The Sixth Circuit has held that, under Kentucky law, an excess carrier can recover against a primary carrier for alleged bad faith failure to settle within the primary limits leading to an excess verdict. The case, entitled National Surety Corporation v. Hartford Casualty Insurance Company, 493 F.3d 752 (6th Cir. 2007), involved the alleged bad faith on the part of the primary carrier for not settling the action against the insured within its policy limits. The action against the insured proceeded to trial and resulted in a verdict in excess of the limits of the primary insurance.
The excess carrier sued the primary carrier directly, arguing that it was entitled to step into the shoes of the policy holder under the doctrine of equitable subrogation. The United States District Court for the Western District of Kentucky dismissed the action holding that the excess carrier did not have a cause of action under Kentucky law to sue the primary carrier directly.
The Sixth Circuit disagreed, ruling that “Kentucky law already permits an insured to sue a primary insurer for bad faith failure to settle a claim. Kentucky law also recognizes the doctrine of equitable subrogation, which permits an insurance company to ‘step into the shoes of the insured’ and recover against a tortfeasor.” Id., at 754. The Sixth Circuit then said that these two principles when viewed together permit an excess insurer to recover from a primary insurer and “furthers Kentucky’s policy goals of encouraging fair and reasonable settlements and preventing third parties from profiting from an insured’s insurance coverage.” Id.
The Sixth Circuit did not discuss what constituted “bad faith” under Kentucky law. Instead, it remanded the case – at least with respect to the primary carrier’s alleged bad faith failure to settle the claim – for further proceedings.
To read the entire case, click here.
