Insurance Coverage & Bad Faith Newsletter - Summer 2020

Charles Carter v. Pulte Home Corporation

(Intervening Insurer Is Not Entitled to Equitable Subrogation From Subcontractors in Connection with Costs of Defending Construction Defect Lawsuit)

(August 2020) - In Carter v. Pulte Home Corp., __Cal.App.5th__(July 23, 2020), the California Court of Appeal affirmed the entry of judgment in favor of subcontractors in connection with a Complaint for Intervention based on equitable subrogation filed by Travelers Property Casualty Company of America (“Travelers”) seeking to recover defense costs incurred in defending Pulte Home Corporation (“Pulte”) in an underlying construction defect lawsuit. The parties’ dispute arose out of Travelers’ defense of Pulte as an additional insured under policies issued to four subcontractors involved in the underlying construction defect lawsuit. Several subcontractors involved in the underlying construction defect lawsuit refused to defend Pulte based on the indemnity clauses in their subcontracts. Such clauses promised to indemnify Pulte as follows:

“all liability, claims, judgments, suits, or demands for damages to persons or property arising out of, resulting from, or relating to Contractor’s performance of work under the Agreement (“Claims”) unless such Claims have been specifically determined by the trier of fact to be the sole negligence of Pulte. . . .”

Pulte eventually settled the construction defect lawsuit and its claims against all of the subcontractors. Travelers ultimately paid $320,491.82 for Pulte’s defense and recovered $164,400 from some of the subcontractors. Travelers’ intervention in the underlying lawsuit was intended to recover the remaining $156,091.82 from the subcontractors that refused to indemnify Pulte for the defense of the construction defect lawsuit. In the underlying trial, Travelers argued that the subcontractors were obligated to pay defense costs on a joint and several basis (minus what Travelers had already recovered). The trial court did not agree and held that Travelers was not entitled to equitable subrogation for the remaining defense costs.

In affirming the trial court’s decision, the Court of Appeal explained equitable subrogation as follows:

“Subrogation is the ‘substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt of claim.’ (Fireman’s Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1273, 1291.) ‘In the case of insurance, subrogation takes the form of an insurer’s right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid. [Citations.]’ (Id. at pp. 1291 – 1292.) ‘The subrogated insurer is said to “‘stand in the shoes’” of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured. Thus, an insurer cannot acquire by subrogation anything to which the insured has no rights, and may claim no rights which the insured does not have.’ (Id. at p. 1292.)” (Interstate Fire & Casualty Ins. Co. v. Cleveland Wrecking Co. (2019) 182 Cal.App. 4th 23, 31-32 (Cleveland Wrecking).)

“ ‘ “As now applied [the doctrine of equitable subrogation] is broad enough to include every instance in which one person, not acting as a mere volunteer or intruder, pays a debt for which another is primarily liable, and which inequity and good conscience should have been discharged by the latter.” [Citations.]’ (Caito v. United California Bank (1978) 20 Cal. 3d 694, 704.) (Fireman’s Fund Ins. Co. v. Maryland Casualty Co., supra, 65 Cal.App.4th at p. 1292 (Fireman’s Fund).)

“ ‘The essential elements of an insurer’s cause of action for equitable subrogation are as follows: [1] the insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer; [2] the claimed loss was one for which the insurer was not primarily liable; [3] the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; [4] the insurer has paid the claim of its insured to protect its own interest and not as a volunteer; [5] the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer; [6] the insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends; [7] justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and [8] the insurer’s damages are in a liquidated sum, generally the amount paid to the insured.’ (Fireman’s Fund [supra,] 65 Cal.App.4th at p. 1292.)” (Cleveland Wrecking, supra, 182 CalApp.4th at pp. 33-34.)

The Court of Appeal reasoned that since Travelers took an “all or nothing” approach to recovering defense costs from the subcontractors, it was not entitled to equitable subrogation. Hence, Travelers could not satisfy elements 3 (primarily liable), 7 (justice requires that the loss be shifted entirely), and 8 (damages are in a liquidated sum) required to prevail on an equitable subrogation claim. The Court of Appeal reasoned that based on California law regarding contractual indemnity, Travelers was only entitled to recover allocated shares of defense costs from the subcontractors based on their work at issue in the construction defect lawsuit, and not all of the costs on a joint and several basis.

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