A Dog-Eat-Dog World: When Insurers Sue Each Other For Bad Faith

There is an old adage in journalism that a dog biting a man is not news, but a man biting a dog—that's a story. Similarly, there is nothing novel about a policyholder suing its insurer for bad faith, but an insurer suing another insurance company for bad faith is much more unusual.

Although rare, there have been instances in which insurance companies have sued other insurers for bad faith. Insurers' willingness to sue each other for bad faith may, in some cases, undermine their contention that policyholders' similar bad faith claims lack merit. There are several contexts in which such claims may arise, but the most common involves insurance programs that contain multiple layers of coverage. For example, a primary carrier may have an opportunity to settle within its policy limits prior to trial, but fails to do so, and the eventual judgment exceeds the limits of the primary policy, thus triggering the excess coverage.

For the most part, however, courts have not been sympathetic to insurers that attempt to borrow this weapon from the policyholder arsenal. At least two courts have held that a primary insurer does not owe a duty of good faith to excess insurers participating in the same insurance program. Recently, in Scottsdale Insurance Company v. Addison Insurance Company, a policyholder and an excess insurer sued a primary insurer for bad faith refusal to settle. No. SC 93792, 2014 WL 6958157 (Mo. Dec. 9, 2014). A lower court granted summary judgment for the primary insurer, and the Missouri Supreme Court overruled the holding, finding that an excess insurer could bring a claim "under the theories of assignment, conventional subrogation, and equitable subrogation." Id. at *8. The court, however, refused to recognize an excess insurer's direct cause of action for breach of a primary insurer's independent duty to settle in good faith. Id. at *11. Similarly, the Hawaii Court of Appeals also determined that there is no cause of action for bad faith by an excess carrier against a primary carrier because the duty of good faith and fair dealing arises from contract, and there is no contract between primary and excess carriers. Group Builders, Inc. v. Admiral Ins. Co., 2013 WL 1579600 (Haw. App., April 15, 2013).

In contrast, at least one court has recognized a duty of good faith between a primary insurer and an excess insurer. In Westchester Fire Ins. Co. v. Mid-Continental Casualty Company, a construction worker was injured while operating a...