Rsui Indemnity Company v. Discover P&cinsurance Co.

NOT FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
RSUI INDEMNITY COMPANY,
Plaintiff - Appellant,
v.
DISCOVER P&C INSURANCE CO.,
Defendant - Appellee.
No. 14-15825
D.C. No. 2:13-cv-00960-TLN-
EFB
MEMORANDUM*
Appeal from the United States District Court
for the Eastern District of California
Troy L. Nunley, District Judge, Presiding
Argued and Submitted April 12, 2016
San Francisco, California
Before: THOMAS, Chief Judge and REINHARDT and CHRISTEN, Circuit
Judges.
RSUI Indemnity Company (“RSUI”) appeals the district court’s dismissal of
its equitable subrogation suit against Discover P&C Insurance Company
(“Discover”). We reverse and remand. Because the parties are familiar with the
history of this case, we need not recount it here.
FILED
MAY 03 2016
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
* This disposition is not appropriate for publication and is not precedent
except as provided by 9th Cir. R. 36-3.

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The district court erred in concluding that RSUI failed to state a claim for
equitable subrogation under California law. RSUI sought recovery in equitable
subrogation against the primary insurer, Discover, after Discover rejected offers to
settle a personal injury action within the limits of the primary policy.1 The
personal injury action ultimately settled for an excess amount, and RSUI paid the
excess on behalf of its insured. Because the personal injury action resolved
through settlement, there was no litigated excess judgment. The district court
concluded that California law required the entry of a litigated excess judgment as
prerequisite to an equitable subordination action. We respectfully disagree.
In analyzing California law when under diversity jurisdiction, “we are bound
by the decisions of the state’s highest court.” U.S. Fid. & Guar. Co. v. Lee Invs.
LLC, 641 F.3d 1126, 1133-34 (9th Cir. 2011). However, “[i]f the California
Supreme Court has not decided the question, we are required to ascertain from all
the available data what the state law is and apply it.” Id. at 1134 (quotation
1 “Equitable subrogation allows an insurer that paid coverage or defense
costs to be placed in the insured’s position to pursue a full recovery from another
insurer who was primarily responsible for the loss.” Md. Cas. Co. v. Nationwide
Mut. Ins. Co., 97 Cal. Rptr. 2d 374, 377 (Cal. Ct. App. 2000). “[A]n insurer may
be held liable for a judgment against the insured in excess of its policy limits where
it has breached its implied covenant of good faith and fair dealing by unreasonably
refusing to accept a settlement offer within the policy limits.” Commercial Union
Assurance Cos. v. Safeway Stores, Inc., 610 P.2d 1038, 1040 (Cal. 1980) (citations
omitted).
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omitted) (citing Soltani v. W. & S. Life Ins. Co., 258 F.3d 1038, 1045 (9th Cir.
2001)). The decisions by state intermediate appellate courts are “dat[a] for
ascertaining state law which is not to be disregarded by a federal court unless it is
convinced by other persuasive data that the highest court of the state would decide
otherwise.” Estrella v. Brandt, 682 F.2d 814, 817 (9th Cir. 1982) (quoting West v.
A.T.&T. Co., 311 U.S. 223, 237 (1940)).
The California Supreme Court has not decided whether a litigated excess
judgment is required as a prerequisite to an equitable subrogation action. It has,
however, addressed the issue in the context of actions filed by the insured (or the
claimant as the insured’s assignee) against the insurer for breach of the statutory
duty to settle. In Isaacson v. California Insurance Guarantee Ass’n, 750 P.2d 297,
308-09 (Cal. 1988) (in bank), the court held that an insured could file an action
against an insurer for breach of the duty to settle without a litigated excess
judgment if the insured had expended its own funds to settle the underlying claim
in excess of the insurance policy limits. However, in Hamilton v. Maryland
Casualty Co., 41 P.3d 128 (Cal. 2002), the court imposed a requirement for the
entry of a litigated excess judgment as a prerequisite to filing a breach of
settlement claim, in the situations in which there was a risk of collusive settlement
between the insured and the claimant. Hamilton involved a situation in which,
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without the insurer’s participation or permission, (1) the insured and the claimant
entered into a stipulated judgment in excess of insurance policy limits; (2) the
claimant executed a covenant not to execute on the judgment; and (3) the insured
assigned to the claimant the insured’s cause of action for breach of the insurer’s
duty to accept a reasonable settlement demand. Id. at 130.
Under these conditions, the California Supreme Court concluded that a
stipulated settlement amount “may [not] be treated as a presumptive measure of the
damages the policyholder has suffered as a result of the insurer’s breach” of its
duties to the insured. Id. at 133. The court held that under the circumstances, an
assigned claim for breach of the duty to settle “does not become operative, and the
claimant’s action against the insurer does not mature, until a judgment in excess of
the policy limits has been entered against the insured.” Id. at 132 (citing Safeco
Ins. Co. v. Superior Court, 84 Cal. Rptr. 2d 43, 46-47 (1999)). The court’s
rationale was based on the risk of a collusive settlement in which the insured and
the claimant agree to inflate a stipulated judgment beyond the actual value of the
case, absolving the insured of financial liability and artificially increasing the value
of the claimant’s subsequent suit against the insurer. Hamilton distinguished
Issacson, because Issacson involved the situation in which the insured had
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contributed to the settlement. Id. at 136-37. Under those circumstances, the court
noted, there was little risk of the collusive elements presented in Hamilton.
The California Supreme Court has not opined on whether the Hamilton
excess judgment requirement applies to equitable subrogation actions between
excess and primary insurers. The California Courts of Appeal have addressed this
question, however, and they have reached contrary conclusions. Compare
Fortman v. Safeco Ins. Co., 271 Cal. Rptr. 117 (Cal. Ct. App. 1990) (holding that
an excess insurer’s equitable subrogation claim does not depend on the entry of an
excess judgment to prove damages to the insured), with RLI Ins. Co. v. CNA Cas.
of Cal., 45 Cal. Rptr. 3d 667 (Cal. Ct. App. 2006) (expressly rejecting Fortman).
Because there is no controlling California Supreme Court authority, our task is to
determine which intermediate appellate decision contains the rule most likely to be
adopted by the California Supreme Court were it to address this question. See
West, 311 U.S. at 236-37.
We conclude that the rule announced in Fortman is more likely to be
adopted by the California Supreme Court because it more faithfully applies
California insurance law. As we have noted, Hamilton only applies an excess
judgment requirement to situations in which the insured did not contribute to the
settlement. It explained that an action for breach of the duty to settle could be
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brought (either by the insured or the claimant as the insured’s assignee) without a
litigated excess judgment if the insured contributes payment to conclude the
settlement in excess of the insurance policy limits. 41 P.3d at 136. The logic of
drawing the distinction is that the risk of a collusively inflated settlement or
judgment does not exist when an insured has contributed to the settlement.
Hamilton did not overrule Issacson, which permitted suit without a litigated excess
judgment when the insured contributed to the settlement.
Fortman recognized this critical distinction between the settlement
scenarios, and applied this principle to disputes between contributing excess
insurers and primary insurers: when an excess insurer, faced with a primary
insurer’s unreasonable refusal to pay a settlement demand within the policy limits,
actually contributes payment to conclude settlement, it may state a claim for
equitable subrogation despite the absence of a litigated excess judgment. 271 Cal.
Rptr. at 119. Fortman’s conclusion is consistent with Hamilton and Issacson. The
collusive risk that Hamilton wished to avoid is not present when an excess insurer
contributes to settle a case on behalf of an insured.
The Fortman rule is also consistent with public policy interests identified by
California courts in the insurance context: it promotes the settlement of claims,
promotes excess insurers’ contribution to settlement, and is favorable both to the
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insured and to claimants. As we have previously concluded, under California law,
“policy considerations pertinent to both the courts and the insurance industry favor
allowing an excess insurer to enforce a primary insurer’s duties to the insured.”
Valentine v. Aetna Ins. Co., 564 F.2d 292, 297 (9th Cir. 1977).
In contrast, RLI Ins. Co. overreads Hamilton to establish a categorical rule
requiring the entry of a litigated excess judgment in all cases. This construction is
not consistent with the rationale of Hamilton, nor is it consistent with Issacson.2
Therefore, we conclude that the California Supreme Court would likely
adopt the Fortman rule that an excess litigated judgment is not a prerequisite to an
equitable subrogation action by an excess insurer against a primary insurer when
the excess carrier has contributed to the underlying settlement. Under Fortman,
RSUI has stated a claim upon which relief could be granted, and we must reverse
the district court’s contrary conclusion.
REVERSED AND REMANDED.
2 Our decision in Mercado v. Allstate Insurance Co., 340 F.3d 824, 827 (9th
Cir. 2003), a case upon which the district court relied, is not to the contrary.
Mercado involved a Hamilton scenario in which the insured and the claimant
entered into a stipulated judgment far in excess of the insurance policy limits; the
claimant entered into a covenant not to execute on the judgment; and the insured
assigned its claims against the insurer to the claimant. Thus, Mercado was
squarely controlled by Hamilton, and we appropriately applied the Hamilton
excess judgment rule. Mercado did not extend an excess judgment requirement to
equitable subrogation cases.
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