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A unit of Great American Insurance Co. can assert a subrogation claim as a second-level excess insurer against a first-level excess insurer that is a unit of Zurich North America, an appeals court has ruled.
The dispute between Steadfast Insurance Co., a unit of Schaumburg, Ill.-based Zurich, and Great American Assurance Co., a unit of Cincinnati-based Great American, involves insurance policies issued to the Grand River Dam Authority in Vinita, Okla., according to Tuesday's ruling by the 10th U.S. Circuit Court of Appeals in Steadfast Insurance Co. v. Agricultural Insurance Co., now known as Great American Assurance Co.
Steadfast issued successive insurance policies providing the authority with first-level excess general liability coverage from 1993 through 2002, and defended it against a number of flooding claims made during the period, according to the ruling.
Although the flooding at issue spanned the entire nine-year period of coverage, Steadfast and the authority agreed the amounts Steadfast paid on those claims would be allocated to a single Steadfast policy, the 1993-94 policy, said the ruling.
During this same time period, Great American provided the authority with second-level excess liability insurance, which was triggered once Steadfast reached its policy limits for a given year.
At one point in the proceedings, Steadfast agreed to pay the full amount remaining on the 1993 Steadfast policy, or about $8.5 million, to satisfy the mediated claims, according to the lower court ruling.
In its lawsuit, Great American contended that Steadfast artificially allocated all of the flooding claims it paid on the authority's behalf to Steadfast's 1993-94 policy, “wrongfully triggering” its second-level excess coverage for the year. It also accused Steadfast of breach of duty, good faith and fair dealing.
After a trial, a Tulsa, Okla., federal Judge Gregory K. Frizzel ruled in Steadfast's favor. Great American appealed.
The 10th Circuit asked the Oklahoma Supreme Court to consider the issue. The Oklahoma Supreme Court held that “a second-level excess insurer can assert a claim for equitable subrogation against a first-level excess insurer under the circumstances in this case.”
Based on the state Supreme Court's decision, the appeals court panel ruled unanimously to reverse Judge Frizzel's ruling in favor of Steadfast on the subrogation issue. The appeals court did, however, uphold his ruling that Steadfast had not breached an implicit duty of good faith and fair dealing.
“While both Steadfast and (Great American) had a contractual relationship with (the authority), the insurers did not have contractual relationship between themselves from which such an implied duty could arise,” the appeals court said.