INTERSTATE FIRE AND CASUALTY INSURANCE COMPANY, Plaintiff
and Appellant, v. CLEVELAND WRECKING COMPANY, Defendant and
Respondent.
A124920
COURT OF APPEAL OF CALIFORNIA, FIRST APPELLATE DISTRICT,
DIVISION FIVE
2010 Cal. App. LEXIS 212
February 22, 2010, Filed
PRIOR HISTORY:
Superior Court of San Francisco County, No. 475134, Patrick J. Mahoney,
Judge.
COUNSEL: Kenney & Markowitz, David W. Gordon for Plaintiff and Appellant.
Seyfarth Shaw, Lawrence E. Butler and Jonathan A. Braunstein for Defendant
and
Respondent.
JUDGES: Opinion by Needham, J., with Simons, Acting P. J., and Bruiniers,
J.,
concurring.
OPINION BY: Needham
OPINION
NEEDHAM, J.--Interstate Fire and Casualty Insurance Company (Interstate)
appeals from a judgment entered after the court sustained, without leave to
amend, a demurrer to Interstate's amended complaint against Cleveland
Wrecking
Company (Cleveland). Interstate contends the court erred because: (1) its
subrogation complaint, based on its insured's contractual indemnification
claim
against Cleveland, was not barred by Cleveland's good faith settlement in
the
underlying litigation; and (2) Cleveland's equities were not equal to or
superior to those of Interstate as a matter of law. We agree with
Interstate,
and the judgment and the order sustaining the demurrer will be reversed.
I. FACTS AND PROCEDURAL HISTORY
We derive the relevant facts from the allegations of the operative
pleading,
Interstate's first amended complaint.
A. The Parties and the Underlying Frisby Litigation
Webcor Construction, Inc. (Webcor) was the general contractor for a
construction project in San Francisco. Cleveland Wrecking Company
(Cleveland)
was a subcontractor responsible for certain demolition work. Delta Steel
Erectors (Delta) was a subcontractor engaged in the installation of steel
stairways.
Cleveland and Delta each entered into similar subcontracts with Webcor,
by
which they undertook to indemnify Webcor for liability arising out of their
work
and to procure general liability insurance with Webcor as an additional
insured.
In particular, section 15.1.1 of the agreement between Webcor and
Cleveland
(the Agreement) obligated Cleveland to indemnify "Contractor" (Webcor), to
the
extent set forth therein, from "claims, demands, causes of action, damages,
costs, expenses, actual attorney's fees, losses or liability, in law or in
equity, of every kind and nature whatsoever ('Claims') arising out of or in
connection with Subcontractor's operations to be performed under this
Agreement
for, but not limited to ... Personal injury ... caused or alleged to be
caused
in whole or in part by any negligent act or omission of Subcontractor
[Cleveland]." Under section 15.1.2, Cleveland was required to, at its "own
cost,
expense and risk, defend all Claims as defined in Section 15.1.1" by third
parties, pay any judgment, and reimburse Webcor and certain others for legal
expenses they incurred.
Although both Cleveland and Delta had agreed to procure liability
insurance
with Webcor as an additional insured, only Delta complied with the
obligation.
Interstate issued to Delta a written commercial general liability policy in
effect from July 1, 2003, to July 1, 2004. Webcor was an additional insured.
1. Frisby's Injury
On April 29, 2004, Cleveland's employees were moving debris to an area
where
it could be loaded onto trucks. They had been warned that Delta's employees
were
working in areas below them, and that Delta's employees were being showered
by
debris dislodged by Cleveland's operations. One of Delta's employees,
ironworker
Thelbert Allen Frisby (Frisby), was working in a stairwell below an opening
in
the floor on which Cleveland's employees were moving the debris.
To move the debris, Cleveland's Bobcat operator drove a loader bucket
into
the pile of debris, and then backed up with the load to move it. This
repeated
process moved the pile of debris closer to the opening and ultimately into a
slab grabber, which became dislodged and fell into the opening where Frisby
was
working. The slab grabber struck Frisby and caused significant injury.
2. Frisby's Complaint
Frisby filed a workers' compensation claim against his employer Delta. In
addition, he filed a lawsuit against Webcor and Cleveland in San Francisco
Superior Court.
In Frisby v. Cleveland Wrecking Company et al., San Francisco Superior
Court
Case No. CGC-05440636, Frisby sought to recover for personal injuries he
sustained in the accident, alleging a cause of action against Cleveland for
negligence and causes of action against Webcor for negligence, premises
liability, and negligent provision of unsafe equipment. Among other things,
Frisby alleged that Cleveland breached its duty to perform work in a safe
manner
by failing to use reasonable care to prevent damage to Frisby, whom it knew
or
should have known was working in an area below.
3. Webcor's Tender
Webcor tendered its defense and indemnification to Cleveland pursuant to
the
terms of the Agreement. Cleveland rejected the tender. Webcor also tendered
its
defense and indemnification to Interstate pursuant to the terms of the
Interstate-Delta Policy. Interstate accepted it.
4. Webcor's Cross-Complaint
Webcor filed a cross-complaint against Cleveland (and Delta) for express
indemnification, equitable indemnification, and breach of contract. Webcor
thereafter voluntarily dismissed its equitable indemnity and contribution
claims
with prejudice, but dismissed its cause of action for express indemnity and
breach of contract without prejudice. The parties expressly reserved their
rights with respect to an Interstate subrogation claim in a separate action.
5. Settlement of Frisby
In July 2007, Webcor and Frisby entered into a settlement by which Webcor
would pay Frisby $ 575,000 and Frisby would dismiss his claims against
Webcor.
The court approved their agreement as a good faith settlement under Code of
Civil Procedure section 877.6. Interstate funded the $ 575,000 settlement
payment and additionally paid over $ 152,000 for the attorney fees and costs
incurred in defending Webcor against Frisby's claims.
Cleveland also entered into a settlement with Frisby, which the court
approved as a good faith settlement as well. (Code Civ. Proc., § 877.6.)
B. The Subrogation Litigation
In the matter before us, Interstate filed a complaint for subrogation
against
Cleveland, alleging that Cleveland had breached its contract with Webcor by
failing to defend and indemnify Webcor in Frisby.
Cleveland filed a general demurrer, contending that Interstate was not
entitled to subrogation as a matter of law, because it was not in a superior
equitable position to Cleveland, and because Cleveland's alleged breach of
contract had not caused any damage. The court sustained the demurrer with
leave
to amend, allowing Interstate to allege how Cleveland's tortious conduct
gave
rise to the loss.
In its first amended complaint, Interstate realleged Cleveland's breach
of
its agreement to defend and indemnify Webcor. Interstate further alleged
that
Cleveland's negligence was a proximate cause of Frisby's injuries, and that
Cleveland had violated its subcontract by failing to obtain insurance
covering
Webcor. Interstate sought judgment for all amounts it spent to defend
against
and settle the claims against Webcor in Frisby, alleging it was subrogated
to
Webcor's claims against Cleveland for breach of its express contractual
indemnity obligation. Attached to the first amended complaint were the
Webcor-Cleveland subcontract and the Interstate-Delta Policy, provision 8 of
which set forth a subrogation clause: "If the insured has rights to recover
all
or part of any payment we have made under this Coverage Part, those rights
are
transferred to us. The insured must do nothing after loss to impair them. At
our
request, the insured will bring 'suit' or transfer those rights to us and
help
us enforce them."
Cleveland filed a general demurrer, again arguing that Interstate lacked
the
superior equities required for subrogation and that Webcor did not incur
damages
by Cleveland's alleged breach of the indemnification provision. Cleveland
requested judicial notice of files and records including the good faith
settlement order and dismissal in Frisby.
The court sustained Cleveland's demurrer without leave to amend. By
written
order, the court explained: "The good faith settlement in the Frisby case
cut
off Webcor's ability to sue Cleveland for indemnity or contribution for its
alleged negligent conduct. At the same time, Webcor has no claim against
Cleveland for Cleveland's breach of its duty to defend Webcor because Webcor
has
sustained no damages as a consequence of the breach. It is for this reason
that
Interstate's equitable position is not superior to Cleveland's equitable
position. [Citations.]"
A judgment of dismissal was entered, and this appeal followed.
II. DISCUSSION
Interstate contends the trial court erred in sustaining the demurrer for
two
reasons: (1) the good faith settlement between Cleveland and Frisby did not
bar
Interstate from proceeding against Cleveland on a claim for breach of an
express
contractual indemnification provision; and (2) the court erred in concluding
that Webcor suffered no damages from Cleveland's alleged breach of the
Agreement
and that Interstate's equitable position was therefore not superior to
Cleveland's.
In reviewing an order sustaining a demurrer, we assume the truth of all
well-pleaded material facts, as well as those facts that may be implied or
inferred from the express allegations. (Blank v. Kirwan (1985) 39 Cal.3d
311,
318 [216 Cal. Rptr. 718, 703 P.2d 58].) We consider as well any matters that
may
be judicially noticed. (Ibid.) We then determine de novo whether the
allegations
stated any cause of action as a matter of law. (Ibid.) Where, as here, the
demurrer is sustained without leave to amend, we determine if necessary
whether
the plaintiff established a reasonable possibility that the defect in the
complaint could be cured by amendment. (Zelig v. County of Los Angeles
(2002) 27
Cal.4th 1112, 1126 [119 Cal. Rptr. 2d 709, 45 P.3d 1171].)
After a brief review of the nature of subrogation, we address the
parties'
contentions.
A. Subrogation
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 or
claim." (Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65
Cal.App.4th
1279, 1291 [77 Cal. Rptr. 2d 296].) "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 pp. 1292-1293.)
Usually, a general liability insurer that has paid a claim to a third
party
on behalf of its insured may have an equitable right of subrogation against
(1)
other parties who contributed to the harm suffered by the third party (joint
tortfeasors) under an equitable indemnification theory, and (2) other
parties
who are legally liable to the insured for the harm suffered by the third
party
(such as by an indemnification agreement) under a contractual indemnity
theory.
As we shall see, a good faith settlement will preclude claims based on an
equitable indemnity theory but not claims based on a contractual indemnity
theory, yet subrogation may not be obtained even as to contractual indemnity
claims unless the insurer is in an equitable position superior to that of
the
defendant.
B. Effect of Good Faith Settlement
A determination that a settlement was made in good faith bars the
nonsettling
defendants from asserting claims against the settling tortfeasor for
equitable
comparative contribution and partial or comparative indemnity. (Code Civ.
Proc.,
§ 877.6, subd. (c).) Because an insurer stands in the shoes of its insured
in a
subrogation action, the insurer cannot pursue those types of indemnity
claims
against the settling tortfeasor. (See Wilshire Ins. Co. v. Tuff Boy Holding,
Inc
. (2001) 86 Cal.App.4th 627, 631-633, 640 [103 Cal. Rptr. 2d 480].)
However, a good faith settlement order does not bar a non-settling
tortfeasor
from asserting an indemnification claim against the settling defendants
based on
an express contract. (Bay Development, Ltd. v. Superior Court (1990) 50
Cal.3d
1012, 1031-1032 [269 Cal. Rptr. 720, 791 P.2d 290] [good faith settlement
bars
claim for implied contractual indemnity, but not express contractual
indemnity];
Plant Insulation Co. v. Fibreboard Corp. (1990) 224 Cal.App.3d 781, 790 [274
Cal. Rptr. 147]; C.L. Peck Contractors v. Superior Court (1984) 159
Cal.App.3d
828, 834 [205 Cal. Rptr. 754] ["We hold that an indemnity claim against a
codefendant based on express contract survives a good faith [Code of Civil
Procedure] section 877.6 settlement"].) Because an insurer stands in the
shoes
of its insured, the insurer can pursue a cause of action against the
settling
tortfeasor for breach of an express contractual indemnification clause.
Interstate's first amended complaint against Cleveland sets forth a claim
for
express contractual indemnity, based on Cleveland's refusal to defend and
indemnify Webcor under the terms of the Agreement. The claim is not barred
by
the good faith settlement determination.
Cleveland argues that Interstate's claim for express contractual
indemnity
does not seek damages resulting from Cleveland's alleged contractual breach,
but
rather seeks to recover tort damages resulting from Cleveland's alleged
negligence, a liability precluded by the good faith settlement order under
Code
of Civil Procedure section 877.6. Cleveland is incorrect. As discussed post,
Interstate's allegations concerning Cleveland's negligence pertains neither
to
the legal theory of the indemnity claim nor the amount or nature of the
damages
alleged, but to the respective equities of the parties. The good faith
settlement does not bar Interstate from pursuing its cause of action for
express
contractual indemnification against Cleveland. 1
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -1 The
trial
court did not expressly rule that the good faith settlement barred
Interstate
from proceeding against Cleveland on a claim for breach of an express
indemnification provision. It ruled that the good faith settlement "cut off
Webcor'[s] ability to sue Cleveland for indemnity or contribution for its
alleged negligent conduct." (Italics added.) To the extent the court meant
that
Interstate's new allegations about Cleveland's tortious conduct did not
entitle
it to subrogate to any claim for equitable indemnification, it was correct.
However, the fact that Interstate was clearly purporting to subrogate to
Webcor's right to contractual indemnification required the trial court--and
now
requires this court--to determine whether subrogation is unavailable as a
matter
of law on other grounds.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
C. Elements of Subrogation
"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 Ins. Co. v. Maryland Cas. Co., supra, 65
Cal.App.4th at p. 1292.)
Cleveland contends that all but the fourth and eighth elements are not
met,
based largely on its specious contention that Webcor suffered no damages
from
Cleveland's alleged breach of the Agreement. We address each of the disputed
elements in turn.
1. The Insured Webcor Suffered a Loss for which Defendant Cleveland is
Liable
According to the allegations of the first amended complaint, Webcor
suffered
a loss in defending against the Frisby litigation and incurring the Frisby
settlement. It is further alleged that Cleveland is legally responsible to
Webcor for that loss under the terms of the indemnification provision in the
Agreement. These allegations satisfy this first element of a subrogation
claim.
Cleveland contends Webcor did not actually suffer any loss, because
Interstate paid the costs of defending against and settling Frisby's claims.
Because Interstate paid these costs, Cleveland concludes, Interstate cannot
subrogate to recover them.
Cleveland's position is untenable. The only reason Webcor had no
out-of-pocket expense was because its insurer, now seeking subrogation, made
the
payment. Under Cleveland's view, no insurer could ever state a cause of
action
for subrogation in order to recover amounts it paid on behalf of its
insured,
because of the very fact that it had paid amounts on behalf of its insured.
Not
only is this illogical, it contradicts decades of cases consistently holding
that an insurer may be equitably subrogated to its insured's indemnification
claims. (See, e.g., Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13
Cal.3d
622, 634 [119 Cal. Rptr. 449, 532 P.2d 97] (Rossmoor) [landowner's insurer
was
subrogated to the landowner's right of express contractual indemnification
against a contractor, where the insurer had paid the judgment for the
landowner]; Truck Ins. Exchange v. County of Los Angeles (2002) 95
Cal.App.4th
13, 27 [115 Cal. Rptr. 2d 179] (Truck) [hospital's insurer, which incurred
defense costs on hospital's behalf, was subrogated to hospital's cause of
action
against county for express contractual indemnity].) 2 Indeed, the insurer's
right to subrogation does not even arise unless it has paid for its
insured's
loss. (Smith v. Parks Manor (1987) 197 Cal.App.3d 872, 878-879 [243 Cal.
Rptr.
256] [where insurer reached a settlement agreement on behalf of its insured
to
pay the injured parties, the insured at that point had suffered a loss, the
insurer was subrogated to the insured's rights upon payment of the
settlement,
and it was "not necessary for [the insured] actually to pay the settlement
sum
out-of-pocket, then secure reimbursement, to suffer a loss"].)
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - -
-2 Cleveland
contends that Truck and Rossmoor are inapplicable because they did not
involve
good faith settlements. However, Cleveland does not explain why this
distinction
would make any difference. A good faith settlement might bar an equitable
indemnity claim, but not an express contractual indemnity claim.
Furthermore,
even though Webcor incurred its loss by way of a good faith settlement, it
still
incurred its loss.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Cleveland's argument apparently stems from a faulty reading of Bramalea
California, Inc. v. Reliable Interiors, Inc. (2004) 119 Cal.App.4th 468 [14
Cal.
Rptr. 3d 302] (Bramalea) and Patent Scaffolding Co. v. William Simpson
Constr.
Co. (1967) 256 Cal.App.2d 506 [64 Cal. Rptr. 187] (Patent Scaffolding).
Cleveland cites these cases for the proposition that the collateral source
rule
(which permits a plaintiff to recover against tortfeasors even though it has
been compensated by its insurer) applied only to a plaintiff's tort claims,
and
not to contract claims like the one asserted by Interstate. The collateral
source rule, however, pertains to whether an insured may recover on its own
behalf. (Bramalea, at p. 473 [insured could not recover in contract from
third
party where loss compensated by insurer].) It has nothing to do with whether
the
insurer can recover in subrogation on its insured's contractual
indemnification
claim. In fact, after the court in Patent Scaffolding discussed, as an
unnecessary aside, that the insured could not invoke the collateral source
rule,
the court returned to the subrogation issue before it: "Insurers' Equitable
Subrogation [¶] The fact alone that Patent could not recover from Simpson
because Patent suffered no loss does not defeat the insurers' subrogation
rights
." (Patent Scaffolding, at p. 511, italics added.) 3
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - -
-3 Another
way to look at the situation is this: Interstate's payment to Frisby and
payment
for Webcor's defense simultaneously satisfied both the first element of a
subrogation claim (Webcor's loss) and the third element (Interstate's
reimbursement of Webcor for the loss). Cleveland's insistence that Webcor
suffered no loss because Interstate paid Frisby, and Interstate therefore
suffered no loss because it stands in the shoes of its insured, is circular
and
erroneous.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
2. The Loss Was One for which the Insurer Was Not Primarily Liable
The "loss," for purposes of this analysis, is the amount incurred in
defending Webcor and settling Frisby's claims against Webcor. The liability
for
this amount was arguably on the shoulders of Cleveland (under the
Agreement),
Delta (under the Webcor-Delta contract), and Interstate (under the
Interstate-Delta policy, with Webcor as an additional insured). In its first
amended complaint, however, Interstate alleged: "Cleveland is solely
responsible
for the costs of defense and settlement of Frisby's claims against Webcor."
(Italics added.) Cleveland does not demonstrate that another allegation, or
any
other matter subject to consideration at the demurrer stage, establishes
that
Interstate was primarily liable for the loss.
Cleveland's only argument on this point is that Delta and Cleveland did
not
bear "more or less primary liability than the other," since both of them had
entered into contracts by which they were obligated to defend and indemnify
Webcor. Cleveland has not demonstrated why that would make Interstate
primarily
liable. For purposes of Cleveland's demurrer, this element of subrogation
was
met.
3. The Insurer Compensated the Insured for the Loss
Interstate compensated Webcor for the defense and settlement in Frisby,
by
paying Frisby and Webcor's attorneys. Cleveland nonetheless argues that
Interstate made those payments because of its obligations under the
Interstate-Delta insurance policy, and not because of Cleveland's
contractual
breach of the indemnification provision or its alleged negligence in causing
Frisby's injuries. However, regardless of why Interstate made the payments,
it
made the payments. Indeed, it can always be said that an insurer has
compensated
its insured because it had to under its insurance policy. Cleveland provides
no
authority for its suggestion that subrogation must be denied on this ground.
4. The Insured Has a Cause of Action Against the Defendant
This element asks whether Webcor would have an assignable cause of action
against Cleveland "had it not been compensated for its loss" by Interstate.
(
Fireman's Fund Ins. Co. v. Maryland Cas. Co., supra, 65 Cal.App.4th at p.
1292.)
The first amended complaint satisfies this element, alleging that, under the
terms of the Webcor-Cleveland contract, Cleveland had a duty to defend and
indemnify Webcor, and it breached that duty by failing to do so. Webcor
could
have pursued a cause of action against Cleveland had Interstate not made the
payments, and there is no contention the cause of action is of a type that
cannot be assigned.
Cleveland urges that Webcor does not have an existing cause of action
against
Cleveland because Webcor has already been fully compensated by Interstate.
This
argument is of course wrong, not only for the reasons stated above, but also
because it is directly contradicted by the wording of the subrogation
element
itself. The element--even as described in Cleveland's own brief--asks
whether
the insured has a cause of action against the defendant which it could have
asserted "had it not been compensated for its loss by the insurer." (Italics
added.) (See Fireman's Fund Inc. Co. v. Maryland Cas. Co., supra, 65
Cal.App.4th
at p. 1292.)
5. The Insurer Suffered Damages Arising from the Defendant's Act or Omission
Interstate has suffered damages by Cleveland's failure to indemnify
Webcor
for its costs of defense and settlement payment to Frisby. If Cleveland had
made
the payments, Interstate would not have had to make them.
Cleveland argues that Interstate has not actually suffered damages,
because
Interstate was obligated to defend and indemnify Webcor anyway under the
terms
of the insurance policy. However, this merely reflects Cleveland's view that
Interstate should have to pay, while Webcor alleges that Cleveland should
pay.
The fact that both Interstate and Cleveland were contractually obligated to
defend and indemnify Webcor in the Frisby litigation gives rise to the
question
of which of them is in a superior equitable position to the other. We
address
that issue next. 4
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -4 At
oral
argument, Cleveland noted that Interstate's insurance was stated to be
primary
insurance. The specification of insurance as primary with respect to other
potential competing insurance policies does not in itself mean that the
insurer's obligation to the insured kicks in before or notwithstanding the
contractual indemnification obligations of a third-party such as Cleveland.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
6. The Insurer's Superior Equitable Position
This element asks whether it is fair to shift the entire loss from
Interstate
to Cleveland, because Interstate's equitable position is superior to
Cleveland's. Based on the allegations of the first amended complaint in this
case, it can reasonably be inferred that Interstate's equitable position is
superior to that of Cleveland.
Cleveland, which had the burden in its demurrer to show that Interstate
cannot establish superior equities as a matter of law, relies on a number of
cases including Meyers v. Bank of America etc. (1938) 11 Cal.2d 92 [77 P.2d
1084] and Patent Scaffolding, supra, 256 Cal.App.2d 506. We summarize these
two
cases as a starting point, and conclude that neither they nor the other
cases on
which Cleveland relies support Cleveland's arguments.
In Meyers, an office manager obtained possession of checks payable to
Meyers,
forged them for his own use, and negotiated them with an individual
defendant.
The individual defendant in turn deposited them with the defendant bank,
which
accepted them. (Meyers, supra, 11 Cal.2d at p. 93.) Meyers was indemnified
for
his loss under a bond issued by his surety, and the surety pursued the bank
in
subrogation. (Id. at p. 94.) The court ruled that the surety could not
recover:
"[T]he right to maintain an action of this kind and to a recovery thereunder
involves a consideration of, and must necessarily depend upon the respective
equities of the parties. Here, the indemnitor [the surety company] has
discharged its primary contract liability. It has paid what it contracted to
pay, and has retained to its own use the premiums and benefits of such
contract.
It now seeks to recover from the bank the amount thus paid. It must be
conceded
that the bank is an innocent third party, and its duty to the employer was
based
upon an entirely different theory of contract [not disclosed in the
opinion],
with which the indemnitor was not in privity. Neither the indemnitor nor the
bank was the wrongdoer, but by independent contract obligation each was
liable
to the employer. In equity, it cannot be said that the satisfaction by the
bonding company of its primary liability should entitle it to recover
against
the bank upon a totally different liability. The bank, not being a
wrongdoer,
but in the ordinary course of banking business, paid money upon these
checks,
the genuineness of which it had no reason to doubt, and from which it
received
no benefits. The primary cause of the loss was the forgeries committed by
the
employee, whose integrity was at least impliedly vouched for by his employer
to
the bank. We cannot say that as between the bank and the paid indemnitor
[the
surety], the bank should stand the loss." (Id. at pp. 102-103, italics
added.)
Meyers is not on point. In that case, the bank played no part in the
underlying loss, and there is no indication that the bank's alleged
contractual
liability to Meyers was an express contractual obligation to indemnify
Meyers
for such a loss. The alleged facts in the matter before us are just the
opposite: Cleveland did allegedly contribute to the underlying loss (by
negligently causing Frisby's injuries), and Cleveland was allegedly
contractually obligated to indemnify Webcor for the loss.
A little closer to our case, but still plainly distinguishable, is Patent
Scaffolding. There, a subcontractor (Patent) was hired by a general
contractor
(Simpson) to perform certain work on a building. (Patent Scaffolding, supra,
256
Cal.App.2d at p. 508.) Their contract required Simpson to obtain fire
insurance
on Patent's property at the job site, but Simpson failed to do so. (Ibid.) A
fire of unknown origin destroyed Patent's property. (Ibid.) Patent's own
fire
insurers paid Patent for the loss, and then sought to subrogate to Patent's
rights against Simpson for the latter's failure to obtain the insurance.
(Ibid.)
The trial court permitted subrogation, finding that Simpson had agreed not
only
to obtain fire insurance but also to indemnify Patent against fire loss
(despite
the absence of an express indemnification provision in the contract). (Id.
at
pp. 508-509.)
The Court of Appeal reversed, holding that the insurers were not entitled
to
subrogation because Simpson did not cause the fire and the insurers were
merely
paying a loss that they had agreed to insure. The court explained: "The
insurers' loss was not caused by Simpson's failure to get insurance or to
indemnify Patent. The insurers' loss was caused by the fire, the very risk
which
each assumed, and Simpson's failure to perform its contractual duty had
nothing
to do with the fire." (Patent Scaffolding, supra, 256 Cal.App.2d at p. 512.)
The
court held: when "two parties are contractually bound by independent
contracts
to indemnify the same person for the same loss, the payment by one of them
to
his indemnitee does not create in him equities superior to the nonpaying
indemnitor, justifying subrogation, if the latter did not cause or
participate
in causing the loss." (Id. at p. 514.)
Under Patent Scaffolding and its progeny, Cleveland urges, Interstate is
precluded from subrogation. Specifically, Cleveland argues, Interstate's
loss
was not caused by Cleveland's failure to defend, indemnify, or obtain
insurance
for Webcor, but by the lawsuit Frisby brought for his injuries at the job
site,
which was one of the specific risks that Interstate accepted premiums to
cover.
Patent Scaffolding supports neither Cleveland's argument nor the trial
court's decision in this case, for three reasons: (1) Patent Scaffolding did
not
involve a situation where, as here, the defendant was alleged to have caused
the
loss; (2) even where the defendant has not caused the loss, the equities may
support the insurer where, as here, the defendant expressly promised to
indemnify (not just to obtain insurance) in a contract related to the
project
from which the underlying loss occurred; and (3) the insurer's receipt of
premiums to cover the type of loss that occurred, although a factor to be
considered, does not preclude it from being in an equitably superior
position to
another party that contractually agreed to indemnify.
a. Additional allegations that Cleveland caused the loss
Unlike the proposed indemnitor in Patent Scaffolding, Cleveland is not
only
alleged to be liable for the loss under a contractual provision, it is also
alleged to have caused the loss. Cleveland's alleged negligence toward
Frisby is
relevant to the respective equities of Interstate and Cleveland.
Instructive in this regard is Pylon, Inc. v. Olympic Ins. Co. (1969) 271
Cal.App.2d 643 [77 Cal. Rptr. 72] (Pylon), decided just two years after
Patent
Scaffolding. The court in Pylon stated: "The holding in the Patent
Scaffolding
case does not constitute a rule applicable to every situation in which an
insurer of an indemnitee seeks to hold the contractor-indemnitor on an
indemnity
contract." (Pylon, at p. 651.) The Pylon court cited our Supreme Court's
decision in Harvey Machine Co. v. Hatzel & Buehler, Inc. (1960) 54 Cal.2d
445 [6
Cal. Rptr. 284, 353 P.2d 924], in which the defendants had agreed in a
construction contract to indemnify a landowner for any liability imposed
against
the landowner, including for injuries to the defendants' employees. One of
the
defendants' employees was thereafter injured and sued the landowner. The
landowner and its liability insurance carrier sued the defendants;
defendants
were held obligated to indemnify the plaintiffs under the contractual
indemnification provision. The Pylon court observed: "The Harvey Machine Co.
case clearly holds that the insurance carrier of an indemnitee is subrogated
to
the right of the latter to obtain indemnification for loss paid by the
carrier
from an indemnitor whose active negligence, operating concurrently with the
negligence of the indemnitee, caused the loss." (Pylon, supra, 271
Cal.App.2d at
p. 652, italics added.) Pylon, therefore, teaches that an insurer is
subrogated
to its insured's express contractual indemnity claim against a party who
contributed toward the underlying loss, despite Patent Scaffolding. That is
the
situation alleged here.
Of additional and much more recent guidance is Truck, supra, 95
Cal.App.4th
13. There, a county and a hospital (Santa Marta) entered into an agreement
by
which Santa Marta would provide services for patients referred by the
county.
The county agreed, among other things, to refer only low-risk patients and
further agreed to indemnify Santa Marta for claims or damages. (Id. at p.
16.)
The county later referred a high-risk patient, Panduro, to Santa Marta, who
was
injured, as was her baby, during a breech birth. The Panduros sued the
county
and Santa Marta for her injuries. (Ibid.) The county refused to defend Santa
Marta, so Santa Marta's insurer (Truck) provided a defense. (Id. at p. 17.)
The
jury found that the county was negligent in causing the Panduros' injuries,
but
Santa Marta was not. (Ibid.) Truck thereafter sued the county in
subrogation,
based on the county's contractual obligation to indemnify and defend Santa
Marta
in the medical malpractice action. (Id. at p. 18.)
On appeal, the court held that Truck was entitled to equitable
subrogation,
because the county had caused the underlying loss. "County's negligent
referral
of a high-risk patient to Santa Marta resulted in injury to the Panduros,
precipitated the Panduros' lawsuit against County and Santa Marta, and made
it
necessary for Santa Marta to incur defense costs. Since Santa Marta was not
at
fault and County's misconduct was a substantial factor in causing Santa
Marta to
incur defense costs, we conclude that County is primarily liable and
equitably
should bear the entire obligation. We therefore conclude that Truck has
established a right of subrogation against County subject to any applicable
defenses that County may have." (Truck, supra, 95 Cal.App.4th at p. 27.)
As applied here, the first amended complaint alleges that Cleveland's
negligence caused Frisby's lawsuit, and precipitated the lawsuit against
Webcor
and Cleveland, which made it necessary for Webcor to incur the costs of
defense
and settlement. Since it is not alleged that Interstate (or even Webcor) was
at
fault, the allegations of the first amended complaint give rise to the
inference
that Cleveland should cover Webcor's defense and settlement costs.
There is, of course, a distinction between the circumstances of Truck and
the
facts of this case. Truck was decided after a trial had determined that the
insured (Santa Marta) was not negligent and the proposed indemnitor (county)
was
negligent. By contrast, this case comes after a pair of good faith
settlements
in which the insured (Webcor) and the proposed indemnitor (Cleveland) each
settled in purported relation to their respective degrees of liability. We
must
ask, therefore, whether the procedural posture of this case compels an
analysis
or result different from that in Truck. In particular, is it appropriate to
consider the extent to which Cleveland tortiously caused the loss (which
would
ordinarily be the subject of a claim for equitable indemnity), in
determining
whether Cleveland may be held liable for the loss under a subrogated claim
for
contractual indemnity, where the parties have already indicated by good
faith
settlements their proportionate culpability for the underlying injuries to
Frisby?
First, it must be emphasized--contrary to Cleveland's protestations--that
Interstate's allegations of Cleveland's negligence are not being used to
assert
an equitable indemnity claim. The only consideration of the extent to which
Cleveland caused the underlying loss (i.e. its alleged negligence in causing
Frisby's injuries) is to determine whether the equities tip in Interstate's
favor, so that Interstate may pursue in subrogation a contractual indemnity
claim. In other words, Interstate's indemnity claim is based solely on
Cleveland's contractual obligations (the indemnity provision), Cleveland's
breach of contract (not providing or paying for a defense or the settlement
of
Webcor's liability in Frisby), and the resulting contractual damages (the
costs
of defending against and settling Frisby's claims against Webcor). 5
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -5 Nor
are
the allegations of Cleveland's negligence being used to ascertain the extent
of
Cleveland's duty of contractual indemnity, which must be determined from the
contract rather than reliance on the doctrine of equitable indemnity.
(Rossmoor,
supra, 13 Cal.3d at p. 628.)
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Second, we see no reason that Cleveland's alleged negligence in causing
the
loss should be ignored in determining the respective equities of the
parties,
simply because Interstate is seeking to subrogate to a contractual indemnity
claim rather than an equitable indemnity claim. The court in Truck
considered
the county's negligence in permitting the insurer to pursue the county on a
contractual indemnification claim. Consideration of Cleveland's alleged
causation of the underlying loss is entirely consistent with the fundamental
proposition set forth in every relevant case the parties have cited: the
party
more responsible for the loss, or in a better position to avoid it, should
bear
the loss.
Third, we recognize that the good faith settlement order in the
underlying
case determined that the amount Cleveland paid to Frisby to settle the case
was
sufficiently proportionate to Cleveland's tort liability to Frisby.
Notwithstanding its good faith settlement, however, Cleveland should have
appreciated the risk that this litigation would ensue, because a good faith
settlement order does not bar contractual indemnity claims. 6
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - -
-6 Cleveland
asserts that the good faith settlement cuts off Cleveland's tort liability
and
precludes a finding that Cleveland was primarily responsible for Frisby's
injuries or that Delta or Webcor was not primarily responsible for them. It
cites to an order in Frisby simply providing that Webcor's and Cleveland's
good
faith settlement motions, being unopposed, were granted. Neither the order
nor
allegations in Frisby that Webcor contributed to the injuries demonstrate
dispositively that Webcor was the primary cause of harm. On this record,
Cleveland's conclusory assertion, unsupported by relevant legal authorities
or
record citations, does not establish that the good faith settlements
preclude
Interstate's cause of action as a matter of law.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
In the final analysis, consistent with authorities such as Patent
Scaffolding
, Pylon, and Truck, Interstate's allegations that Cleveland caused the
injuries
giving rise to the loss supports the inference that Interstate's equitable
position is superior to Cleveland's.
b. The nature and context of the parties' promises to indemnify
Aside from Cleveland's alleged cause of the underlying loss, another
factor
in the comparison of Interstate's and Cleveland's equities relates to the
nature
and context of their respective agreements to indemnify Webcor. While
Cleveland
agreed to indemnify Webcor in the subcontractor agreement pertaining to the
project from which the underlying injury arose, Interstate was a third-party
insurer uninvolved in the project.
In Fireman's Fund Ins. Co. v. Wilshire Film Ventures, Inc. (1997) 52
Cal.App.4th 553 [60 Cal. Rptr. 2d 591] (Wilshire), Wilshire Film Ventures,
Inc.
(Wilshire) leased camera equipment from Leonetti Company (Leonetti), under
an
agreement requiring Wilshire to return the equipment by a certain date or
pay
its value. (Id. at p. 555 & fn. 1 .) Through no fault of Wilshire, burglars
broke into a van and stole the equipment while it was on lease to Wilshire.
(
Ibid.) Wilshire refused to pay Leonetti for the equipment. (Ibid.) Leonetti
submitted a claim to its own insurer (Fireman's Fund), which paid the claim
and
filed a subrogation action against Wilshire for breach of its contractual
obligations. (Ibid.) A jury found for Fireman's Fund. (Ibid.)
On appeal, Wilshire cited Patent Scaffolding and argued that subrogation
was
inappropriate because Wilshire had not caused the burglary. (Wilshire,
supra, 52
Cal.App.4th at p. 556.) The Court of Appeal asserted: "Wilshire misses the
point." (Ibid.) Independent of who caused the burglary, the insurer could
pursue
its claim against Wilshire.
The court first distinguished Patent Scaffolding, because both parties in
that case (the insurer and Simpson) had agreed to indemnify the same loss,
since
both agreed to obtain insurance to cover potential fire damage; but
Fireman's
Fund and Wilshire had not agreed to indemnify the same loss, since Fireman's
Fund agreed to provide insurance while Wilshire agreed to pay for the
equipment
if it did not return it. (Wilshire, supra, 52 Cal.App.4th at p. 557.) 7
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -7 The
court
in Wilshire also explained a shortcoming in the Patent Scaffolding
reasoning:
"The problem with Patent Scaffolding's 'causal connection' approach is that
it
appears to preclude recovery in any case in which the defendant's negligence
is
not the cause of the insured's loss, a result inconsistent with the rule
articulated in Patent Scaffolding itself and the cases on which it relies.
As
noted at the outset, the first element of a subrogation claim is satisfied
if
the insurer proves that the insured suffered a loss for which the defendant
is
liable either (a) because the defendant is a wrongdoer whose act or omission
caused the loss or (b) because the defendant is legally responsible to the
insured for the loss causes by the wrongdoer." (Wilshire, supra, 52
Cal.App.4th
at p. 557.)
We find the reasoning of Patent Scaffolding puzzling on another ground.
The
court defended its ruling because "[t]he contest is not between two
insurance
companies, each of which has received premiums for bearing the loss which
ultimately occurred, but between insurers and a general contractor [Simpson]
who
received no independent consideration for the assumption of the risk." (
Wilshire, supra, 256 Cal.App.2d at p. 516.) This distinction suggests that
the
equitable positions of the insurers and Simpson were not equal, but favored
Simpson. On the same page of its opinion, however, the court indicated a
contrary view, declaring that "had Simpson first paid, it likewise would be
denied equitable subrogation against the insurers." (Ibid., italics added.)
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
The court then compared Fireman's Fund's insurance obligation with
Wilshire's
contractual obligation, and concluded that Wilshire's obligation to pay for
the
equipment if it was not returned made it primarily liable for the loss, even
though it had not caused the loss. (Wilshire, supra, 52 Cal.App.4th at p.
558.)
The court concluded: "It follows that, on our facts, Fireman's Fund's
position
is superior to Wilshire's position. Wilshire was obligated to return the
equipment or pay for it, not merely to provide insurance coverage. Wilshire
did
neither, and is therefore in breach of its contractual obligation. Fireman's
Fund, on the other hand, fully performed its contractual obligation by
paying
its insured the benefits due under its contract. As between these parties,
therefore, the equities are with Fireman's Fund and it is entitled to
recover
from Wilshire. [Citation.]" (Id. at pp. 558-559.) 8
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - -
-8 Cleveland
argues that Fireman's Fund Ins. Co. v. Wilshire Film Ventures, Inc. is
inapposite because it did not involve a good faith settlement. Patent
Scaffolding and other cases on which Cleveland relies did not involve a good
faith settlement either. In any event, Cleveland has not shown the
distinction
to be material, because a good faith settlement does not preclude the
express
contractual indemnity claim Interstate alleged.
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
Applying Wilshire to the matter at hand, Cleveland and Interstate did not
agree to indemnify the same loss. Cleveland agreed to indemnify and hold
harmless Webcor from all claims "arising out of or in connection with
[Cleveland's] operations to be performed under this Agreement," for, but not
limited to, personal injury (including bodily injury) to an employee of
another
subcontractor, "caused or alleged to be caused in whole or in part by any
negligent act or omission of Subcontractor." (Agreement, § 15.1.1.) It also
agreed to indemnify Webcor for losses or liability Webcor incurred for
Cleveland's failure to procure liability insurance with Webcor as an
additional
insured and other breaches of Cleveland's obligations. (Agreement, §§
15.1.1(f),
16.) By contrast, the Interstate insurance policy provided coverage to
Webcor
for amounts Webcor became legally obligated to pay as damages because of
bodily
injury to which the insurance applied, without limiting it to liability
arising
out of or in connection with Cleveland's operations to be performed under
the
Webcor-Cleveland subcontract. (See Pylon, supra, 271 Cal.App.2d at p. 648
[insurer and indemnitor under contract provision did not indemnify the same
risk].)
Furthermore, comparing Interstate's undertaking with Cleveland's
undertaking
tips the scale of equities in Interstate's favor. An entity which, like
Cleveland, agrees to indemnify the other party to the underlying transaction
has
a liability of greater primacy than an independent insurer that insures
against
loss. (See Wilshire, supra, 52 Cal.App.4th at pp. 558-559; Meyer Koulish Co.
v.
Cannon (1963) 213 Cal.App.2d 419, 423, 429 [28 Cal. Rptr. 757] (Meyer
Koulish)
[insurer was entitled to equitable subrogation against the party who had
agreed
to accept the risk of loss for consigned jewelry until its return to the
insured].) The parties directly involved in the transaction are better able
to
evaluate and control the risk. Therefore, for purposes of weighing the
equities
in an equitable subrogation case, and absent language in the insurance
policy or
indemnification agreement leading to a contrary conclusion (which the
parties
here do not contend), the Agreement between the parties who were connected
to
the incident giving rise to the loss (Webcor and Cleveland as workers at
Frisby's job site) creates the greater equitable responsibility for
indemnification, as compared to that of the general liability insurer
(Interstate). 9
- - - - - - - - - - - - - - Footnotes - - - - - - - - - - - - - - -9 Our
conclusion is also consistent with numerous cases holding that the insurer
of a
party who contractually agreed to indemnify another party can be held
entirely
liable for the loss, notwithstanding the provisions of the competing
insurance
agreements, in order to give effect to the contractual indemnification
provision. (See, e.g., Hartford Casualty Ins. Co. v. Mt. Hawley Ins. Co.
(2004)
123 Cal.App.4th 278, 289-298 [20 Cal. Rptr. 3d 128], and cases cited
therein.)
- - - - - - - - - - - - End Footnotes- - - - - - - - - - - - - -
c. Interstate's receipt of premiums is not dispositive
Cleveland insists, based on language found in Patent Scaffolding, that
Interstate should not be able to obtain indemnification from Cleveland
because
it accepted premiums to insure the risk of loss. Cleveland is incorrect.
In our view, the fact that Interstate accepted premiums is not
particularly
significant, since every insurer that pays a loss on behalf of its insured
will
have accepted premiums for the risk. Furthermore, while Interstate was
compensated for undertaking the risk of loss, so was Cleveland, which
accepted
consideration for the performance of its obligations under the
Webcor-Cleveland
subcontract. (See California Food Service Corp. v. Great American Ins. Co.
(1982) 130 Cal.App.3d 892, 900, fn.2 [182 Cal. Rptr. 67].) Finally, while it
may
be that Interstate merely did what it was obligated to do under the
insurance
policy, that does not change the fact that Cleveland did not do what it was
allegedly obligated to do under the indemnification provision, after it
allegedly caused the loss.
The extent to which an insurer's receipt of premiums relates to the
equities
of subrogation was clarified by this appellate district in State Farm
General
Ins. Co. v. Wells Fargo Bank, N.A. (2006) 143 Cal.App.4th 1098 [49 Cal.
Rptr. 3d
785] (State Farm). There, the premises of State Farm's insureds sustained
damage
from a fire that had started in an adjacent apartment building. State Farm
paid
its insureds' claim for the fire loss, and then sued in subrogation the
other
apartment building's owner and others (respondents). Although respondents
had
not actually ignited the fire, State Farm contended the fire was caused by
respondents' negligent failure to provide for the safe disposal of fireplace
ashes. The trial court granted summary judgment in favor of respondents, on
the
ground that State Farm's claims were barred by the doctrine of superior
equities. (Id. at p. 1103.)
The appellate court reversed. The court rejected the respondents'
contention
that the insurer was not entitled to subrogation due to its receipt of
premiums.
"[T]he fact that an insurer has been compensated for its risk does not, in
and
of itself, swing the balance in favor of a third party. [Citation.] Rather,
compensation is a 'fact to be considered, it is no more than that ... .'
[Citations.]" (State Farm, supra, 143 Cal.App.4th at pp. 1110-1111, italics
added.)
The State Farm court then noted that "a significant factor in weighing
the
equities is whether a defendant's negligent acts were related to or
contributed
to the primary cause of loss," and the issue was "whether respondents were
in a
better position to avoid the loss than State Farm or its insureds." (State
Farm,
supra, 143 Cal.App.4th at p. 1118.) "While arguably an insurer should in
fairness bear the loss where the third party's liability is solely
contractual
[citing Morse, Meyers, and Patent Scaffolding but noting the split of
authority
in Wilshire and Meyer Koulish], such a result seems unfair when the loss has
been caused by the third party's tortious conduct." (State Farm, at p. 1118
&
fn. 12, italics added.) Because State Farm alleged that respondents
negligently
permitted a fire to occur and to spread to its insureds' property, it could
proceed in subrogation against respondents, even though the respondents had
not
actually started the fire. (Id. at p. 1119.)
The court in State Farm ruled: "In the case at bench, the contest is
between
an innocent insurance company (which admittedly received premiums for the
very
loss that occurred) and alleged tortfeasors (who did not physically start
the
fire, but whose negligence allegedly permitted the fire to be started and to
spread by failing to provide for the safe disposal of fireplace ashes). On
this
record, we cannot say that respondents are entitled to judgment as a matter
of
law, based on the doctrine of superior equities. We reverse the trial
court's
order granting summary judgment on that basis." (State Farm, supra, 143
Cal.App.4th at p. 1119.)
As applied in the matter before us, Interstate's acceptance of premiums
does
not itself preclude subrogation as a matter of law, particularly since the
risk
it insured was distinct from the risk Cleveland agreed to indemnify, and
Cleveland's alleged negligence contributed to the loss. Based on the
allegations
of the first amended complaint, State Farm indicates that Cleveland's
demurrer
should have been overruled.
d. Public policy favors equitable subrogation under the facts alleged
Patent Scaffolding recognized the unfairness of precluding an insurer
from
subrogating to a claim against a party who had refused to live up to its
promise
of contractual indemnification. The court acknowledged that its rule led to
a
result that "appears to reward delay in the payment of just claims because
had
Simpson first paid, it likewise would be denied equitable subrogation
against
the insurers," but chalked it up to the fact that justice is not always
perfect
and the insurer could have sought equitable contribution (to share the loss)
rather than the all-or-nothing equitable subrogation. (Patent Scaffolding,
supra
, 256 Cal.App.2d at p. 516.) Here, of course, equitable contribution is no
longer available to Interstate because of the determination that Cleveland's
settlement was a good faith settlement. Although one could fault Interstate
for
not tying up that loose end in the Frisby litigation, the fault (if any)
could
also be laid at Cleveland's feet for the same reason. It may also be that
the
parties found it more prudent to resolve the underlying Frisby litigation
promptly, without the delay that would be entailed in litigating this
indemnification dispute.
In any event, the result we reach in this case avoids the injustice of
Patent
Scaffolding. In our view, it is not a good idea to reward parties who refuse
to
fulfill their alleged indemnification obligations, particularly under the
rubric
that they are in as good or better equitable position as the insurer that
did
fulfill its alleged indemnification obligation. We believe it is more
prudent to
permit subrogation, so that a party with an alleged contractual
indemnification
obligation will be encouraged to step up in the underlying case and either
fulfill the obligation (and implicitly help settle the case) or resolve any
dispute over the application of the indemnification obligation. If
permitting
subrogation to the insurer in any way results in a windfall (because the
insurer
that accepted premiums to insure against the loss may now shift the loss to
the
other indemnitor), it would be better for the windfall to go to the one that
undisputedly fulfilled its contractual obligations, than to the one that
allegedly breached them.
In the matter before us, Interstate issued insurance, accepted Webcor's
defense, and made the payment to resolve the claims against Webcor.
According to
the allegations of the first amended complaint, Interstate did everything it
was
supposed to do to fulfill its contractual obligations to Webcor. Cleveland,
on
the other hand, allegedly did not. Although contractually obligated to
obtain
insurance covering Webcor, it failed to do so. Notwithstanding its alleged
contractual obligation to defend and indemnify Webcor, it refused to defend
or
indemnify. While Interstate had nothing to do with the incident underlying
the
Frisby litigation, Cleveland was allegedly a contributory cause to Frisby's
injuries. The comparison, therefore, is between one party who had nothing to
do
with causing the loss but abided by its contractual obligation to pay for
it,
and another party who caused the loss and then shunned its contractual
obligation to pay it. Based on the allegations of the first amended
complaint,
Interstate is in a superior equitable position to Cleveland.
e. Cleveland's cases are inapposite
The remaining cases on which Cleveland relies are distinguishable from
this
case. In California Food Service Corp. v. Great American Ins. Co., supra,
130
Cal.App.3d 892, Sandy's operated a restaurant under a lease requiring it to
obtain fire insurance on the building. Sandy's insured the building through
its
insurer (Highlands). Sandy's later agreed to sell the restaurant to CFS,
which
also obtained fire insurance on the building for the benefit of the
building's
owners, through Great American. (Id. at pp. 895-896.) Before the sale of the
restaurant consummated, there was a fire. The owner of the building looked
to
Sandy's, whose insurer (Highlands) paid the claim. (Id. at p. 896.)
Highlands
sought recovery in subrogation from CFS's insurer, Great American. (Ibid.)
Viewing the Highlands contract and the CFS contract on equal footing, the
court
held that Highlands could not obtain equitable subrogation from CFS's
insurer,
Great American. (Id. at pp. 895, 901.) The court nonetheless found that the
insurers should split the loss under the doctrine of equitable contribution.
(Id
. at p. 895.)
California Food Service, which followed Patent Scaffolding, is
distinguishable from this case for the same reason we distinguished Patent
Scaffolding: in those cases, the insurer did not allege a causal connection
between the defendant and the loss; in this case, Interstate made this
allegation.
In Fireman's Fund Ins. Co. v. Morse Signal Devices (1984) 151 Cal.App.3d
681
[198 Cal. Rptr. 756] (Morse), Fireman's Fund insured certain commercial
establishments that had contracted with one of several alarm companies to
maintain burglar or fire alarms on the premises. (Id. at p. 685.) In those
contracts, the alarm companies expressly disclaimed that the alarm systems
would
prevent burglary or fire loss, and stated that the alarm companies were not
insurers, the commercial establishments assumed all risk of loss, and the
alarm
companies' liability was limited to liquidated damages. (Id. at pp.
685-686.)
Fires or burglaries occurred at each commercial establishment when the alarm
systems failed to function properly. (Id. at p. 686.) Fireman's Fund paid
its
insureds' claims and then sued the alarm companies, alleging they failed to
perform their contractual duties to the insureds, but not alleging that they
created the fires or perpetrated the burglaries. (Id. at p. 687.) The alarm
companies filed demurrers to Fireman's Fund's complaint, which were
sustained
without leave to amend. (Id. at p. 684.)
The Court of Appeal affirmed. Because the alarm companies had not caused
the
loss, the equities of Fireman's Fund were not superior to those of the alarm
companies, and equitable subrogation was unavailable. (Morse, supra, 151
Cal.App.3d at pp. 687-688.) The court also observed that the reasonable
expectations of the insureds (parties to the alarm service contracts) had
not
been frustrated because the alarm companies had not represented that their
alarms made the insured premises absolutely secure, and that it was for this
reason the insureds had procured insurance for the losses they suffered.
(Id. at
p. 688.)
Morse is distinguishable from the matter at hand, because the alarm
companies
from which subrogation was sought expressly disclaimed any obligation to
indemnify Fireman's Fund's insureds, while Cleveland expressly undertook the
obligation to indemnify Interstate's insured. Furthermore, while Fireman's
Fund's insureds and the alarm companies did not reasonably expect the alarm
companies to cover the loss, Interstate's insured and Cleveland did
reasonably
expect Cleveland to cover the loss, based on the indemnification provision
in
the Agreement.
In Bramalea, supra, 119 Cal.App.4th 468, a real estate developer
(Bramalea)
was sued by homeowners for construction defects. Bramalea's insurer, Zurich,
hired counsel to provide a defense and filed cross-complaints against
subcontractors for both equitable indemnity and contractual indemnity, the
latter of which was based on a provision in the subcontractor agreement
requiring the subcontractors to indemnify Bramalea and hold it harmless from
all
damages including attorney fees arising from the subcontractors' act or
omission. (Id. at pp. 470-471.) Eventually, Bramalea tendered its defense to
the
subcontractors' insurers; the insurers accepted the tender. (Id. at p. 471.)
The
litigation was settled except as to Bramalea's right to recover from the
subcontractors attorney fees incurred before its tender of the defense to
the
subcontractors' insurers. (Id. at p. 470.) The trial court dismissed the
cross-complaint on the ground that Bramalea had no standing to recover the
attorney fees from the subcontractors because it had not paid the attorney
fees.
(Ibid.) In so ruling, the court concluded: "This is not an action by Zurich
for
subrogation. It is an action [by Bramalea] for indemnity and breach of
contract." (Id. at p. 471, italics added.) Bramalea appealed.
On appeal, the court affirmed, holding that Bramalea could not maintain a
claim against the subcontractors for attorney fees because it had suffered
no
out-of-pocket loss. (Bramalea, supra, 119 Cal.App.4th at pp. 472-473.) The
court
then proceeded to discuss an issue neither before it on appeal nor
ostensibly
presented by the case, volunteering that it was "questionable whether Zurich
could pursue equitable subrogation against the subcontractors." (Id. at p.
474.)
Noting a conflict of authority, the Bramalea court observed that under
Patent
Scaffolding, Zurich would not be entitled to equitable subrogation because
the
"attorney fees were not caused by the subcontractors' breach of their
obligation
to indemnify Bramalea" but by the homeowners' lawsuit for construction
defects,
"which was one of the risks Zurich accepted premiums to cover," and
"[w]hether
the subcontractors caused the construction defects was not resolved by this
litigation." (Id. at p. 475 & fn. 4.) The court added that Zurich could
presumably pursue an action against the subcontractors for equitable
contribution. (Id. at p. 475, fn. 5.)
Bramalea is unhelpful to our analysis. First, the language on which
Cleveland
relies is pure dictum. Second, Bramalea is distinguishable from this matter
for
the same reasons we distinguished Patent Scaffolding.
In sum, the allegations of Interstate's amended complaint establish each
of
the elements for subrogation. The court erred in sustaining the demurrer.
III. DISPOSITION
The judgment is vacated and the order sustaining the demurrer to
appellant's
first amended complaint is reversed. The trial court shall enter a new order
overruling the demurrer. Respondent shall pay appellant for appellant's
costs on
appeal.
Simons, Acting P. J., and Bruiniers, J., concurred.