The summaries of the Colorado Court of Appeals published opinions
constitute no part of the opinion of the division but have been prepared by
the division for the convenience of the reader. The summaries may not be
cited or relied upon as they are not the official language of the division.
Any discrepancy between the language in the summary and in the opinion
should be resolved in favor of the language in the opinion.
SUMMARY
April 5, 2018
2018COA49
No. 17CA405, Preferred Professional Insurance Company v.
The Doctors Company — Insurance — Subrogation — Excess
Insurer
A division of the court of appeals concludes that an excess
insurer seeking recovery under equitable subrogation for a primary
insurer’s failure to settle a case against their mutual insured “steps
in the shoes of the insured” and must plead and prove the primary
insurer’s bad faith.
COLORADO COURT OF APPEALS 2018COA49
Court of Appeals No. 17CA0405
City and County of Denver District Court No. 15CV31295
Honorable Elizabeth A. Starrs, Judge
Preferred Professional Insurance Company,
Plaintiff-Appellee,
v.
The Doctors Company,
Defendant-Appellant.
JUDGMENT REVERSED AND CASE
REMANDED WITH DIRECTIONS
Division IV
Opinion by JUDGE DAVIDSON*
J. Jones and Richman, JJ., concur
Announced April 5, 2018
Sweetbaum Sands Anderson, P.C., Jon F. Sands, Marilyn S. Chappell, Denver,
Colorado, for Plaintiff-Appellee
Taylor Anderson, LLP, Kyle P. Seedorf, John M. Roche, Lauren E. Rhinehart,
Denver, Colorado, for Defendant-Appellant
*Sitting by assignment of the Chief Justice under provisions of Colo. Const. art.
VI, § 5(3), and § 24-51-1105, C.R.S. 2017.
¶1 Suppose that an injured party sues a person who has both
primary and excess insurance covering the claim. The injured party
offers to settle for an amount within the primary coverage limit.
The primary insurer exercises its contractual, discretionary right
not to accept the settlement. But the excess insurer, perhaps
spooked by the prospect of a judgment exceeding the primary
coverage limit, pays the settlement demanded by the injured party.
When the excess insurer sues the primary insurer to recover the
amount paid in settlement, claiming that the primary insurer
should have accepted the settlement offer, what sort of claim may
the excess insurer assert? And must the excess insurer plead and
prove that the primary insurer acted in bad faith in declining to
settle?
¶2 We hold that an excess insurer in this situation must proceed
on a theory of equitable subrogation premised on the rights of the
insured under his contract with the primary insurer — that is, the
excess insurer must step into the shoes of the insured. It follows
that, under Colorado law, because the insured would have to prove
bad faith in an action against his primary insurer based on the
1
insurer’s refusal to settle, the excess insurer must also plead and
prove such bad faith.
¶3 The facts of this case match those of our hypothetical.
Preferred Professional Insurance Company (PPIC) is the excess
insurer that paid the settlement. The Doctors Company (TDC) is
the primary insurer that declined to settle. But while PPIC
purported to bring a claim of equitable subrogation against TDC, it
disavowed any intent to proceed on the legal theory that it stands in
the insured’s shoes. And it did not plead or attempt to show that
TDC acted in bad faith. Instead, PPIC’s theory is that general
equitable principles allow it to recover from TDC apart from any
rights of the insured under his contract with TDC, and that it need
not plead or prove that TDC acted in bad faith.
¶4 The district court accepted PPIC’s theory and granted
summary judgment in its favor. But we conclude that PPIC’s theory
of recovery is not viable under Colorado law. So we reverse the
summary judgment and remand the case to the district court for
entry of judgment in TDC’s favor.
2
I. Background
¶5 The undisputed facts establish that the parties both held
separate professional liability policies for the same insured, Dr.
Rupinder Singh. A medical malpractice suit was filed against Dr.
Singh and other parties.
¶6 TDC defended Dr. Singh in the suit as required by its primary
liability policy. The policy provided coverage up to a limit of $1
million. TDC’s policy required Dr. Singh’s consent before accepting
any settlement offers, but TDC retained the discretion whether to
accept or reject any such offers.
¶7 PPIC’s insurance policy was an “excess policy,” which would
cover any losses that exceeded TDC’s $1 million coverage up to an
additional $1 million. As an excess insurer, PPIC did not have any
duty to defend Dr. Singh in the suit.
¶8 The plaintiff in the medical malpractice suit offered to settle
the case with Dr. Singh for $1 million. Dr. Singh conveyed his
desire to accept the settlement offer to both insurers, but TDC
declined the plaintiff’s offer. PPIC told Dr. Singh he should accept,
and it paid the $1 million settlement.
3
¶9 PPIC filed a claim for equitable subrogation, seeking payment
of the $1 million from TDC. Both parties filed summary judgment
motions. In its motion, PPIC argued that the applicable standard
for recovery under equitable subrogation is a five-factor test set
forth in Hicks v. Londre, 125 P.3d 452, 456 (Colo. 2005). TDC
responded that in order to recover under equitable subrogation,
PPIC was required to prove that TDC refused to settle in bad faith.
In reply, PPIC argued that its claim for equitable subrogation was
“not premised on the assertion that it has stepped into the shoes of
its insured, Dr. Singh, through its payment of the settlement,” and
that it was “not required to establish [bad faith]” to recover, relying
exclusively on Unigard Mutual Insurance Co. v. Mission Insurance
Co., 907 P.2d 94, 99 (Colo. App. 1994), and Hicks. The district
court applied the Hicks factors and found in PPIC’s favor without
addressing TDC’s argument concerning the need to show bad faith.
¶ 10 On appeal, TDC contends that the district court erred as a
matter of law. TDC asserts that, under well-established Colorado
insurance law, an equitable subrogation claim brought by an excess
insurer against the primary insurer to recover the amount paid in
settlement can only be derivative (“standing in the shoes”) of the
4
insured’s rights. Consequently, TDC argues, PPIC’s refusal to plead
and present evidence that TDC acted in bad faith in declining to
settle, under the circumstances here, requires dismissal of PPIC’s
claim. We agree with TDC.
II. Standard of Review
¶ 11 We review an appeal of a summary judgment de novo.
Edwards v. Bank of Am., N.A., 2016 COA 121, ¶ 13. Summary
judgment is a drastic remedy that should be granted only when the
pleadings and the supporting documents demonstrate that no
genuine issue of material fact exists and that the moving party is
legally entitled to judgment. W. Elk Ranch, L.L.C. v. United States,
65 P.3d 479, 481 (Colo. 2002). The moving party carries the
burden to establish the lack of a genuine issue of fact. Any doubts
in that regard must be resolved against the moving party. Bankr.
Estate of Morris v. COPIC Ins. Co., 192 P.3d 519, 523 (Colo. App.
2008).
¶ 12 An appellate court may “independently review the question of
whether the doctrine of equitable subrogation applies to the
circumstances.” Hicks, 125 P.3d at 455.
5
III. Issue Preservation
¶ 13 As a threshold matter, we address and reject PPIC’s argument
that TDC did not properly preserve this issue in the district court.
TDC argued in opposing PPIC’s motion for summary judgment that
PPIC was pursuing a novel theory of recovery in the primary/excess
insurance coverage context that should be rejected, and that the
Hicks test has never been applied in this setting to allow an excess
carrier to usurp the primary insurer’s role without a showing that
the primary insurer acted in bad faith. TDC cited several bad faith
failure to settle cases, including some arising in the insurance
context between excess and primary insurers. So, while the words
“step into the shoes of the insured” do not appear in TDC’s
response, we conclude that the district court was alerted to the
issue.
IV. Analysis
¶ 14 From settled Colorado insurance law, we conclude that an
excess carrier asserting an equitable subrogation claim against a
primary carrier for failing to settle must plead and prove that the
primary insurer’s settlement decisions were made in bad faith.
Without such an allegation, the claim is not legally viable.
6
A. In the Context of Colorado Insurance Law, the Claim of
Equitable Subrogation Is Identified As Derivative of the Rights
of the Insured
¶ 15 Subrogation is “a creature of equity having for its purpose the
working out of an equitable adjustment between the parties by
securing the ultimate discharge of a debt by the person who in
equity and good conscience ought to pay it.” In re Estate of Boyd,
972 P.2d 1075, 1077 (Colo. App. 1998) (quoting United Sec. Ins. Co.
v. Sciarrota, 885 P.2d 273, 277 (Colo. App. 1994)); see Cedar Lane
Invs. v. Am. Roofing Supply of Colo. Springs, Inc., 919 P.2d 879, 884
(Colo. App. 1996) (Equitable subrogation arises “because it is
imposed by courts to prevent unjust enrichment.” (quoting 1 Dan B.
Dobbs, Law of Remedies § 4.3(4), at 606 (2d ed. 1993))).
¶ 16 In insurance cases, equitable subrogation is often used as a
loss-shifting mechanism, dependent on the rights, obligations, and
duties between the parties as set forth in the insurance policy.
Thus, a subrogated insurer has “no greater rights than the insured,
for one cannot acquire by subrogation what another, whose rights
he or she claims, did not have.” Am. Family Mut. Ins. Co. v. DeWitt,
218 P.3d 318, 323 (Colo. 2009) (citation omitted); see Bainbridge,
Inc. v. Travelers Cas. Co. of Conn., 159 P.3d 748, 751 (Colo. App.
7
2006) (“[T]here must first exist a valid claim, right, or debt in order
for another to become subrogated to it.”); Union Ins. Co. v. RCA
Corp., 724 P.2d 80, 82 (Colo. App. 1986) (“The claim of a subrogee
insurance carrier is derivative of the claim of its subrogor insured.
Subrogation merely alters the beneficial ownership of the claim, not
its identity, and gives the insuror the right to prosecute against
responsible third parties whatever rights its insured possesses
against them.”), overruled on other grounds by Mile Hi Concrete, Inc.
v. Matz, 842 P.2d 198, 206 n.17 (Colo. 1992).
¶ 17 In the insurance context, regardless of how an insurer obtains
ownership of subrogation rights (viz., under contract with the
insured or through principles of equity), they are derivative of the
rights of the insured. “Once an insurance company enjoys those
rights, [it] ‘stand[s] in the shoes of the insured’ for all legal purposes
and may pursue any rights held by the insured subrogor.” DeWitt,
218 P.3d at 323; see Cotter Corp. v. Am. Empire Surplus Lines Ins.
Co., 90 P.3d 814, 834 (Colo. 2004) (by subrogation, a party who
discharges another’s debt “stands in the shoes” of the subrogor);
United Fire Grp. ex rel. Metamorphosis Salon v. Powers Elec., Inc.,
240 P.3d 569, 573 (Colo. App. 2010) (same); Bainbridge, 159 P.3d
8
at 751; Wright v. Estate of Valley, 827 P.2d 579, 582 (Colo. App.
1992); Union Ins. Co., 724 P.2d at 82.
B. Under Colorado Insurance Law, Any Settlement Obligation
Owed by TDC to PPIC Was Defined by TDC’s Insurance Policy
With Dr. Singh
1. TDC Only Had a Duty to Dr. Singh to Make Reasonable
Settlement Decisions
¶ 18 Under the terms of an insurance policy, a primary insurer, to
the exclusion of the insured, may have complete discretion to
accept or reject settlement offers. See Farmers Grp., Inc. v. Trimble,
691 P.2d 1138, 1141 (Colo. 1984); Aetna Cas. & Sur. Co. v.
Kornbluth, 28 Colo. App. 194, 199, 471 P.2d 609, 611 (1970).
However, in deciding whether to accept a settlement offer, the
insurer must give at least as much consideration to the insured’s
interests as it does to its own. See Goodson v. Am. Standard Ins.
Co. of Wis., 89 P.3d 409, 415 (Colo. 2004).
¶ 19 Because of the special nature of insurance contracts, Colorado
courts have extended the duty of good faith and fair dealing implied
in every bilateral contract to allow an insured to bring a separate
tort action for bad faith refusal to settle. See id. at 414-15.
9
¶ 20 Thus, Dr. Singh had a contractual right to bring a tort claim
against TDC for breach of the insurance contract for alleged bad
faith failure to settle. In that claim, Dr. Singh would be required to
prove that TDC acted in bad faith, or “unreasonably under the
circumstances.” Am. Family Mut. Ins. Co. v. Allen, 102 P.3d 333,
342 (Colo. 2004) (quoting Goodson, 89 P.3d at 415). Under Dr.
Singh’s policy, TDC would be liable for any excess damages
awarded against Dr. Singh if TDC had unreasonably — that is, in
bad faith — refused the $1 million pretrial settlement offer. See
Lira v. Shelter Ins. Co., 903 P.2d 1147, 1149 (Colo. App. 1994),
aff’d, 913 P.2d 514 (Colo. 1996).
¶ 21 Conversely, Dr. Singh could not recover against TDC for any
liability he suffered if TDC’s settlement decisions were shown to
have been objectively reasonable. See, e.g., Hazelrigg v. Am. Fid. &
Cas. Co., 228 F.2d 953, 956 (10th Cir. 1955) (A primary insurer
does not guarantee that its decision as to settlement will end
advantageously, but it owes to its insured “the duty to exercise an
honest discretion at the risk of liability beyond its policy limits.”).
Premising liability on an insurer’s negligence for failure to settle
reasonably reflects “the quasi-fiduciary relationship that exists
10
between the insurer and the insured by virtue of the insurance
contract,” Trimble, 691 P.2d at 1141, which “necessarily imposes a
correlative duty on the part of the insurance company to ascertain
all facts” in making a decision to settle. Kornbluth, 28 Colo. App. at
199, 471 P.2d at 611.
2. Numerous Other Jurisdictions Allow an Excess Insurer to
“Stand in the Shoes of the Insured” to Seek Recovery
From the Primary Insurer for Bad Faith Breach of the
Duty to Settle Owed to the Insured
¶ 22 As the excess carrier, PPIC assumed Dr. Singh’s risk of a
judgment that exceeded the limits of his policy with TDC. PPIC and
Dr. Singh contracted for the possibility of this exposure, but PPIC
had no contractual relationship with TDC and, in that regard, no
control over TDC’s settlement decisions. However, unlike Dr.
Singh, PPIC did not have a contract or tort claim against TDC for
any bad faith failure to accept the $1 million settlement offer.
¶ 23 Other jurisdictions, concerned that excess insurers were
facing ever-increasing risks of excess verdict amounts without
recourse against primary insurers, created a remedy for excess
insurers through derivative equitable subrogation. They reasoned
that the excess insurer is effectively the insured for the purpose of
11
any judgment exceeding primary policy limits and, therefore, it
should be protected at least to the same extent that the insured is
protected by the contractual obligations owed to it by its primary
insurer. See, e.g., Twin City Fire Ins. Co. v. Country Mut. Ins. Co., 23
F.3d 1175, 1178 (7th Cir. 1994) (citing cases; the duty that a
primary insurer owes an excess insurer is derivative of the primary
insurer’s duty to the insured); Great Sw. Fire Ins. Co. v. CNA Ins.
Companies, 547 So. 2d 1339, 1348 (La. Ct. App. 1989) (“[T]he
excess insurer . . . stands in the shoes of the insured and should be
permitted to assert all claims against the primary insurer which the
insured himself could have asserted.”).
¶ 24 As one commentator has explained, regardless of the fact
there is no contractual relationship between them, “the primary
insurer should be held responsible to the excess for improper
failure to settle, since the position of the latter is analogous to that
of the insured when only one insurer is involved.” Robert E.
Keeton, Insurance Law § 7.8(d) (1971).
¶ 25 Thus, an overwhelming number of courts allow an excess
insurer to be equitably subrogated to the insured’s right to seek
relief against the primary insurer for bad faith refusal to settle. See
12
W. Am. Ins. Co. v. RLI Ins. Co., 698 F.3d 1069 (8th Cir. 2012); Nat’l
Sur. Corp. v. Hartford Cas. Ins. Co., 493 F.3d 752 (6th Cir. 2007)
(collecting cases); Twin City Fire Ins., 23 F.3d at 1178; Hartford
Accident & Indem. Co. v. Aetna Cas. & Sur. Co., 792 P.2d 749 (Ariz.
1990); Morrison Assurance Co., 600 So. 2d at 1151; St. Paul Fire &
Marine Ins. Co. v. Liberty Mut. Ins. Co., 353 P.3d 991 (Haw. 2015);
Scottsdale Ins. Co. v. Addison Ins. Co., 448 S.W.3d 818 (Mo. 2014);
Truck Ins. Exch. of Farmers Ins. Grp. v. Century Indem. Co., 887 P.2d
455, 460 (Wash. Ct. App. 1995).
¶ 26 According to these courts, equitable subrogation in this
context works to remedy the situation because the primary
insurer’s contractual obligation to the common insured “is not
reduced merely because of another contract between the insured
and its excess insurer.” Peter v. Travelers Ins. Co., 375 F. Supp.
1347, 1350 (C.D. Cal. 1974).
¶ 27 TDC asserts, and PPIC does not seem to disagree, that the
reasoning of these decisions is sound and fully consistent with well-
accepted principles of Colorado insurance law.
C. The Division in Unigard Did Not Recognize an “Independent
Equitable Subrogation Claim” and Its Decision is Fully Consistent
13
with Settled Colorado Law Recognizing Only Derivative Equitable
Subrogation in the Insurance Context
¶ 28 Nevertheless, PPIC insists that regardless of the viability of a
“standing in the shoes” claim, it is not pursuing such a claim. It
asserts that it is not seeking equitable subrogation “in the shoes” of
Dr. Singh, but an “independent equitable claim” — in which it need
only prove that it “equitably should have been paid” by TDC — a
theory recognized, according to PPIC, in Unigard, 907 P.2d 94. We
disagree.
¶ 29 First, the issues presented in this case were not raised in
Unigard, and the division did not address them. In Unigard, both
insurers had agreed to settle and had paid differing portions of the
settlement amount, which exceeded the limit of the primary
coverage. The primary insurer had paid less than the limit of its
primary coverage, and the insurers had reserved the right to a
judicial determination of what each of them owed. The issue then
was whether the primary insurer had to pay back the excess
insurer for amounts paid by the excess insurer up to the limit of the
primary coverage. Whether Colorado recognized an “independent,”
14
or non-derivative, claim of equitable subrogation simply had
nothing to do with the case.
¶ 30 Second, the principles of equitable subrogation discussed by
Unigard must be considered in that context. The division first
noted that under contract principles, in some jurisdictions in the
circumstances before it, “the excess insurer succeeds, under the
excess policy’s subrogation provisions, to the insured’s contract
rights under the primary policy.” Id. at 99. The Washington and
New Mexico cases cited by the division as supporting this theory
both addressed the situation where two insurers are battling over
whether one of them has an absolute obligation to pay, and
therefore should reimburse the other. And, the decisions turned on
the terms of the primary policies. See State Farm Mut. Auto. Ins. Co.
v. Found. Reserve Ins. Co., 431 P.2d 737, 741-42 (N.M. 1967)
(“Plaintiff had a right of subrogation against defendant by
contract.”); Millers Cas. Ins. Co., of Tex. v. Briggs, 665 P.2d 887, 890
(Wash. 1983) (subrogating excess insurer to the primary insurer
based on “the terms of its policy and under general principles”).
¶ 31 The Unigard division also noted a theory used in other
jurisdictions “that equity will create a subrogation right in the
15
excess insurer because of that insurer’s payment of an obligation
that equitably should have been paid by the primary insurer.” 907
P.2d at 99. The Pennsylvania case cited for the “equitably should
have been paid” formulation also concerned a nondiscretionary
obligation of the primary — to defend a claim — and turned on the
terms of the primary policy. See F.B. Washburn Candy Corp. v.
Fireman’s Fund, 541 A.2d 771, 774 (Pa. Super. Ct. 1988).
Moreover, the F.B. Washburn court itself based its decision on
derivative equitable subrogation principles to determine whether an
excess insurer could recover:
“It has often been said that the equitable
doctrine of subrogation places the subrogee in
the precise position of the one to whose rights
and disabilities he is subrogated.” Based on
this principle, we are of the opinion that [the
excess insurer and subrogee] stands in the
same place as [the insured] . . . .
Id. (emphasis added) (quoting Allstate Ins. Co. v. Clarke, 527 A.2d
1021, 1024 (Pa. Super. Ct. 1987)).
¶ 32 Thus, fairly read, Unigard is fully consistent with our
interpretation of fundamental principles of Colorado insurance law
that any subrogation rights sought by an excess insurer in the
settlement context are derivative of the insured’s as set forth by the
16
primary insurance policy’s terms. We simply do not read Unigard
as implying that the rights of the insured under the primary policy
are irrelevant. To the contrary, liability under either theory
discussed in Unigard turned on the obligations imposed by the
primary policy. And, the division observed that the debtor was
asserting “a contract claim, based on the terms of the [primary]
policy, that otherwise could have been enforced by [the insured].”
Unigard, 907 P.2d at 99.
D. Under the Insurance Policy, TDC’s Legal Obligation Was to
Make Reasonable Settlement Decisions; Equity Will Not Require
TDC to Pay Something It Was Otherwise Not Legally Obligated to
Pay
¶ 33 Whether derivatively based or not, an equitable subrogation
claim allows for recovery only against obligated parties. Conversely,
equity will not impose on someone an obligation not otherwise
required by law. See, e.g., Blue Cross of W. N.Y. v. Bukulmez, 736
P.2d 834, 840 (Colo. 1987); see also In re Masonite Corp. Hardboard
Siding Prods. Liab. Litig., 21 F. Supp. 2d 593, 607 (E.D. La. 1998)
(Equitable subrogation “is not an unchecked principle of conscience
that allows recovery whenever it seems fair or right to make the
17
defendant pay for the subrogor’s losses that defendant is not legally
obligated to pay.”).
¶ 34 As discussed above, in the insurance context, whether an
insurer is legally obligated depends on the terms of the insurance
policy and the relationship between or among the parties to that
policy. See DeWitt, 218 P.3d at 323; Bainbridge, 159 P.3d at 751;
Union Ins. Co., 724 P.2d at 82. In this case, TDC’s settlement
obligation was defined by its contract with Dr. Singh. TDC
bargained for the discretion to settle, subject only to the legally
imposed obligation of good faith, and that bargained-for
discretionary obligation was the only potential source of any
obligation TDC had to settle. See Hazelrigg, 228 F.2d at 957 (A
primary insurer “is not required to prophesy or foretell the results of
litigation at its peril. If it acts in good faith and without negligence
in refusing the proffered settlement, it has fulfilled its duty to its
insured, and those in privity with it.”).
¶ 35 Absent a showing that a contractual provision violates public
policy, equity should not be employed to defeat a party’s bargained-
for contractual rights. See Dover Assocs. Joint Venture v. Ingram,
768 A.2d 971, 974 (Del. Ch. 2000). That seems to be particularly
18
so when a primary insurer is being sued by another entity with
which it has no contractual relationship, to which it owes no
independent obligation imposed by law (as PPIC concedes), and
whose actions it has no ability to control. As TDC points out, it is
inequitable to allow an excess carrier to nullify the primary
insurer’s contractual right merely because the excess insurer
disagrees with the primary insurer over the risk of exposure.
¶ 36 Indeed, PPIC presents no good reason for ignoring the parties’
rights under the insurance contract. To the contrary, if PPIC were
allowed to seek recovery without a showing that TDC acted in bad
faith in ordinary circumstances such as alleged here, an excess
carrier could accept a pretrial settlement offer within the primary
insurer’s policy limits, knowing it could collect reimbursement from
the primary carrier for whatever settlement amount it, as the
“equitable subrogee,” paid. This outcome would occur regardless of
whether the primary carrier had fulfilled its contractual duty to its
insured to make settlement decisions reasonably and in good faith.
Were we to accept PPIC’s argument that equitable subrogation
applies where the excess insurer shows merely that it “had a
reasonable, good faith belief that it should make the payment to
19
settle the claim,” we would subvert a primary insurer’s contractual
right to control the insured’s case by effectively giving control of
settlement decisions to the excess insurer. That would incentivize
excess carriers to settle claims within primary policy limits without
regard to damages or liability, and with no risk to them.
E. As Applied to Equitable Subrogation Claims in the Insurance
Context, the Hicks Factors Are, At Best, Incomplete
¶ 37 In Hicks v. Londre, the court set forth specific requirements for
allowing equitable subrogation in mortgage/lien cases.1 Although,
at PPIC’s urging, the district court analyzed PPIC’s equitable
subrogation claim under these factors, we conclude that they have
limited relevance in the context of Colorado insurance law. The
Hicks factors were expressly tailored to the situation in that case,
where a creditor was seeking to leapfrog another creditor in priority
vis-a-vis the debtor’s real property because it had paid the
mortgagor’s obligations to the primary and secondary creditors.
1 Those factors are: (1) the subrogee made the payment to protect
his or her own interest; (2) the subrogee did not act as a volunteer;
(3) the subrogee was not primarily liable for the debt paid; (4) the
subrogee paid off the entire encumbrance; and (5) subrogation
would not work any injustice to the rights of the junior lienholder.
Hicks v. Londre, 125 P.3d 452, 456 (Colo. 2005).
20
But, what is “inequitable” in the insurance context is, as discussed,
tied to the insurance policy. See generally DeWitt, 218 P.3d at 323;
Unigard, 907 P.2d at 99. Importing into insurance cases the
requirements of equitable subrogation used in lien cases seems like
forcing the proverbial square peg into a round hole.
¶ 38 Moreover, as our supreme court has noted, “the roots of
equitable subrogation lie in the concept of remedying a mistake.”
Joondeph v. Hicks, 235 P.3d 303, 307 (Colo. 2010). Applying the
Hicks factors overlooks the central “mistake” in this context —
whether a primary insurer’s failure to settle was in bad faith.
Without that, there would be no wrong or mistake for equity to
remedy. See Steiger v. Burroughs, 878 P.2d 131, 135 (Colo. App.
1994); Fed. Deposit Ins. Corp. v. Mars, 821 P.2d 826, 832 (Colo.
App. 1991).
F. PPIC Was Required to Plead and Prove That TDC’s Refusal to
Accept the $1 Million Offer of Settlement Was Made in Bad Faith
¶ 39 We hold that in the insurance context, Colorado law
recognizes equitable subrogation only as a derivative right
dependent on the obligations of the insurance contract.
Consequently, PPIC could assert an equitable subrogation claim
21
against TDC only to the extent of Dr. Singh’s rights under his
insurance contract with TDC, which only obliged TDC to exercise its
discretion to settle reasonably under the circumstances. Goodson,
89 P.3d at 415.
¶ 40 However, in concluding that PPIC must plead and prove that
TDC acted in bad faith, we reject TDC’s proposed two-part bad faith
test, as set forth in Continental Casualty Co. v. Reserve Insurance
Co., 238 N.W.2d 862 (Minn. 1976), that would also require proof of
the insured’s liability. Under Colorado law, “[t]he basis for tort
liability is the insurer’s conduct in unreasonably refusing to pay a
claim and failing to act in good faith, not the insured’s ultimate
financial liability.” Goodson, 89 P.3d at 414; see Travelers Ins. Co.
v. Savio, 706 P.2d 1258, 1270 (Colo. 1985) (“[B]ad faith depends on
the conduct of the insurer regardless of the ultimate resolution of
the underlying compensation claim.”).
V. Disposition
¶ 41 PPIC argued in its reply brief in support of its summary
judgment motion that its claim
is premised on the general equitable remedy of
equitable subrogation, as fleshed out in the
Hicks standard. It is not premised on the
22
assertion that it has stepped into the shoes of
its insured, Dr. Singh, through its payment of
the settlement, and a follow-on argument that
Dr. Singh could make that TDC’s refusal to
settle was in bad faith.
PPIC made the same argument in opposing TDC’s motion to
dismiss. However, we have concluded that without an assertion
that TDC acted in bad faith, PPIC’s equitable subrogation claim is
not legally viable.
¶ 42 Therefore, because PPIC’s claim for recovery is not supported
by law, we reverse the district court’s order granting summary
judgment for PPIC and remand for entry of judgment of dismissal in
TDC’s favor. See, e.g., Goeddel v. Aircraft Fin., Inc., 152 Colo. 419,
382 P.2d 812 (1963) (dismissal is appropriate when there is an
absence of law supporting the plaintiff’s claim); Mahaney v. City of
Englewood, 226 P.3d 1214, 1220 (Colo. App. 2009) (reversing grant
of summary judgment in favor of appellee and remanding for entry
of judgment in favor of appellant); Geiger v. Am. Standard Ins. Co. of
Wis., 192 P.3d 480, 484 (Colo. App. 2008) (same).
¶ 43 The district court’s grant of PPIC’s summary judgment motion
is reversed, and the case is remanded to the district court to enter
summary judgment in TDC’s favor.
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JUDGE J. JONES and JUDGE RICHMAN concur.
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