Douglas R. Richmond on Excess Versus Primary Insurers: The Bad Faith Battle
Business and individuals alike commonly purchase excess insurance and umbrella policies as protection against potentially catastrophic liability. In cases where judgments implicate such policies, disputes often arise between the excess carrier and the primary insurer.
- The central allegation here is bad faith: the excess insurer alleges that the primary carrier wrongfully failed to resolve the underlying case within its policy limits.
- In contrast, the primary insurer is bound to contend that it did nothing wrong and that the excess carrier is unjustifiably complaining about having to bear the financial burden that it contractually agreed to assume and for which it collected premiums.
This is a critical bad faith battleground with important new twists on established tort and contract law principles. Significantly, the author observes, “The theory on which an excess insurer may recover against a primary insurer is unsettled in many jurisdictions.” The author proceeds to provide a practice insight as to what theories lawyers handling suits on behalf of excess insurers in these jurisdictions should consider in their pleadings.
This commentary examines the essential issues and explains in practical terms key bad faith aspects of the primary-excess insurer relationship.
The author also discusses several seminal bad faith decisions, including the case of California Union Insurance Co. v. Liberty Mutual Insurance Co. (illustrating the burdens primary insurers may bear when trying to resolve a case short of an excess carrier’s coverage), National Surety Corp. v. Hartford Casualty Insurance Co. (reasoning that allowing excess insurers to sue primary insurers for bad faith on equitable subrogation theory could cause primary insurers to raise their premiums because they would face assuming and paying the cost of excess insurers’ economic risk), and Federal Insurance Co. v. Travelers Casualty & Surety Co. (holding 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).
This Emerging Issues Commentary also discusses the Guiding Principles for Primary and Excess Insurers adopted and jointly created by several insurance industry associations and interested insurers in 1974. The author writes: “There is no questioning the importance or prevalence of excess insurance and umbrella coverage nor the potential for controversy between them and primary insurers. Although many primary and excess insurers either declined to adopt the Guiding Principles or have withdrawn as signatories to them, at least two courts have specifically applied the Guiding Principles as though they are an industry standard, with liability flowing from their breach.”
The author concludes: “bad faith litigation between primary and excess insurers shows no signs of abating. The size of many losses and verdicts gives excess insurers a powerful incentive to vigorously pursue their interests. It is critical for insurance lawyers to understand the contours of bad faith law in this context.”