ST. PAUL FIRE & MARINE INSURANCE COMPANY, a Minnesota corporation, Plaintiff-Appellant,
LIBERTY MUTUAL INSURANCE COMPANY, a Massachusetts corporation, Defendant-Appellee
Wesley H.H. Ching and Sheree Kon-Herrera, for plaintiff.
Richard B. Miller and David R. Harada-Stone, for defendant.
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.
[135 Hawai'i 450] ORIGINAL PROCEEDING
The United States District Court for the District of Hawai'i (district court) certified the following question to this 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?
We modify the certified question slightly to hold that an excess liability insurer can bring a cause of action, under the doctrine of equitable subrogation, against a primary liability insurer who in bad faith fails to settle a claim within the limits of the primary liability policy, when the primary insurer has paid its policy limit toward settlement.
[135 Hawai'i 451]I. Background
The factual background relevant to a certified question proceeding " is based primarily upon the information certified to this court by the district court . . . ."
Davis v. Four Seasons Hotel Ltd.,122 Hawai'i 423, 425, 228 P.3d 303, 305 (2010) (citing TMJ Hawaii, Inc. v. Nippon Trust Bank,113 Hawai'i 373, 374, 153 P.3d 444, 445 (2007)).
Plaintiff St. Paul Fire & Marine Insurance Company (St. Paul), the excess insurer, and Defendant Liberty Mutual Insurance Company (Liberty Mutual), the primary insurer, issued insurance policies to Pleasant Travel Service, Inc. dba Royal Kona Resort and Hawaiian Hotels and Resort (Pleasant Travel). Pleasant Travel was insured from January 1, 2010 through January 1, 2011 by both St. Paul and Liberty Mutual. A primary insurer provides insurance against liability risk from $0 up to the limits of the policy. An excess insurer provides insurance beyond the limits of the primary insurance policy. In this case, the primary insurance policy covered up to $1 million.
In July 2010, Pleasant Travel was sued in the Circuit Court of the Third Circuit for the State of Hawai'i for damages resulting from an accidental death. As the primary insurer, Liberty Mutual appointed counsel to represent Pleasant Travel. As the excess insurer, St. Paul alleges that Liberty Mutual rejected multiple pretrial settlement offers within the $1 million limit of its primary liability policy.
The subsequent trial resulted in a finding of liability against Pleasant Travel and a verdict of $4.1 million. In 2012, after the verdict, the action was settled for a confidential amount in excess of the Liberty Mutual policy limit. St. Paul claims that it paid the amount in excess.
On June 10, 2013, St. Paul filed a Complaint against Liberty Mutual in the Circuit Court of the First Circuit for the State of Hawai'i (circuit court). St. Paul, the excess insurer, alleged that Liberty Mutual, the primary insurer, acted in bad faith by rejecting multiple settlement offers within the limit of its primary liability policy. On July 22, 2013, Liberty Mutual filed a Notice of Removal from the circuit court to the district court.
The certified question arose following the filing of Liberty Mutual's Motion for Judgment on the Pleadings on November 20, 2013, in which Liberty Mutual argued that St. Paul lacked standing to assert a claim for insurer bad faith and that St. Paul had no claim against Liberty Mutual for equitable subrogation. On February 5, 2014, a hearing on the Motion for Judgment on the Pleadings was held. The district court ordered the parties to meet and confer to frame a question for submission to this court. Because the parties were unable to agree upon the question for submission, the district court drafted the certified question.
II. Standard of Review
This court has " jurisdiction and powers . . . [t]o answer, in its discretion . . . any question or proposition of law certified to it by a federal district or appellate court if the supreme court shall so provide by rule[.]" Hawai'i Revised Statutes (HRS) § 602-5(a)(2) (Supp. 2010).
When a federal district or appellate court certifies to the Hawai'i Supreme Court that there is involved in any proceeding before it a question concerning the law of Hawai'i that is determinative of the cause and that there is no clear controlling precedent in the Hawai'i judicial decisions, the Hawai'i Supreme Court may answer the certified question by written opinion.
Hawai'i Rules of Appellate Procedure Rule 13(a) (2010).
A question of law presented by a certified question is reviewable de novo under the right/wrong standard of review. Miller v. Hartford Life Ins. Co.,126 Hawai'i 165, 173, 268 P.3d 418, 426 (2011) (citing [135 Hawai'i 452] Francis v. Lee Enters., Inc.,89 Hawai'i 234, 236, 971 P.2d 707, 709 (1999)).
We hold that St. Paul can bring a cause of action as an excess insurer against Liberty Mutual, a primary insurer, under the doctrine of equitable subrogation. Hawai'i state courts broadly apply the doctrine of equitable subrogation and thus, allowing the excess insurer a cause of action here comports with our prior jurisprudence. Further, this broad application is in line with the majority of jurisdictions, which have recognized equitable subrogation claims under similar circumstances. Finally, 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.
A. Hawai'i Case Law Supports a Broad Application of the Doctrine of Equitable Subrogation
Hawai'i has recognized the doctrine of equitable subrogation as an appropriate remedy when equity demands. Through subrogation, the subrogee " is put in all respects in the place of the party to whose rights he is subrogated." Peters v. Weatherwax,69 Haw. 21, 27, 731 P.2d 157, 161 (1987) (quoting Kapena v. Kaleleonalani,6 Haw. 579, 583 (Haw. Kingdom 1885)) (internal quotation mark omitted). Subrogation is a " creature of equity jurisprudence," and is " so administered as to secure real and essential justice without regard to form[.]" Id. (alteration in original) (citation omitted) (internal quotation marks omitted).
Equitable subrogation has a broad scope and we have defined the doctrine as " broad enough to include every instance in which one party pays a debt for which another is primarily answerable, and which, in equity and good conscience, should have been discharged by the latter[.]" Id. (alteration in original) (citation omitted) (internal quotation mark omitted). In considering this broad application, the district court has previously explained that " [s]ubrogation is proper between a primary and excess insurer." Reliance Ins. Co. v. Doctors Co.,299 F.Supp.2d 1131, 1151 (D. Haw. 2003), aff'd sub nom. Reliance Ins. Co. v. Doctors' Co., 132 F.App'x 730 (9th Cir. 2005).
Notwithstanding the broad scope of equitable subrogation, Liberty Mutual asserts that St. Paul's claim should be dismissed because " St. Paul has not paid a debt or satisfied some liability for which another party . . . is primarily responsible." Liberty Mutual explains that it defended Pleasant Travel against the accidental death claim and paid its liability up to the primary policy limit. According to Liberty Mutual, St. Paul did not pay for Liberty Mutual's liability but " merely discharged its own contractual obligations" to Pleasant Travel.
While it is true that St. Paul discharged its obligations to Pleasant Travel, Liberty Mutual, as the primary insurer, also had an obligation to Pleasant Travel to pursue settlement. An insurer owes a duty of good faith and fair dealing to its insured. See Best Place Inc. v. Penn Am. Ins. Co.,82 Hawai'i 120, 132, 920 P.2d 334, 346 (1996).  [135 Hawai'i 453] A breach of this duty includes an insurer's unreasonable refusal to settle a claim on behalf of the insured. Id. at 124, 920 P.2d at 338. We have explained that " [e]ven if the ultimate judgment was in excess of the policy limits, the insurer may still be liable for the entire amount if its refusal to settle was unreasonable." Delmonte v. State Farm Fire & Cas. Co.,90 Hawai'i 39, 52 n.9, 975 P.2d 1159, 1172 n.9 (1999) (citing Crisci v. Security Ins. Co.,66 Cal.2d 425, 58 Cal.Rptr. 13, 426 P.2d 173 (Cal. 1967) (in bank)). Applying the doctrine of equitable subrogation in this context permits an excess insurer to hold a primary insurer to its obligation to the insured.
Upholding Liberty Mutual's characterization of St. Paul's actions, in contrast, would permit primary insurers to chance litigation and choose to " 'gambl[e]' with the excess carrier's money when potential judgments approach the primary insurer's policy limits," rather than settle. Hartford Accident & Indem. Co. v. Aetna Cas. & Sur. Co.,164 Ariz. 286, 792 P.2d 749, 753 (Ariz. 1990) (in banc) (quoting Commercial Union Ins. Co. v. Med. Protective Co.,426 Mich. 109, 393 N.W.2d 479, 483 (Mich. 1986)). For example, suppose that in the instant case, the underlying plaintiff's claim was for $3 million in damages, but the plaintiff agreed to settle for $1 million. Liberty Mutual, however, determines that at trial, the plaintiff's chance of prevailing is 50%. In such a situation, Liberty Mutual would have no incentive to settle. If the plaintiff prevailed at trial, winning an amount in excess of $1 million, Liberty Mutual would be in the same position as if it settled, given that St. Paul would cover the excess amount. However, if the plaintiff lost at trial, Liberty Mutual would be in a better position than if it settled, saving itself from payment of $1 million. Such a hypothetical demonstrates how allowing St. Paul's claims to go forward can function to mitigate the " potential that a primary insurer will forgo fair and reasonable settlements and roll the dice with, what is in essence, the excess insurer's money." Nat'l Sur. Corp. v. Hartford Cas. Ins. Co.,493 F.3d 752, 758 (6th Cir. 2007).
Liberty Mutual also argues that St. Paul cannot subrogate to the rights of Pleasant Travel because Pleasant Travel " never faced the prospect of direct liability for the amount of the  verdict in excess of [Liberty Mutual's] liability limit because that amount was within St. Paul's liability limit." Equitable subrogation may, however, be applied even " without any showing that the insured ha[s] suffered any loss." Seabright Ins. Co. v. Matson Terminals, Inc.,828 F.Supp.2d 1177, 1194 (D. Haw. 2011) (quoting Nw. Mut. Ins. Co. v. Farmers' Ins. Grp.,76 Cal.App.3d 1031, 143 Cal.Rptr. 415, 423 (Cal. Ct.App. 1978)). In Seabright, the district court explained that " [i]t is not a prerequisite to equitable subrogation that the subrogor suffered actual loss; it is required only that he would have suffered loss had the subrogee not discharged the liability or paid the loss." Id. at 1193 (emphasis added) (quoting Nw. Mut. Ins. Co., 143 Cal.Rptr. at 423). In other words, because an insured can recover from a primary [135 Hawai'i 454] insurer that refused reasonable settlement offers, " the excess carrier, who discharged the insured's liability as a result of this tort, stands in the shoes of the insured and should be permitted to assert all claims against the primary carrier which the insured himself could have asserted." Commercial Union Ins. Co., 393 N.W.2d at 482 (quoting Commercial Union Assurance Cos. v. Safeway Stores, Inc.,26 Cal.3d 912, 164 Cal.Rptr. 709, 610 P.2d 1038, 1041 (Cal. 1980)) (internal quotation mark omitted). St. Paul can thus bring a cause of action under the doctrine of equitable subrogation against Liberty Mutual if Pleasant Travel could assert such a claim, even when Pleasant Travel suffers no actual loss. This court's line of cases advocating for a broad and equity-based application of subrogation supports such a finding.
B. The Majority of Jurisdictions Permit an Excess Insurer To File a Claim Against a Primary Insurer Under the Doctrine of Equitable Subrogation
Hawaii's broad application of the doctrine of equitable subrogation comports with the majority of jurisdictions, which have held that, under the state law applicable in those cases, an excess insurer can seek relief from a primary insurer under the doctrine. For example, the United States Court of Appeals for the Ninth Circuit allowed an excess insurer to bring a claim against a primary insurer under the doctrine of equitable subrogation for the primary insurer's bad faith refusal to settle. Valentine v. Aetna Ins. Co.,564 F.2d 292, 297 (9th Cir. 1977). The court explained: " When there is no excess insurer, the insured becomes his own excess insurer, and his  primary insurer owes him a duty of good faith in protecting him from an excess judgment and personal liability." Id. (quoting Cont'l Cas. Co. v. Reserve Ins. Co.,307 Minn. 5, 238 N.W.2d 862, 864 (Minn. 1976)). If the insured purchases excess insurance, " he in effect substitutes an excess insurer for himself." Id. (quoting Cont'l Cas. Co., 238 N.W.2d at 864). The Supreme Court of Michigan further explained that when an insured does not have excess insurance, the insured has " every incentive to enforce the primary insurer's contractual duty to defend or to attempt to settle within policy limits in good faith."
Commercial Union Ins. Co., 393 N.W.2d at 482. But, if the insured does carry excess coverage, " that incentive dissolves" and " [t]he excess carrier, and not the insured, bears the injury resulting from the primary insurer's breach, and is therefore the party with the greatest incentive to enforce the primary insurer's duties." Id.
In a case similar to the one before this court, the Supreme Court of Arizona held that an excess insurer could assert a claim against a primary insurer, under the doctrine of equitable subrogation, for a bad faith failure to settle within primary policy limits. Hartford Accident & Indem. Co. v. Aetna Cas. & Sur. Co.,164 Ariz. 286, 792 P.2d 749, 757 (Ariz. 1990).  The court noted that " [a] number of jurisdictions have expanded the duty of good faith by recognizing a duty to an [135 Hawai'i 455] excess [insurer] by the primary [insurer]"  and adopted the doctrine of equitable subrogation. Id. at 752-53. The court explained that these jurisdictions adopted the doctrine of equitable subrogation in part because subrogation serves " to encourage fair and reasonable settlements of lawsuits." Id. at 753. Based on this public policy analysis, the court determined that " [a]n excess insurer should not have to pay a judgment if the primary insurer caused the excess judgment by a bad faith failure to settle within primary limits" and held that the excess insurer could bring such a claim against the primary insurer. Id. at 754.
The Supreme Court of Oregon also held that an excess insurer can bring a claim against the primary insurer under the doctrine of equitable subrogation. In the case at issue, evidence suggested that the primary insurer " made little or no effort to attempt to negotiate a settlement" and as a result, the excess insurer claimed that its " share of the settlement [was] higher than it otherwise would have been." Maine Bonding & Cas. Co. v. Centennial Ins. Co.,298 Or. 514, 693 P.2d 1296, 1298, 1302-03 (Or. 1985). The court explained that " [a] primary insurer owes an excess insurer essentially the same duty of due diligence in claims handling and settlement negotiating it owes to an insured--due care under all the circumstances." Id. at 1302. The court further noted that a primary insurer is responsible for considering the interests of all parties involved in a claim, including those of the excess insurer. Id.
The majority of courts faced with the issue before us have permitted excess insurers to bring a claim of bad faith against a primary insurer under the doctrine of equitable subrogation. As discussed further below, the doctrine enables an excess insurer to seek relief from a primary insurer who can otherwise take advantage of a situation that leaves the excess insurer with no other remedy.
C. Application of the Doctrine of Equitable Subrogation Protects the Public Interest
The doctrine of equitable subrogation is an equitable remedy that protects an insurer from paying a debt that should be discharged by another. The Hawai'i Insurance Code, Chapter 431 explains that " [t]he business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception and practice honesty and equity in all insurance matters." HRS § 431:1-102 (2005) (emphases added). Allowing excess insurers to subrogate to the rights of the insured upholds the Hawai'i Insurance Code by enabling excess insurers to litigate bad faith ...