Preferred Professional Insurance Co. v. The Doctors Company

2018 COA 49, 419 P.3d 1020

• Court: Colorado Court of Appeals
• Decided: April 5, 2018
• Docket: 17CA0405
• Status: Published

Opinion

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.

23 JUDGE J. JONES and JUDGE RICHMAN concur.