Arch Specialty Insurance and Travelers Indemnity both issued policies to the same Policyholders for identical periods. Arch issued an "excess" policy while Travelers issued two policies, a primary policy and an umbrella policy. A lawsuit was filed against one or both of the Policyholders (this is unclear) following an accident that occurred during the policy period. The underlying lawsuit settled when Travelers "contributed" the $2 Million limits of its two policies and Arch "funded the $20.5 million balance of the settlement." Travelers Indemnity Co. v. Arch Specialty Insurance Co., 2011 WL 6328286 *1 (E.D. Cal. December 16, 2011), Download Travelers Indem. Co. v. Arch Specialty Ins. Co. (E.D. Cal. Case No. 2.11CV01601, Order Granting Travelers' MD and MS, Filed Dec. 16, 2011) PUBLIC ACCESS.
Arch, the excess carrier, sued Travelers, the primary carrier, on several different theories of recovery. The one of interest here is a theory that Arch alleged as its third claim for relief, that the primary carrier, Travelers, owed it, the excess carrier, "a direct duty of care". Arch pursued this claim under Oregon law. (It contended that California law was "unsettled," and so it conceded for the purpose of resolving Travelers' Motion to Dismiss that it did not have the right to claim a direct duty flowing from primary carrier to excess carrier under California law. Id. at *3 n.2.)
The Federal Court rejected this claim entirely. The Court's analysis began by addressing California law:
Both parties agree that under California law, Arch does not have a direct cause of action in its own right against Travelers for breach of the duty of care. Due to an absence of contractual privity, an excess insurer has no direct claim in its own right against a primary insurer for the primary insurer's allegedly unreasonably [sic] failure to settle a claim within its policy limits. [Citation omitted.] The excess insurer's rights, if any, arise solely through equitable subrogation of the rights of the insured.
Id. at *3.
This is the majority view. Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 7:9 "Actions by Excess Carriers--Subrogation" (West Third Edition 2011). The reason is that under equitable subrogation, the excess carrier must first protect its Policyholder and other Insureds before it can claim their rights of action over against the primary carrier. See id.
Oregon is aligned with this view, as is California. The Federal Court noted this fact, Travelers Indemnity Co. v. Arch Specialty Insurance Co., 2011 WL 6328286 at *5, citing Wall, Litigation and Prevention of Insurer Bad Faith, supra § 7:9, n.11, and the Court accordingly dismissed with prejudice the excess carrier's claim of direct duty owed to it by the primary carrier in this case because any duty owed by primary carrier to excess carrier "is a duty that arises from equitable subrogation and not from a direct duty". Id. at *6.
In short, the excess carrier's protection lies in its own protection of its own Policyholder or other Insured first.
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