Insurer Barred From Bringing Subrogation Action on Behalf of Suspended Insured

Attribution not required.

It’s commonly stated that when it comes to subrogation actions, where an insurer seeks reimbursements from responsible third parties for claims paid out by the insurer, the insurer for “stands in the shoes” of its insured, meaning simply that in seeking subrogation an insurer has no greater or lesser rights than its insured.

Typically, that’s a powerful weapon since an insurer, otherwise, has no contractual or legal relationship with the third party from whom it is seeking reimbursement. Sometimes, however, it’s not, as seen in the case of Travelers Property Casualty Company of America v. Engel Insulation, Inc., California Court of  for the Third District, Case No. C085753 (November 30, 3018), in which an insurer was barred from bringing a subrogation action on behalf of an insured whose corporate license was suspended.

The Subrogation Action

In 2011, a homeowner’s association filed suit against Westlake Villas, LLC and Meer Capital Partners, LLC (collectively “Westlake”) alleging various construction defects. Insurer Travelers Property Casualty Company of America (Travelers) agreed to defend Westlake under insurance policies it had issued to contractors Rex Moore Electrical Contractors & Engineers, Foremost Superior Marble Co., Inc., Duran & Venebles, Inc. and Dura Fence Company, presumably based on an additional insured provision naming Westlake as an additional insured under the policies issued to these contractors.

While the case doesn’t discuss what happened in the underlying action by the homeowner’s association, Travelers later filed a subrogation action against Engel Insulation, Inc. and other subcontractors (collectively “Engel”) seeking reimbursement of its attorney’s fees and costs incurred in defending Westlake. Travelers’ subrogation action alleged causes of action for declaratory relief, breach of contract, equitable subrogation and contractual subrogation. At the time of the subrogation action, the Westlake parties were suspended corporations due to non-payment of corporate taxes.

In the trial court,  the Engel defendants filed a motion for judgment on the pleading contending that Travelers could not sue on behalf of the Westlake parties because the Westlake parties were suspended corporations and under Revenue and Taxation Code section 23301 “a suspended corporation cannot sue or defend a lawsuit while its taxes remain unpaid.”

The trial court agreed and Travelers appealed.

The Appeal

On appeal, Travelers argued that pursuant to Revenue and Taxation Code section 19719 the corporate suspensions of the Westlake parties did not prevent Travelers from bringing its subrogation action against the Engel defendants. Section 19719 provides:

(a) Any person who attempts or purports to exercise the powers, rights, and privileges of a corporation that has been suspended pursuant to Section 23301 or who transacts or attempts to transact intrastate business in this state on behalf of a foreign corporation, the rights and privileges of which have been forfeited pursuant to the section, is punishable by a fine of not less than two hundred fifty dollars ($250) and not exceeding one thousand dollars ($1,000), or by imprisonment not exceeding one year, or both fine and imprisonment.

(b) This section shall not apply to any insurer, or to counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation in a civil action based upon a claim for personal injury, property damage, or economic losses against the suspended corporation, and, in conjunction with this defense, prosecutes subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.

(c) Nothing in this section shall create or limit any obligation upon an insurer to defend a suspended corporation.

The Court of Appeals disagreed. “Subrogation is purely derivative,” explained the Court. “[A] 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, held the Court, “a subrogated insurer has no right to recover from a third party who has been released from liability by the insured. Nor may an insurer pursue a subrogation recovery if the insured is itself barred from filing suit.”

With respect to Revenue and Taxation Code section 19719, the Court of Appeal explained:

Section 19719 does not generally authorize the insurer to exercise the rights and powers of its corporate insured. This obviously includes the right to sue or defend a lawsuit or even to appear in the lawsuit. . . . Instead, the only manner in which the insurer may exercise those powers is by intervening in the lawsuit under Code of Civil Procedure section 387 and asserting any defenses on behalf of its insured.

And, here, because Travelers was not pursuing subrogation “in conjunction with” an intervention, Travelers could not bring a stand-alone subrogation action against the Engel defendants because the Westlake parties were suspended corporations and had no capacity to sue.

Conclusion

Travelers is a reminder that when bringing a subrogation action on behalf of an insured, an insurer “stands in the shoes” of its insured for all purposes, including an insured’s inability to sue due to the insured’s corporate suspension, unless the subrogation action is brought in conjunction with an intervention.

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