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General Contractor's Insurer Has Subrogation Right Against Subcontractor Responsible For Loss

In Interstate Fire and Cas. Ins. Co. v. Cleveland Wrecking Co. (2010) 182 Cal.App.4th 23 (2010), the Court of Appeal ruled that a liability insurer can state a subrogation claim against a subcontractor that had agreed to defend and indemnify the insured and that had caused the loss that resulted in the suit against the insured. In doing so, the Court distinguished prior cases concluding otherwise.
Cleveland and Delta each entered into subcontracts to procure insurance with general contractor, Webcor, as an additional insured, and to defend and indemnify Webcor for liability arising out of each’s work. Delta obtained a policy from Interstate. Cleveland did not comply with the insurance requirement.
During operations on the project, Cleveland’s work injured Frisby, one of Delta’s employees. Frisby sued Webcor and Cleveland. Cleveland rejected Webcor’s tender. Interstate agreed to defend Webcor. Ultimately, Frisby settled with both defendants, and those settlements were found to be in good faith pursuant to California Code of Civil Procedure § 877.6.
Interstate then sued Cleveland to recover Webcor’s defense and indemnity costs. Cleveland demurred, contending that Interstate was not entitled to subrogation because it was not in a superior equitable position to Cleveland. The trial court agreed with Cleveland.
The Court of Appeal reversed, holding that the cases cited by Cleveland were distinguishable. In Meyers v. Bank of America, 11 Cal.2d 92 (1938), an office manager took checks payable to Meyers, forged them for his own use, and deposited them with a bank. Meyers was indemnified by his surety, and the surety pursued the bank in subrogation. The surety was barred from recovering from the bank because neither the surety nor the bank was the wrongdoer, but “[i]n equity, it cannot be said that that the satisfaction by the bonding company of its primary liability should entitle it to recover against the bank upon a totally different liability.”
In Patent Scaffolding Co. v. William Simpson Constr. Co., 256 Cal.App.2d 506 (1967), a general contractor failed to obtain fire insurance covering its subcontractor’s property as required by contract. A fire of unknown origin destroyed the subcontractor’s property. The subcontractor’s own insurers paid and then sued the general contractor. The insurers were held not entitled to subrogation because the general contractor did not cause the fire and the insurers were merely paying a loss that they had agreed to insure.
In contrast, the Interstate Court found that Interstate’s equitable position was superior to Cleveland’s on three grounds. First, Cleveland allegedly caused the loss that resulted in the suit against Webcor, and by extension, Interstate’s defense and indemnity costs. Second, even if Cleveland did not cause the loss, the equities might support Interstate where Cleveland contracted to indemnify and the loss arose under that contract. Patent Scaffolding was distinguishable because the general contractor there did not agree to indemnify, but agreed only to obtain insurance. Third, the fact that Interstate accepted premiums to insure the risk of loss did not defeat its subrogation claim because Cleveland also accepted payment for its agreement to defend and indemnify Webcor.
The Court also stated that the good faith settlement determination in the underlying case did not bar Interstate’s claim because only equitable, not contractual, indemnity claims by a nonsettling defendant are barred by the determination. As an insurer stands in the shoes of its insured in a subrogation action and Interstate was seeking contractualindemnity, its claims were not barred.
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