The Nevada Supreme Court's Oct. 10 decision to accept a certified question from the U.S. Court of Appeals for the Ninth Circuit will likely shape the scope of equitable subrogation claims in Nevada.
In North River Insurance Co. v. James River Insurance Co., the Nevada Supreme Court will consider, "[u]nder Nevada law, can an excess insurer state a claim for equitable subrogation against a primary insurer where the underlying lawsuit settled within the combined policy limits of the insurers?"
According to the Nevada Supreme Court's 1993 decision in AT&T Technologies v. Reid, subrogation "is an equitable doctrine created to accomplish what is just and fair between the parties."[1] An equitable subrogation claim does not require a contract between the parties. Instead, it is an equitable remedy that "arises when one party has been compelled to satisfy an obligation that is ultimately determined to be the obligation of another," according to the AT&T ruling.[2]
Subrogation allows the subrogee to "assume the same … position" as the subrogor, according to the court's 2003 decision in Houston v. Bank of America.[3] In the insurance context, the state supreme court held in Arguello v. Sunset Station Inc., "an insurer that has paid a loss under an insurance policy [i.e., the subrogee] is entitled to all the rights and remedies belonging to the insured [i.e., the subrogor] against a third party."[4]
While the Ninth Circuit, on appeal in the North River case, stated that Nevada "generally recognizes the doctrine of equitable subrogation,"[5] it remains an open question whether Nevada allows an excess insurer to recover from a primary insurer where the insurers resolved an underlying lawsuit within their collective policy limits. This question will be decided in North River Insurance v. James River Insurance. In the past, the issue has turned on the question of damages.
Case Background
The case arrives at the Nevada Supreme Court after North River, the excess insurer, paid $4 million of a $5 million settlement to resolve underlying litigation arising out of a murder at a Las Vegas apartment complex. The underlying litigation — alleging negligence and wrongful death against the insured owner of the apartment complex — was filed in 2019.
According to the facts as presented in the certification order,[6] the primary insurer, James River, actively defended the underlying litigation. Between March 2019 and November 2021, the primary insurer apparently rejected a number of settlement demands from the plaintiffestate in the underlying litigation, "all at or below the $1 million policy limit."
In August 2022, according to certification order, however, the excess insurer learned of another lawsuit against the insured owner of the apartment complex "involving a more recent murder" at the apartment complex. That lawsuit settled for $11 million after the deposition of the owner of the apartment complex. That same month, the plaintiff-estate increased its demand to $5 million.
The primary insurer subsequently decided to settle, and in November 2022, the case settled for $5 million. The primary insurer contributed its full policy limit of $1 million, and the excess insurer contributed the remaining $4 million.
Because the primary insurer had opportunities to settle at or below its policy limit, the excess insurer filed suit against the primary insurer. Through its equitable subrogation claim, the excess insurer argued that had it not stepped in to cover the costs of the settlement, the insured would have possessed a cause of action for breach of the implied covenant against the primary insurer. The excess insurer argued, under these circumstances, it had the right to step into the insured's shoes as subrogee to that cause of action.
The U.S. District Court for the Central District of California dismissed the case.[7] After performing a choice of law analysis, it held that while California permits claims such as the excess insurer's in this case, Nevada law did not allow an excess insurer to maintain a claim for equitable subrogation against a primary insurer when the underlying litigation settled within the insurers' combined policy limits.
The excess insurer appealed.[8]
On appeal, the Ninth Circuit recognized that the district court relied on two unpublished decisions from the Nevada Supreme Court. While those cases are not "mandatory precedent" in other actions under Nevada Rule of Appellate Procedure 36(c), the Ninth Circuit recognized that in those unpublished cases the Nevada Supreme Court rejected an equitable subrogation claim brought by an excess insurer against a primary insurer because the excess insurer had "no damages" where the underlying settlement did not "exceed[] the collective policy limits."[9]
Despite recognizing the Nevada Supreme Court's 2023 ruling in Aspen Specialty Insurance Co. v. Eighth Judicial District Court, in its certification order, the Ninth Circuit highlighted a potential conflict to be resolved by the Nevada Supreme Court.
The Ninth Circuit noted that "Nevada generally recognizes the doctrine of equitable subrogation."[10] And further, "where Nevada law is less developed on an issue, such as equitable subrogation, Nevada courts have looked to the law of other states, including California."[11]
The Ninth Circuit explained that because the prior, unpublished cases were merely persuasive and because California law recognizes an equitable subrogation action in circumstances such as the case at issue, it "believe[s] that the Nevada Supreme Court should be the first to determine whether equitable subrogation is permitted between two insurers in this context."[12]
As mentioned above, the issue has been a question of damages.
In both of its prior, unpublished decisions, the Nevada Supreme Court rejected an insurer's attempt to seek equitable subrogation where the underlying settlement did not exceed the available policy limits because, absent an excess judgment (or settlement), the insured suffered no damages.[13]
Absent damage, the insured possesses no viable underlying claim. Thus, the insurer also lacks a viable claim because, as explained above, subrogation merely allows the subrogee to "assume the same … position" as the subrogor.[14] North River, the excess insurer, will argue otherwise.
Should the Nevada Supreme Court side with North River, it could expand the scope of equitable subrogation claims in Nevada.
For instance, in California, the lack of an excess judgment against the insured in the underlying litigation does not preclude an excess insurer's claim for equitable subrogation and breach of the duty to settle against a primary insurer.[15] Thus, in the context of an equitable subrogation claim brought by an excess insurer against a primary insurer, California courts have not required the excess insurer to demonstrate that the insured suffered damages.[16]
It remains to be seen whether the Nevada Supreme Court will adopt California's path, which focuses on the excess insurer's damages, or continue to require excess insurers to demonstrate that the insured possessed a viable underlying claim that forms the basis of the excess insurer's subrogation claim.
References
[1] AT&T Technologies v. Reid, 109 Nev. 592, 855 P.2d 533, 535 (Nev. 1993).
[2] Id.
[3] Houston v. Bank of Am. Fed. Sav. Bank, 119 Nev. 485, 488, 78 P.3d 71, 73 (2003) (citation omitted).
[4] Arguello v. Sunset Station, Inc., 127 Nev. 365, 368, 252 P.3d 206, 208 (2011) (citations, quotations omitted).
[5] North River Ins. Co. v. James River Ins. Co., 116 F.4th 855, 2024 U.S. App. LEXIS 21807 (9th Cir. Aug. 28, 2024) (citing In re Fountainebleau Las Vegas, 128 Nev. 556, 572 n. 8, 289 P.3d 1199 (2012)).
[6] James River Ins. Co., 116 F.4th 855, 2024 U.S. App. LEXIS 21807 (9th Cir. Aug. 28, 2024) (citing In re Fountainebleau Las Vegas, 128 Nev. 556, 572 n. 8, 289 P.3d 1199 (2012)).
[7] North River Ins. Co. v. James River Ins. Co., 2:23-cv-00027-PSG-E (C.D. Cal.).
[8] See James River Ins. Co., 116 F.4th 855, 2024 U.S. App. LEXIS 21807 (9th Cir. Aug. 28, 2024).
[9] See Aspen Specialty Ins. Co. v. Eighth Jud. Dist. Ct., 528 P.3d 287 (Nev. 2023); see also, St. Paul Fire & Marine Ins. Co. v. Nat'l Union Fire Ins. Co., 521 P.3d 418 (Nev. 2022).
[10] James River Ins. Co., 116 F.4th 855, 2024 U.S. App. LEXIS 21807 (9th Cir. Aug. 28, 2024) (citing In re Fontainebleau Las Vegas Holdings, 128 Nev. 556, 572 n.8 (2012) ("This court has recognized the doctrine of equitable subrogation in a variety of situations.")).
[11] Id. (citing Mort v. United States, 86 F.3d 890, 893 (9th Cir. 1996) ("Where Nevada law is lacking, its courts have looked to the law of other jurisdictions, particularly California, for guidance. In accordance with this practice, we have looked to the law of other states when necessary to supplement Nevada's law on equitable subrogation.") (internal citations omitted); Zurich Am Ins. Co. v. Aspen Specialty Ins. Co., 2021 WL 3489713 at *3 (D. Nev. Aug. 6, 2021) ("[The court] look[s] to California law for guidance because the Supreme Court of Nevada often does that when deciding an issue of first impression.").)
[12] James River Ins. Co., 116 F.4th 855, 2024 U.S. App. LEXIS 21807 (9th Cir. Aug. 28, 2024).
[13] See Aspen Specialty Ins. Co. v. Eighth Jud. Dist. Ct., 528 P.3d 287 (Nev. 2023); see also, St. Paul Fire & Marine Ins. Co. v. Nat'l Union Fire Ins. Co., 521 P.3d 418 (Nev. 2022).
[14] Houston v. Bank of Am. Fed. Sav. Bank, 119 Nev. 485, 488, 78 P.3d 71, 73 (2003) (citation omitted).
[15] See Ace American Ins. Co. v. Fireman's Fund Ins. Co., 2 Cal. App. 5th 159, 164 (Cal. Ct. App. 2016).
[16] See id.; Northwestern Mut. Ins. Co. v. Farmers Ins. Group, 76 Cal. App. 3d 1031, 1051 (Cal. Ct. App. 1978) ("an excess insurer which has settled and discharged the insured's liability may recover from the primary insurer an amount in excess of the primary insurer's policy limits if the excess insurer can prove the primary insurer's unreasonable refusal to settle within its policy limits resulted in loss to the excess insurer in an amount in excess of the policy limits of the primary insurer it would not otherwise have had.").
Reprinted with permission of Law360.
