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Rhode Island Court Allows Subrogated Insurer to Pursue Bad Faith Claims

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Columbia Casualty Co. v. Ironshore Specialty Ins. Co., No. 15-197-ML, 2016 WL 2930927 (D.R.I. May 19, 2016). A Rhode Island federal district judge allowed Ironshore Specialty Ins. Co.’s bad faith claim against Columbia Casualty Company to proceed. Ironshore alleged Columbia acted in bad faith by failing to settle a medical malpractice action against a hospital within Columbia’s policy limits, thereby exposing Ironshore to excess liability. Elizabeth and Carl Beauchamp, plaintiffs in the underlying medical malpractice suit, claimed Mr. Beauchamp was permanently injured during his stay at Rhode Island Hospital in 2009. The hospital was self-insured for $6 million and had a first excess policy with Columbia for $15 million and a second excess policy with Ironshore for $11 million. Prior to trial Columbia had an opportunity to settle for $15 million but declined to offer more than $1.25 million. Columbia directed defense counsel to concede liability and causation, leaving only damages for trial. On the second day of trial, Columbia negotiated a “high-low” agreement under which guaranteed a minimum recovery of $15 million and a maximum recovery of $31.5 million. Ironshore consented to this agreement. The jury returned a verdict for $25.59 million plus interest, exceeding the $31.5 million maximum under the high- low agreement. Ironshore was thus exposed to $11,011,044, and demanded reimbursement from Columbia. Columbia initiated a declaratory judgment action seeking a ruling that it was not obligated to pay Ironshore’s share of the damages. Ironshore counterclaimed, seeking reimbursement as the contractual and equitable subrogee of the insured, based upon common law and statutory bad faith. Columbia brought a motion to dismiss these claims under FRCP 12 (b)(6).

The Court adopted the portions of a Magistrate’s Report and Recommendation that allowed the bad faith claims to proceed. It found that the high-low agreement did not result in a settlement of the underlying litigation, but merely set upper and lower limits to damages determined by a potential jury verdict, so it did not preclude the bad faith claims. It found that the Rhode Island statutory codification of insurance bad faith claims did not supplant common law bad faith claims. It also found that Ironshore had standing to assert the statutory bad faith claims as well, as the subrogee of the insured. Thus it denied the motion to dismiss.