In the recent case of Carter v. Pulte Home Corporation (2020) 52 Cal.App. 5th 571, the 1st District Court of Appeal denied an insurance carrier’s equitable subrogation claim, explaining an insurer’s obligations under its insurance policy are not the same as an indemnitee’s obligations under an indemnity provision. In other words, as aptly put by the Court of Appeal, while a “subrogated insurer is said to ‘stand in the shoes’ of its insured, because it has no greater rights as the insured. . . [h]ere . . . [the insurer] was seeking to stand in a different, more advantageous set of shoes.”
This was an action for alleged construction defects by the owners of 38 homes in two housing developments against the general contractor, Pulte Home Corporation (“Pulte”.) The general contractor then filed a cross-complaint for indemnity and defense against the subcontractors, many of which worked on projects under contracts requiring each subcontractor to indemnify the general contractor and name it as an additional insured on the subcontractor’s commercial general liability insurance.
Pulte’s contracts with all of its subcontractors required each to indemnify Pulte against “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.’”
The insurer for four subcontractors, Travelers Insurance Company (“Travelers”), provided a defense for Pulte, then filed an equitable subrogation complaint-in-intervention against other subcontractors who did not respond to the tender of general contractor’s defense. As is typical, the general contractor settled homeowners’ claims and its cross-claims against subcontractors.
Travelers proceeded with its suit against seven subcontractors who did not respond to Pulte’s tender of defense and whose insurance carriers denied the additional insured endorsements to their policies required the insurers to provide a defense. Travelers’ position at trial was the defendant subcontractors were each jointly and severally liable for the remainder of its costs for defending Pulte because each subcontractor had a contractual obligation to defend Pulte.
The trial court found that Travelers failed to prove three elements of its
claim for equitable subrogation because (1) it failed to establish the loss for which it compensated Pulte was one for which any of the subcontractors was “primarily liable,” (2) none of the subcontractors was in an equitable position inferior to Travelers, and (3) Travelers failed to prove its damages because its proof included bills for work done for purposes other than Pulte’s defense.
The Court of Appeal affirmed the trial court’s finding in favor of the defendant subcontractors on the equitable subrogation claim by Travelers. Travelers, on behalf of four
subcontractors it insured, agreed to a demand for defense from developer Pulte after Pulte was sued.
The Court of Appeal noted Travelers was seeking to shift to costs for defending Pulte against claims unrelated to the scope of respondents’ work—claims for which the subcontractors did not promise to indemnify and defend Pulte. The subcontractors’ failure to comply with their contractual obligations to indemnify and defend Pulte for claims arising from their own work could not make them liable for losses due to the work of other independent subcontractors. (§ 2782.)
Equitable subrogation allows a loss to be shifted from one who was legally liable to another who is more responsible for the same loss. Here, Travelers was trying to shift the loss jointly and severally to subcontractors who were each liable for only a portion of the total loss. (Maryland Casualty Co. v. Nationwide Mutual Ins. Co. (2000) 81 Cal.App.4th 1082 [equitable subrogation not available to insurer of general contractor seeking to shift cost of defense to subcontractor’s insurer, which refused defense; insurer entitled only to contribution, not entire cost of defense].)
The Court of Appeal further noted that in Pulte Home Corporation v. CBR Electric, Inc. 50 Cal.App5th 216 (2020), which, like the present case, involved an equitable subrogation claim by the insurer that defended Pulte as an additional insured under a subcontractor’s policy, “subrogation entirely shifts the claimed loss, but the claimed loss does not have to be the entire loss the subrogee suffered.” (Ibid. at p. 231.)
Since “the amount of defense costs an insurer may seek depends on what the subrogor (here, Pulte) would be entitled to, … [i]f Pulte could not recover the entire costs of defense from defendants, neither can [the insurer].” (Id.) Pursuant to the subcontracts, “Pulte’s recovery against defendants is defined by the duty to defend in the subcontracts. That duty renders defendants responsible not for the entire cost of defending the construction defect actions, but only for the costs of defending claims related to their work.” (Ibid.)
Further, the Court of Appeal held CCP section 2778(4) limits a duty to defend to “matters embraced by the indemnity.” This provision places a duty to assume the indemnitee’s defense against claims embraced by the indemnity. Here, the contracts limited the subcontractors’ obligations to defend Pulte only with respect to claims involving their scope of work.
The Court of Appeal expressed no opinion as to whether damages could have been allocated proportionally among the subcontractors if Travelers had asserted a cause of action seeking such relief.
This ruling is completely opposite the holding noted in Pulte Home Corporation v. CBR Electric, Inc. The major difference may have been the position the subrogee took in seeking recovery. An alternative approach could have been to allocate among the various subcontractors rather than adopting a “joint and several” approach.
David P. Ramirez is 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 named as a “Top Lawyer” in San Diego for “Complex Litigation” in March 2020 by San Diego Magazine.