Court Opinion

ID: 3200044
Source: CourtListenerOpinion
Date Created: 2016-05-03 20:00:59.045156+00
Date Added: 2024-06-11T14:22:55.444125
License: Public Domain

NOT FOR PUBLICATION                          FILED
                     UNITED STATES COURT OF APPEALS                      MAY 03 2016

                                                                      MOLLY C. DWYER, CLERK
                            FOR THE NINTH CIRCUIT                      U.S. COURT OF APPEALS

RSUI INDEMNITY COMPANY,                              No. 14-15825

              Plaintiff - Appellant,                 D.C. No. 2:13-cv-00960-TLN-
                                                     EFB
 v.

DISCOVER P&C INSURANCE CO.,                          MEMORANDUM*

              Defendant - Appellee.

                    Appeal from the United States District Court
                       for the Eastern District of California
                     Troy L. Nunley, District Judge, Presiding

                        Argued and Submitted April 12, 2016
                             San Francisco, California

Before: THOMAS, Chief Judge and REINHARDT and CHRISTEN, Circuit
Judges.

      RSUI Indemnity Company (“RSUI”) appeals the district court’s dismissal of

its equitable subrogation suit against Discover P&C Insurance Company

(“Discover”). We reverse and remand. Because the parties are familiar with the

history of this case, we need not recount it here.

        *
             This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.
      The district court erred in concluding that RSUI failed to state a claim for

equitable subrogation under California law. RSUI sought recovery in equitable

subrogation against the primary insurer, Discover, after Discover rejected offers to

settle a personal injury action within the limits of the primary policy.1 The

personal injury action ultimately settled for an excess amount, and RSUI paid the

excess on behalf of its insured. Because the personal injury action resolved

through settlement, there was no litigated excess judgment. The district court

concluded that California law required the entry of a litigated excess judgment as

prerequisite to an equitable subordination action. We respectfully disagree.

      In analyzing California law when under diversity jurisdiction, “we are bound

by the decisions of the state’s highest court.” U.S. Fid. & Guar. Co. v. Lee Invs.

LLC, 641 F.3d 1126, 1133-34 (9th Cir. 2011). However, “[i]f the California

Supreme Court has not decided the question, we are required to ascertain from all

the available data what the state law is and apply it.” Id. at 1134 (quotation

      1
         “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.” Md. Cas. Co. v. Nationwide
Mut. Ins. Co., 97 Cal. Rptr. 2d 374, 377 (Cal. Ct. App. 2000). “[A]n insurer may
be held liable for a judgment against the insured in excess of its policy limits where
it has breached its implied covenant of good faith and fair dealing by unreasonably
refusing to accept a settlement offer within the policy limits.” Commercial Union
Assurance Cos. v. Safeway Stores, Inc., 610 P.2d 1038, 1040 (Cal. 1980) (citations
omitted).

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omitted) (citing Soltani v. W. & S. Life Ins. Co., 258 F.3d 1038, 1045 (9th Cir.

2001)). The decisions by state intermediate appellate courts are “dat[a] for

ascertaining state law which is not to be disregarded by a federal court unless it is

convinced by other persuasive data that the highest court of the state would decide

otherwise.” Estrella v. Brandt, 682 F.2d 814, 817 (9th Cir. 1982) (quoting West v.

A.T.&T. Co., 311 U.S. 223, 237 (1940)).

      The California Supreme Court has not decided whether a litigated excess

judgment is required as a prerequisite to an equitable subrogation action. It has,

however, addressed the issue in the context of actions filed by the insured (or the

claimant as the insured’s assignee) against the insurer for breach of the statutory

duty to settle. In Isaacson v. California Insurance Guarantee Ass’n, 750 P.2d 297,

308-09 (Cal. 1988) (in bank), the court held that an insured could file an action

against an insurer for breach of the duty to settle without a litigated excess

judgment if the insured had expended its own funds to settle the underlying claim

in excess of the insurance policy limits. However, in Hamilton v. Maryland

Casualty Co., 41 P.3d 128 (Cal. 2002), the court imposed a requirement for the

entry of a litigated excess judgment as a prerequisite to filing a breach of

settlement claim, in the situations in which there was a risk of collusive settlement

between the insured and the claimant. Hamilton involved a situation in which,

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without the insurer’s participation or permission, (1) the insured and the claimant

entered into a stipulated judgment in excess of insurance policy limits; (2) the

claimant executed a covenant not to execute on the judgment; and (3) the insured

assigned to the claimant the insured’s cause of action for breach of the insurer’s

duty to accept a reasonable settlement demand. Id. at 130.

      Under these conditions, the California Supreme Court concluded that a

stipulated settlement amount “may [not] be treated as a presumptive measure of the

damages the policyholder has suffered as a result of the insurer’s breach” of its

duties to the insured. Id. at 133. The court held that under the circumstances, an

assigned claim for breach of the duty to settle “does not become operative, and the

claimant’s action against the insurer does not mature, until a judgment in excess of

the policy limits has been entered against the insured.” Id. at 132 (citing Safeco

Ins. Co. v. Superior Court, 84 Cal. Rptr. 2d 43, 46-47 (1999)). The court’s

rationale was based on the risk of a collusive settlement in which the insured and

the claimant agree to inflate a stipulated judgment beyond the actual value of the

case, absolving the insured of financial liability and artificially increasing the value

of the claimant’s subsequent suit against the insurer. Hamilton distinguished

Issacson, because Issacson involved the situation in which the insured had

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contributed to the settlement. Id. at 136-37. Under those circumstances, the court

noted, there was little risk of the collusive elements presented in Hamilton.

      The California Supreme Court has not opined on whether the Hamilton

excess judgment requirement applies to equitable subrogation actions between

excess and primary insurers. The California Courts of Appeal have addressed this

question, however, and they have reached contrary conclusions. Compare

Fortman v. Safeco Ins. Co., 271 Cal. Rptr. 117 (Cal. Ct. App. 1990) (holding that

an excess insurer’s equitable subrogation claim does not depend on the entry of an

excess judgment to prove damages to the insured), with RLI Ins. Co. v. CNA Cas.

of Cal., 45 Cal. Rptr. 3d 667 (Cal. Ct. App. 2006) (expressly rejecting Fortman).

Because there is no controlling California Supreme Court authority, our task is to

determine which intermediate appellate decision contains the rule most likely to be

adopted by the California Supreme Court were it to address this question. See

West, 311 U.S. at 236-37.

      We conclude that the rule announced in Fortman is more likely to be

adopted by the California Supreme Court because it more faithfully applies

California insurance law. As we have noted, Hamilton only applies an excess

judgment requirement to situations in which the insured did not contribute to the

settlement. It explained that an action for breach of the duty to settle could be

                                           5
brought (either by the insured or the claimant as the insured’s assignee) without a

litigated excess judgment if the insured contributes payment to conclude the

settlement in excess of the insurance policy limits. 41 P.3d at 136. The logic of

drawing the distinction is that the risk of a collusively inflated settlement or

judgment does not exist when an insured has contributed to the settlement.

Hamilton did not overrule Issacson, which permitted suit without a litigated excess

judgment when the insured contributed to the settlement.

      Fortman recognized this critical distinction between the settlement

scenarios, and 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. 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.

      The Fortman rule is also consistent with public policy interests identified by

California courts in the insurance context: it promotes the settlement of claims,

promotes excess insurers’ contribution to settlement, and is favorable both to the

                                           6
insured and to claimants. As we have previously concluded, under California law,

“policy considerations pertinent to both the courts and the insurance industry favor

allowing an excess insurer to enforce a primary insurer’s duties to the insured.”

Valentine v. Aetna Ins. Co., 564 F.2d 292, 297 (9th Cir. 1977).

      In contrast, RLI Ins. Co. overreads Hamilton to establish a categorical rule

requiring the entry of a litigated excess judgment in all cases. This construction is

not consistent with the rationale of Hamilton, nor is it consistent with Issacson.2

      Therefore, we conclude that the California Supreme Court would likely

adopt the Fortman rule that an excess litigated judgment is not a prerequisite to an

equitable subrogation action by an excess insurer against a primary insurer when

the excess carrier has contributed to the underlying settlement. Under Fortman,

RSUI has stated a claim upon which relief could be granted, and we must reverse

the district court’s contrary conclusion.

      REVERSED AND REMANDED.

      2
        Our decision in Mercado v. Allstate Insurance Co., 340 F.3d 824, 827 (9th
Cir. 2003), a case upon which the district court relied, is not to the contrary.
Mercado involved a Hamilton scenario in which the insured and the claimant
entered into a stipulated judgment far in excess of the insurance policy limits; the
claimant entered into a covenant not to execute on the judgment; and the insured
assigned its claims against the insurer to the claimant. Thus, Mercado was
squarely controlled by Hamilton, and we appropriately applied the Hamilton
excess judgment rule. Mercado did not extend an excess judgment requirement to
equitable subrogation cases.

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