Court Allows Subrogation In Contractual Indemnity Case
July, 2010
by Michael W. Goodin and G. Brent Sims
In Interstate Fire And Casualty Ins. Co. v. Cleveland Wrecking Co., (2010) 182 Cal.App.4th 23(2010), the California Court of Appeals assessed the ability of an insurer to subrogate against an express indemnitor.
FACTS
Frisby, an ironworker, was employed at Webcor’s jobsite in San Francisco, California. Frisby’s work location was regularly showered with debris, dislodged from above by Cleveland Wrecking Company (“Cleveland”), another subcontractor on the job. Inevitably, Frisby was struck by falling material, prompting him to file a worker’s compensation claim, and sue both Webcor and Cleveland Wrecking.
Webcor tendered its defense to Interstate, its insurer, and to Cleveland under an express indemnity provision in the contract between the two parties. Webcor and Cleveland both settled the suit with Frisby, and both obtained determinations of good faith settlement from the court. A determination of good faith settlement defeats equitable, but not express indemnity claims in California.
Interstate then turned its sights on Cleveland in subrogation. Interstate’s complaint alleged a breach of Cleveland’s 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 breached its contract by failing to obtain insurance covering Webcor. Interstate sought the amount it spent to defend against and settle Frisby’s claims.
Cleveland demurred, 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. The trial court sustained the demurrer without leave to amend, and Interstate appealed.
ANALYSIS
The trial court accepted both of Cleveland’s contentions: first, that Webcor did not actually suffer any loss due to Cleveland’s actions; and second, that Cleveland had superior equities to Interstate. In reaching these conclusions, the court relied primarily on Cleveland’s reading of Patent Scaffolding v. William Simpson Constr. Co., 256 Cal.App.2d 506 (1967).
In Patent Scaffolding, a general contractor had agreed to provide insurance for its scaffolding subcontractor. A fire of unknown origin occurred at the jobsite. At that time, the parties discovered the general had failed to provide insurance for the scaffolding company, whose insurer sought subrogation under a breach of contract theory. The insurer obtained a judgment, but the Court of Appeals overturned. The court ruled that the insurer had accepted premium for exactly this type of exposure, and the fact that the general was not alleged to have been negligent placed the general in a superior equitable position to the insurer, thus defeating the insurer’s claim for subrogation.
The Cleveland Wrecking court reversed the trial court’s ruling in favor of Cleveland and upheld Interstate’s subrogation claim. In doing so, the court articulated three bases to distinguish Patent Scaffolding: first, the contract in Patent Scaffolding had been for providing insurance, not for contractual indemnity; second, the general was not alleged to have been at fault in Patent Scaffolding; and finally, the Court found that in this case, the insurer's receipt of premiums to cover the type of loss that occurred did not preclude an equitably superior position to a party that contractually agreed to indemnify.
The Court of Appeals therefore dispensed with Cleveland’s arguments. It clarified that in a breach of contract case, evidence of payment from a collateral source is only available for use against the insured, not against a subrogating insurer who actually made the payments. As such, the court noted that Interstate could be found to have suffered damages as a result of Cleveland’s actions. Had Cleveland fulfilled its indemnity agreement, Interstate would not have had to pay settlement funds or defense costs.
The court then undertook a lengthy examination of the equities in the case. It found that an indemnitor who declines to fulfill its duty under a contract is not necessarily in a superior equitable position over an insurer who has fulfilled that duty. The issue of acceptance of premium is not dispositive as to superior equities, in that a contractual indemnitor has also received consideration for accepting such a risk. Finally, the court noted a split in California law between a subrogation cause of action as to a contractual indemnitor who causes or contributes to an incident, and one who is not alleged to have been so involved. Subrogation is generally tenable against the former, but apparently not the latter, although an argument could be made that such an issue is better addressed in light of the totality of the circumstances, including the types of agreement, the positions of the parties and their ability to avoid the loss.
LEARNING POINT:
Based on Cleveland Wrecking, there is ample room to factually distinguish Patent Scaffolding’s equitable holding in a subrogation case. However, to be on the safe side, an insurer should always attempt to show actual fault against a contractual indemnitor in a subrogation action.
Back to CM Report of Recent Decisions (2010v2) 2010 Volume 2 Table of Contents
