primary insurer owes a duty of good faith to an excess insurer regarding settlement of a claim has been raised before, but never resolved by, this Court. In Nationwide Mutual Insurance Co. v. Hall, 643 So.2d 551 (Ala. 1994), we were asked to make Alabama's tort of bad faith failure to settle a claim available to one insurer (as subrogee of its insured) against another insurer; in that case we briefly discussed but refused to address the issue now before us: The third issue is whether under Alabama law an insurer, as the subrogee of its insured, may bring a claim of bad faith against another insurer. Although the circuit court concluded that sufficient evidence had been presented to establish a claim that Alfa had in bad faith failed to defend and indemnify, it held that Alabama law does not allow an insurer to bring such a claim as the subrogee of its insured. Citing Fireman's Fund Ins. Co. v. Continental Ins. Co., 308 Md. 315, 519 A.2d 202 (1987); Continental Cas. Co. v. Reserve Ins. Co., 307 Minn. 5, 238 N.W.2d 862 (1976); Home Ins. Co. v. Royal Indem. Co., 68 Misc.2d 737, 327 N.Y.S.2d 745 (Sup.Ct.), affirmed, 39 A.D.2d 678, 332 N.Y.S.2d 1003, appeal denied, 31 N.Y.2d 641, 289 N.E.2d 565, 337 N.Y.S.2d 1025 (1972), Nationwide urges this Court to follow those cases and hold that as the excess insurer and subrogee of Friedlander [the insured], it may bring a claim of bad faith against Alfa, Friedlander's primary insurer. We recognize that a number of courts in other jurisdictions have recognized that a primary insurance carrier owes a duty of good faith to an excess insurance carrier of its insured and on that basis have allowed an excess insurer to bring a claim of bad faith against a primary insurer. Hartford Accident & Indem. Co. v. Aetna Cas. & Surety Co., 164 Ariz. 286, 792 P.2d 749, 752-53 & nn. 2-3 (1990) (survey of jurisdictions). See generally Excess Carrier's Right to Maintain Action Against Primary Liability Insurer for Wrongful Failure to Settle Claim Against Insured, 10 A.L.R.4th 879 (1981). A few courts have even recognized a direct duty owed by a primary insurer to an excess insurer and have permitted excess insurers to bring claims of bad faith against primary insurers without being limited to asserting rights as subrogees of their insureds. E.g., Hartford Accident & Indem. Co. v. Michigan Mut. Ins. Co., 93 A.D.2d 337, 462 N.Y.S.2d 175 (1983), affirmed, 61 N.Y.2d 569, 463 N.E.2d 608, 475 N.Y.S.2d 267 (1984); Estate of Penn v. Amalgamated General Agencies, 148 N.J.Super. 419, 424, 372 A.2d 1124, 1127 (1977). See generally Annotation, Liability Insurance: Excess Carrier's Right of Action Against Primary Carrier for Improper or Inadequate Defense of Claim, 49 A.L.R.4th 304 (1986). One factual premise of this cause of action, however, is that the insurer bringing the claim is an excess insurer of the insured. Because Nationwide's insurance is primary, and not excess, we do not address the merits of this issue. Hall, 643 So.2d at 562-63. The issue now squarely before us, we hold that, in the absence of contrary contractual obligations, a primary insurer owes no duty of good faith to an excess insurer with respect to the settlement of a lawsuit against an insured. The reasons which undergird Alabama's tort of bad faith, currently available to insureds against their insurers, see Chavers v. National Security Fire & Casualty Co., 405 So.2d 1 (Ala.1981), are simply not present in the primary-insurer/excess-insurer scenario where, as here, contractual duties with regard to settlement of a claim are absent. In a typical insurance contract, the insured expressly relinquishes to the insurer the right to control the defense and settlement of any action arising under the contract. The insured's reliance on the abilities and the good faith of the insurer is therefore necessarily at a maximum. In this case, not only did Federal not in any way expressly relinquish that right to Travelers, Federal's policy expressly reserved to Federal [t]he right to participate in the investigation, settlement or defense of any claim or suit that we feel may create liability on our part under the terms of the policy. Furthermore, there is a difference in bargaining power between an insurer and an insured in drafting and negotiating the insurance contract. The contract shifts financial risk from the insured, with minimal litigation experience, to the insurer, with substantial litigation experience. However, in the absence of separate contractual duties, the primary and excess insurance carriers stand on more equal footing. Obviously, without a contract between the insurance carriers, there can be no lack of equality in contract negotiations. Each has the responsibility to draft its own insurance contract. Each is assumed to have litigation experience. Without a contract, there can be no contractual shifting of financial risk. Simply put, the primary-insurer/excess-insurer relationship does not involve the same policy considerations that justify imposing on those insurers the duty of good faith to settle that currently exists between an insured and his insurer. Therefore, we answer the first question in the negative.