Excess Insurer v. Agent - No Right of Equitable Subrogation Under California Law

danger_bulls.jpgDelving into the sometimes arcane metes and bounds between insurers’ rights of equitable subrogation and equitable contribution, a California appellate court recently denied an excess insurer’s right to bring an equitable subrogation action against its insured’s agent for failing to renew another excess insurer’s policy that would have covered the same underlying bodily injury risk.  The appellate court expanded on the trial court’s reasoning, and concluded that the excess insurer could not establish at least two necessary elements of an action for equitable subrogation, and could not show that it had paid more than its fair share under the doctrine of equitable contribution.   James Dobbas, et al. v. Fred Vitas, et al., 2011 Cal. App. LEXIS 15 (January 7, 2011).

James Dobbas (Dobbas) owned a ranch and livestock in Sierra County.  Fred Vitas (Vitas), his insurance agent, obtained a $1 million primary liability policy and a $3 million excess liability policy for his ranch operations with Cal Farm Insurance Company (Cal Farm).  Dobbas also owned a railroad emergency response company.  American Guarantee and Liability Insurance Company (American) insured Dobbas as a sole owner of the company under a $7 million excess liability insurance policy.  Vitas allegedly cancelled the Cal Farm $3 million excess policy or failed to renew it.

A bull owned by Dobbas escaped from his ranch and caused a serious two-car collision.  Two people died and four were seriously injured.  They sued Dobbas.  Dobbas sued Vitas for insurance agent malpractice.  Cal Farm paid its $1 million primary limits toward a settlement with the victims, and Dobbas assigned the victims his rights against Vitas as part of the settlement.  The victims obtained a $5 million dollar judgment against Dobbas.  In a separate coverage action, a federal district court held that American’s excess policy also covered the risk.  American then paid $2.8 of its excess policy limits to settle the victims’ claims, and took an assignment of their assigned rights against Vitas.

American moved to intervene in the agent malpractice action against Vitas on a theory of equitable subrogation.  The trial court denied American’s motion to intervene on the grounds that American could never prove that the agent caused or was responsible for the loss—a necessary element of an equitable subrogation claim.  The California Third Appellate District affirmed, and expanded the basis for denying American’s motion to intervene. 

“An insurer bringing an action based upon a claim of equitable subrogation must establish the following elements: ‘(1) The insured has suffered a loss for which the party to be charged is liable, either because the latter is a wrongdoer whose act or omission caused the loss or because he is legally responsible to the insured for the loss caused by the wrongdoer; (2) the insurer, in whole or in part, has compensated the insured for the same loss for which the party to be charged is liable; (3) the insured has an existing, assignable cause of action against the party to be charged, which action the insured could have asserted for his own benefit had he not been compensated for his loss by the insurer; (4) the insurer has suffered damages caused by the act or omission upon which the liability of the party to be charged depends; (5) justice requires  that the loss should be entirely shifted from the insurer to the party to be charged, whose equitable position is inferior to that of the insurer; and (6) the insurer’s damages are in a stated sum, usually the amount it has paid to its insured, assuming the payment was not voluntary and was reasonable.’”  (quoting Patent Scaffolding Co. v. William Simpson Constr. Co., 256 Cal.App.2d 506, 509 (1967))

The appellate court took aim at the fifth element.  It equated the insurance agent’s duty to obtain excess insurance covering the risk with American’s duty to indemnify against the risk.  The appellate court pointed out that since both Vitas and American contracted to protect Dobbas from the same risk, neither could claim a superior equitable right against the other under California law.

“’In subrogation litigation in California, the doctrine of superior equities is critical in determining whether a right of subrogation exists.’ [citation]. The issue is addressed by the fifth element of equitable subrogation, i.e., whether justice requires that the loss be entirely shifted from the insurer to the third party. The equities do not permit recovery where the insurer and the third party promised the same thing, to provide insurance. [citation].”

The appellate court explained that American’s right of recovery, if any, against Vitas was more akin to the right of equitable contribution—not equitable subrogation: 

“Because the obligation of both American Guarantee and Vitas was to provide insurance to Dobbas to indemnify the same loss, American Guarantee’s rights against Vitas parallels those of two equally situated insurers when one fails to pay a claim. The appropriate resolution of such facts is by application of the rules of equitable contribution. Equitable contribution apportions costs among insurers that share the same level of liability on the same risk. [citation].  It arises when one insurer has paid more than its share of the loss that several insurers are obligated to indemnify.  [citation]. Equitable subrogation, on the other hand, allows an insurer that paid a loss to be placed in the insured’s position to recover from another insurer who was primarily responsible for the loss. [citation].  Under the rules of equitable contribution, an insurer can recover only when it has paid more than its fair share with regard to other insurers who are obligated to pay the same claim. If it has not paid more than its fair share, it cannot recover, even though the other insurer has paid nothing. [citation]. “

Applying the rules of equitable contribution, the appellate court concluded that American paid no more than it would have paid had the Cal Farm excess policy been in place.  Accordingly, the appellate court sent American away empty handed. 

It isn’t immediately intuitive that an insurance agent’s duty to obtain insurance against a risk is co-extensive with an insurer’s duty to indemnify against the risk.  But for purposes of equitable subrogation under California law, it is.  It will be interesting to see whether the appellate court’s expansive holding leads to unintended consequences in future cases. 

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