## Facts

- Safeway maintained layered liability protection: (1) Travelers as primary insurer for the first $50,000; (2) Safeway self-insured from $50,000 to $100,000; and (3) Commercial Union and Mission as excess insurers above $100,000 up to $20 million.
- In an underlying personal injury action against Safeway, judgment was entered for $125,000.
- The excess insurers paid $25,000 (the amount above the $100,000 combined primary and self-insured layers).
- The excess insurers alleged Safeway and Travelers could have settled the underlying claim for $50,000–$60,000, and that they knew or should have known there was a substantial risk of a judgment exceeding $100,000.
- The excess insurers sued Safeway and Travelers seeking reimbursement, pleading negligence and breach of the implied covenant of good faith and fair dealing based on failure to accept a reasonable settlement opportunity.
- The trial court sustained Safeway’s demurrer with leave to amend; the excess insurers declined to amend and the action was dismissed as to Safeway. The Court of Appeal affirmed.
- The California Supreme Court granted review to resolve whether, and on what theory, an insured and/or primary insurer can be liable to an excess insurer for an unreasonable failure to settle.

## Issues

1. Whether a primary liability insurer can be liable to an excess insurer for an unreasonable refusal to accept a reasonable settlement within primary limits when an excess judgment results.
2. Whether an insured can be liable to its excess insurer based on settlement-related conduct that foreseeably exposes the excess layer.
3. Whether an excess insurer may recover on a negligence theory, or must proceed under a bad-faith/implied-covenant theory (including equitable subrogation).

## Decision

- The court held that an excess insurer may pursue the primary insurer for a bad-faith failure to settle within limits when that conduct causes an excess judgment paid by the excess insurer.
- The excess insurer’s right to recover is grounded primarily in equitable subrogation to the insured’s rights against the primary insurer and the primary insurer’s implied-covenant duty in settlement decisions.
- The court rejected a standalone negligence theory as an adequate basis for liability for failure to settle; the governing standard is bad faith/unreasonable failure to settle under the implied covenant.
- The court clarified that settlement-related obligations in a primary–insured–excess relationship are evaluated through established bad-faith and subrogation doctrines rather than an expanded negligence-based regime.
- The court reversed the rulings to the extent they categorically foreclosed the excess insurer’s bad-faith/equitable-subrogation theory and remanded for further proceedings consistent with these principles.

## Legal Principles

- A primary liability insurer must give at least as much consideration to the insured’s interests as to its own when evaluating reasonable settlement opportunities within policy limits where there is a substantial risk of an excess judgment.
- An excess insurer that pays an excess judgment may sue the primary insurer by equitable subrogation to the insured’s rights for bad-faith (unreasonable) failure to settle within limits.
- Liability for failure to settle in this context is not established by mere negligence; the claim sounds in breach of the implied covenant of good faith and fair dealing (bad faith/unreasonable refusal to settle).
- The insured’s settlement-related conduct may be relevant to the excess insurer’s recovery analysis, but the excess insurer’s principal path to recovery is subrogation-based enforcement of the insured’s claim against the primary insurer.

## Conclusion

The California Supreme Court recognized that an excess insurer can recover from a primary insurer, via equitable subrogation, for a bad-faith failure to accept a reasonable settlement within primary limits that results in an excess judgment, while rejecting negligence as a sufficient theory for such recovery.


Commercial Union Assurance Companies v. Safeway Stores, Inc., 26 Cal. 3d 912, 610 P.2d 1038 (Cal. 1980)