Friday, November 15, 2013

Louisiana Court Dismisses Excess Insurer’s Claim Against Primary Insurer

In its recent decision in RSUI Indem. Co. v. American States Ins. Co., 2013 U.S. Dist. LEXIS 161805 (E.D. La. Nov. 13, 2013), the United States District Court for the Eastern District of Louisiana had occasion to consider the duties owed by a primary insurer to an excess insurer.

Ameraseal was insured under a $1 million primary commercial auto policy issued by American States Insurance Company (“ASIS”) and a $5 million excess policy issued by RSUI.  Following an auto accident involving a vehicle owned by ASIS and being operated by an Ameraseal employee, a personal injury suit was filed against Ameraseal, the employee and ASIS.  RSUI was not named as a defendant.  Plaintiff settled with ASIS for the policy’s $1 million limit of liability, and a week later RSUI settled on behalf of its insureds, and itself, for $2 million.  As a result of the settlements, the matter never had to go to trial.

RSUI later brought suit against ASIS alleging bad faith failure to properly defend Ameraseal and the employee in the underlying matter.  RSUI claimed that had ASIS properly defended the case, then the loss would have remained in the primary insurance layer and RSUI would not have been required to pay $2 million.  ASIS countered that RSUI’s lawsuit was an impermissible means of stating legal malpractice claim against ASIS’ defense counsel.  ASIS further argued that it could not be liable in excess of its policy’s $1 million limit of liability since there was never an opportunity to settle the underlying matter within the policy’s limit of liability and since there was no excess verdict.  The court only considered ASIS’ latter argument.

Citing to Great Southwest Fire Insurance Co. v. CNA Insurance Companies, 557 So. 2d 966, 967 (La. 1990), the court acknowledged that under Louisiana law, a primary insurer owes a duty to an excess carrier to defend and to conduct settlement negotiations in good faith.  The court further noted, that while there was no controlling case law from Louisiana’s highest court as to whether such a claim can exist in the absence of a jury verdict, case law from the federal court level, including the Fifth Circuit, has consistently held that a verdict is a predicate for such a claim. RSUI argued that this case law was distinguishable, since its bad faith theory was not premised on a failure to settle, but instead was based on ASIS’ failure to properly defense the underlying suit, which resulted in a settlement value higher than necessary.  The court rejected RSUI’s theory, holding that even if such a distinction was relevant, RSUI would still be required to demonstrate an excess judgment as a necessary element of a bad faith claim against the primary insurer.

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