Insurance Policies and Indemnity Provisions Are Not the Same

Just because you own a pair of Air Jordans doesn’t make you Michael Jordan. In the next case, Carter v. Pulte Home Corporation, Case No. A154757 (July 23, 2020), the 1st District Court of Appeal denied an insurance carrier’s equitable subrogation claim explaining that an insurer’s obligations under its insurance policy are not the same as an idemnitee’s obligations under an indemnity provision. Or, 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 than the insured. Here . . . [the insurer] is seeking to stand in a different, more advantageous set of shoes.” 

Carter v. Pulte Home Corporation

Pulte Home Corporation was sued for construction defects by 38 homeowners in two housing developments. Various subcontractors had worked on the projects, but under their subcontracts, each subcontractor agreed to indemnify Pulte from and 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 . . . ”

Pulte tendered the claim to its subcontractors and Travelers Property Casualty Company of America, the insured for four of the subcontractors, accepted the tender under its policies. Insurance carriers for seven subcontractors, however, refused to accept Pulte’s defense claiming that their policies did not require that they indemnify Pulte.

Thereafter, Travelers filed a complaint in intervention against the seven subcontractors and their insurers for declaratory relief, equitable subrogation, equitable indemnity and contractual subrogation. Travelers later dismissed each of its causes of action except its claim for equitable subrogation.

The homeowners’ claim against Pulte ultimately settled with Travelers having paid $320,491.82 for Pulte’s defense. Travelers later recovered $164,400 from other subcontractors, but as to the balance of $156,091.82, the seven subcontractors and their insurers refused to reimburse Travelers, and the case went to trial.

At trial, Travelers took the position that the seven subcontractors and their insurers were “jointly and severally liable” for the $156,091.82 balance in defense costs. In other words, each of the seven subcontractors and their insurers were responsible for the entirety of the $156,091 balance in defense costs irrespective of their actual proportionate responsibility of allegedly defective work.

In line with the position Travelers took at trial, Travelers filed a motion in limine to exclude all evidence or argument suggesting that damages should be allocated or apportioned among the seven subcontractors in proportion to their allegedly defective work. This motion was granted by the trial court. In addition, Travelers filed, and the trial court granted, a motion in limine excluding all evidence or argument regarding whether the work of the seven subcontractors was defective or caused damage.

During the trial, the evidence showed that there was considerable variation in the number of homes each of the seven subcontractors worked on. Two of the seven subcontractors worked on each of 38 homes, another worked on 30 of the 38 homes, two worked on 23 of the 38 homes, and the remaining two worked on only six or eight of the 38 homes.

Following the presentation of evidence including closing argument, the court found that Travelers had failed to prove its equitable subrogation claim, by failing to carry its burden on three of the eight elements necessary to prove equitable subrogation.

Travelers appealed.

The Appeal

On appeal, Travelers argued that the trial court essentially “led it astray” by granting its two motions in limine seeking to exclude evidence or argument that damages should be allocated or apportioned in proportion to the seven subcontractor’s allegedly defective work and to exclude evidence or argument regarding whether the work of the seven subcontractors was defective or caused damage.

Relying on the trial court record, the Court of Appeals found Traveler’s argument on appeal to be “untenable,” finding that while Travelers chose to frame its case as an “all or nothing” joint and several liability claim, nothing precluded the seven subcontractors to challenge the premise of Traveler’s assertion as framed, and nothing precluded the trial court from rendering a decision on the subcontractor’s challenge to this assertion.

As to the three elements that the trial court found that Travelers had failed to carry its burden of proof on, the Court of Appeal explained that the eight essential elements of an insurer’s cause of action for equitable subrogation are:

  1. The insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer;
  2. The claimed loss was one for which the insurer was not primarily liable;
  3. The insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable;
  4. The insurer has paid the claim of its insured to protect its own interest and not as a volunteer;
  5. The insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer;
  6. The insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends;
  7. Justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and
  8. The insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

In this instance, explained the Court of Appeal, the trial court found that Travelers had failed to satisfy its burden on three of the eight elements necessary to prove equitable subrogation, namely, that: (1) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (2) Justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (3) The insurer’s damages are in a liquidated sum, generally the amount paid to the insured.

The Subcontractors Were Not “Primarily Liable” for the Defense Costs Travelers Paid to Pulte

As to whether Travelers had met its burden of showing that it had compensated the insured (Pulte) in whole or in part for the same loss for which defendant (the seven subcontractors) were “primarily liable,” The Court of Appeal held that while Travelers (on behalf of its insured subcontractors) may have reimbursed Pulte for its defense costs, it does not follow the the seven subcontractors were “primarily liable” for the defense costs Travelers reimbursed to Pulte, since the  subcontractors worked on different houses and each of the subcontractors were only obligated contractually to defend Pulte with respect to claims involving their respective “performance of work.”

Importantly, the Court of Appeal drew a distinction between an insurer’s obligation to defend an insured even if claims only potentially involve the scope of work of its insured, which is based on policy considerations, as opposed to a subcontractor’s obligation to defend a general contractor under an indemnity provision, which is based on contract. And, here, under the indemnity provision contained in the subcontractors’ subcontracts with Pulte, the subcontractors only agreed to defend Pulte for claims arising from their respective “performance of work.”

The Subcontractors Were Not in an Equitable Position That Was Inferior to That of Travelers

This distinction, between “policy” considerations when it comes to an insurer’s obligation to defend an insured, and a subcontractor indemitor’s obligation to defend a general contractor indemnitee under a “contractual” indemnity provision, also, held the Court, supported the trial court’s finding that Travelers had failed to show that justice required that the loss (Travelers’ payment of Pulte’s defense costs) be entirely shifted from Travelers to the seven subcontractors because their equitable positions were inferior to that of Travelers.

While noting that “there is no facile formula for determining superiority of equities,” the Court of Appeal noted that cases examining the issue had found that an insurer in a “superior position” generally involved a situation where the insurer’s insured contractually agreed to indemnify another, and that the party in the “inferior position” usually involved a party who both contractually agreed to defend the insurer’s insured and who was also performing in whole or in part the work agreed to be performed by the insurer’s insured. In other words, the typical case where a general contractor subcontracts its scope of work in whole or in part to a subcontractor. In such a situation, the general contractor’s insurer would be in the “superior position,” and the subcontractor would be in the “inferior position” because, while the general contractor agreed to indemnify the project owner, the work alleged to be defective was performed by the subcontractor:

Significantly, Travelers is seeking to shift to respondents costs for defending Pulte against claims unrelated to the scope of respondents’ work—claims for which respondents did not promise to indemnify and defend Pulte. Respondents’ 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. 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 is trying to shift the loss jointly and severally to respondents who were each liable for only a portion of the total loss.

Finally, as to the trial court’s finding that Travelers had failed to carry its burden that Travelers’ damages were in liquidated sum, the Court of Appeal held that its holding on the two elements of equitable subrogation made it unnecessary to consider this third element.

Conclusion

So, there you have it. An insurer’s obligations under an insurance policy is different than an indemnitee’s obligations under an indemnity provision. While one is based on policy consideration the other is based on contract. And while both can be broad, they’re not the same.

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