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Equities Favor Subrogating Insurer Over a Subcontractor For Alleged Defective Work

In Valley Crest Landscape v. Mission Pools, (2015) 238 Cal.App.4th 468, a California Court of Appeal held that equities favor an insurer seeking equitable subrogation over a subcontractor that agreed to defend and indemnify claims arising out of its performance of work under the subcontract agreement.

Facts:
An intoxicated guest who was rendered quadriplegic after diving in the shallow end of the swimming pool at the St. Regis Hotel in Dana Point brought a negligence and loss of consortium action against hotel, design consultant, general contractor and swimming pool subcontractor. The suit included allegations the pool depth was improperly marked; there was inadequate warning signage; and the pool finish caused the pool to appear deeper than it was. Valley Crest Landscape (“Valley Crest”) contracted to build the pool at the St. Regis Hotel. Valley Crest subcontracted with Mission Pools of Escondido (“Mission Pools”) to perform the work.

Valley Crest filed a cross-complaint against its subcontractor, Mission Pools, for indemnity. The master contract contained an indemnity clause in favor of St. Regis, and the subcontract contained an indemnity clause in favor of Valley Crest. Valley Crest tendered its defense to Mission Pools under the subcontract’s indemnity agreement.

The Superior Court ruled on multiple parties’ motions for summary judgment, granting some and denying others. All parties ultimately reached a settlement with the injured plaintiff, leaving Valley Crest’s cross-complaint against Mission Pools.

Valley Crest was insured by National Union under a policy with a $250,000 self-insured retention (SIR). National Union then intervened in Valley Crest’s remaining cross-complaint against Mission on theories of equitable subrogation and contribution, seeking recovery of the money it had paid to defend and settle the case over and above the policy’s SIR.

Rationale:
In this appeal from the judgment, Mission Pools made three contentions: (1) the cross-complaint was time-barred under Code of Civil Procedure, section 337.1; (2) the trial court erred by finding National Union could recover on its claim for equitable subrogation because, under the element of balancing the equities, National Union should bear the loss; and (3) the trial court erred by denying Mission Pools a jury trial on Valley Crest’s claim for express indemnity.

The Court first determined the claims were not time-barred by Code of Civil Procedure section 337.1, which imposes a four-year statute of limitations on suing for patent defects in construction. The Court stated section 337.1 is inapplicable to express indemnity claims. The Court declined to follow Wagner v. State of California (1978) 86 Cal.App.3d 922, which held the time limitation for an indemnity claim is the same as for the underlying defect claim. Instead, the Court explained not only is an express indemnity claim subject to the four-year statute applicable to contract claims generally (See, Code. Civ. Proc. § 337), but the claim does not accrue until the indemnitee sustains a loss by paying the money to be indemnified, which occurs when the defendant pays a judgment or settlement.

The Court relied on Interstate Fire & Casualty Ins. Co. v. Cleveland Wrecking Co. (2010) 182 Cal.App.4th 23, to conclude National Union was entitled to reimbursement in equitable subrogation, on a theory the equities favored the insurer. Because the subcontract promised to indemnify for claims arising out of the work, whereas National Union’s insurance policy was only a general contract of indemnity, “the equities tipped in favor of the insurer,” since “[a]n entity which . . . agrees to indemnify the other party to the underlying transaction has a liability of greater primacy than an independent insurer that insures against loss.” The conclusion was further bolstered by the fact that Mission Pools had allowed its own insurance to be cancelled, in breach of the subcontract agreement’s insurance provision.

The Court also distinguished Patent Scaffolding Co. v. William Simpson Constr. Co. (1967) 256 Cal.App.2d 506, which Mission cited to argue 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.” The Court noted “[a]ge and subsequent appellate court opinions have not been kind to Patent Scaffolding.” Instead, the Court explained “[t]he better policy, the Interstate Fire court explained, is to permit subrogation for an insurer that fulfilled its contractual obligations, even if the result was a windfall for the insurer. To whatever extent Patent Scaffolding might be relevant here, we decline to follow it.”

Although National Union was arguably entitled to full reimbursement, Mission Pools obtained a minor victory on its express indemnity claim against Valley Crest, which was seeking to recover the money it paid satisfying the National Union policy’s SIR. The trial court refused Mission Pool’s demand for a jury trial on the express indemnity claim, ruling it was in the nature of the claim for specific performance of the express promise to indemnify and therefore equitable, with no right to a jury. The appeals court disagreed, pointing out the relief requested was damages and “[b]y alleging, down to the penny, the precise amount of money sought to be recovered from Mission Pools, the first amended cross complaint disclosed the legal remedy of damages was adequate.” Ultimately the claim was for money damages and not equitable relief, and therefore carried a right to trial by a jury.

Of note, the Court of Appeal decision did not disturb the trial court’s earlier ruling that by failing to accept the tender of defense when first made, Mission Pools forfeited its right to seek allocation of the claimed attorney fees and settlement costs between the claims related to the work of Mission Pools and unrelated claims. In its statement of decision, the trial court ruled that no apportionment would be made between attorney fees and costs related and unrelated to Mission Pools’ work, and there would be no apportionment of the moneys National Union paid in settlement as between amounts related and amounts unrelated to Mission Pools’ work. Thus, by failing to accept the tender, Mission Pools waived or forfeited any right to allocate whether amounts paid by National Union in defense and settlement did or did not arise out of Mission’s performance of work under the subcontract.

The case was subsequently returned to the trial court for a jury trial on Valley Crest’s express indemnity claim.

ABOUT THE AUTHOR
David Ramirez is a Senior Counsel at TYSON & MENDES, LLP, and primarily represents clients in complex litigation, including construction defect, insurance law, property disputes, and product liability. Mr. Ramirez was recently named as a “Top Lawyer” in California for “Litigation” in the February 2015 issue of San Diego Magazine.

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