Hawaii Supreme Court Recognizes Cause of Action for Equitable Contribution by Excess Insurer against Primary Insurer for Failure to Settle Within Limits

In St. Paul Fire & Marine Ins. Co. v. Liberty Mutual Ins. Co., No. SCCQ–14–0000727 (June 29, 2015), the Hawaii Supreme Court ruled that an excess insurer can bring a cause of action, based on the doctrine of equitable subrogation, against a primary insurer that failed to settle a claim within the limits of the primary policy, even where the primary insurer eventually paid its full policy limit toward settlement.

The U.S. District Court certified the following question to the Hawaii Supreme Court:

"May an excess liability insurer bring a cause of action, under the doctrine of equitable subrogation to the rights of the insured, against a primary liability insurer for failure to settle a claim against the mutual insured within the limits of the primary liability policy, when the primary insurer has paid its policy limit toward settlement?"

Here, the primary insurer rejected demands to settle the underlying action within primary policy limits of $1 Million and the case proceeded to trial. After trial, the jury entered a verdict of $4.1 Million against the insured. The excess insurer, St. Paul, then sued the primary insurer, Liberty Mutual, for damages for bad faith failure to settle within limits.

Answering the certified question, the Hawaii Supreme Court held the excess insurer could bring a cause of action against the primary insurer for failure to settle within policy limits under the doctrine of equitable subrogation. The court reasoned that “permitting an excess insurer to subrogate to the rights of the insured, and assert a claim against a primary insurer for a bad faith failure to settle a claim within the limits of the primary liability policy, protects the public interest in ensuring equity in insurance matters and encouraging settlement.”

The decision confirms that Hawaii is among those states where an excess insurer can sue a primary insurer for failure to settle within primary policy limits when there is an opportunity to do so and where an excess verdict results impacting the excess insurer's policy.

Peter is the managing partner of the Selman Breitman Seattle office.  Peter is a member of the Hawaii State Bar and is licensed to practice in all state and federal courts in Hawaii.