Hawaiian High Court Allows an Excess Insurer to Equitably Subrogate a Bad Faith Claim

On a certified question from the Hawaiian federal district court, the Hawaiian Supreme Court allowed an excess insurer to sue a primary insurer for bad faith. The case, St. Paul Fire and Marine Insurance Co. v. Liberty Mutual Insurance Co., arose out of claims that the primary insurer failed to settle underlying claims within its policy limits. The excess insurer contended the primary insurer had multiple opportunities to settle an accidental death claim within the $1 million primary limits, and its failure to do so resulted in a $4.1 million judgment.

The federal court certified the following question: “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 …?” The Hawaiian high court slightly modified the question by requiring the failure to settle be done in bad faith. Upon the modified question, the court found Hawaiian law, and the majority of other jurisdictions, allowed such a claim.

The court began by noting that Hawaiian law broadly applies the doctrine of equitable subrogation. The subrogee is, in all respects, in an identical place as the person whose rights were subrogated. Further, the doctrine can be applied even where the insured has not suffered any loss – it only requires that the insured “would have suffered loss had the subrogee nor discharged the liability or paid the loss.” The court further noted that the majority of courts facing this issue have permitted an excess insurer to subrogate a bad faith claim under equitable subrogation. Finally, the court noted that allowing such claims would further Hawaiian public policy by requiring insurers to practice honesty and equity in all insurance matters.

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