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August 2010

Essex Insurance Company v. Heck ? Insurer's Actions Creates Implied Waiver Of Subrogation Rights

Insurer Waives Its Right To Equitable Subrogation By Failing To Identify The Subrogated Claim During Settlement Negotiations

(July 19, 2010) ___ Cal. ___, 10 C.D.O.S 9747

The Court of Appeal of the State of California, Fifth Appellate District, upheld a trial court's granting of summary judgment, and awarding of costs, to a doctor sued by Essex Insurance Company ("Essex") for equitable subrogation.  The Court held that Essex, by settling several underlying lawsuits without identifying the amounts paid on each, had waived its right to subrogation. 

John Dompeling was injured when he stepped on a nail while moving refrigeration units at a restaurant that was being remodeled.  Dompeling, a diabetic, sought treatment for his injury from his physician, Dr. Richard Heck ("Heck.")  Dompeling's wound did not respond to treatment and his leg was amputated below the knee. 

In 2002, Domepling filed a personal injury action against Robert Abraham ("Lincoln Abraham") and Cindy's Restaurant.  Abraham tendered his defense to Essex under a policy issue to a Robert Lee Abraham ("Lee Abraham"), Lincoln Abraham's son.  Lincoln Abraham then cross complained against Dr. Heck for indemnity and contribution.  The personal injury action resulted in a jury verdict of $826,762.50, plus costs, against Lincoln Abraham. 

During the course of the personal injury action, Essex filed a declaratory relief action against Lincoln Abraham, Cindy's Restaurant, and Dompeling alleging it had no duty to indemnify Lee Abraham or anyone else in connection with the personal injury action.  In 2004, after judgment was entered in the personal injury action, Essex asserted for the first time that Lincoln Abraham, and not Lee Abraham, was the party for whom it had provided a defense and added him as a defendant in the declaratory relief action.  After unsuccessfully moving for summary judgment in the declaratory relief action, Essex refused to pay the personal injury judgment.  

Dompeling filed a bad faith action alleging Essex and defense counsel knowingly proceeded with their defense of Lincoln Abraham in a fraudulent attempt to deny coverage and their legal obligation to pay a judgment. 

Following a mediation, Dompeling and Essex executed a settlement agreement.  In exchange for receipt of $700,000, Dompeling released and discharged Essex, Lincoln Abraham, Lee Abraham, and "their respective partners, partnerships, attorneys, . . . and all those claiming by, through, or under them, of any and all claims . . . known or unknown, arising out of or in anyway connected with:"  1) the incident involving Dompeling; 2) the manner in which the insurance claims of the incident were handled or adjusted, and 3) any and all claims that could have been asserted in all three actions. 

In 2007, Essex was substituted as the cross complainant to pursue equitable subrogation against Heck for the $700,000 it paid pursuant to the settlement agreement.  Heck moved for summary judgment which the court granted.  The Court ruled that Essex failed to preserve a claim against Heck when it executed the settlement agreement and waived it's right to equitable subrogation or indemnification.  Essex appealed.

The Court of Appeal affirmed.  The Court held that, in order for Essex to prevail, it must prove it compensated its insured for the same loss for which Heck was liable.  Heck's liability turned on whether he committed medical malpractice.  Thus, Essex was required to show the settlement amount included money paid to Dompeling for his personal injury on behalf of its insured, and the amount it paid.  But the settlement agreement encompassed several claims and multiple parties.  The issue was further complicated because evidence of communications among the parties and their attorneys during settlement was inadmissible due to the mediation privilege. 

Essex contended 1) its actions during settlement, including the amount it paid, and the fact it provided its insured with a defense created a triable issue whether the settlement money was to compensate Dompeling; 2) it acted under an obligation to pay the judgment against its insured; 3) the record contained no evidence of misconduct by Essex, and 3) the trial court appeared to have granted the motion to punish Essex.    

The Court of Appeal rejected these arguments.  Because extrinsic evidence was inadmissible, an implied waiver against Essex was the only equitable solution.  Essex's position it was acting under an obligation to pay a judgment against its insured was contrary to the position it took during the course of the personal injury action and the ensuing declaratory relief action.  Evidence of Essex's alleged misconduct was irrelevant because the question was what it paid to settle the personal injury claim.

The Court also affirmed fees awarded to Heck, pursuant to a statutory offer.  Essex contended Heck's section 998 offer to compromise for a waiver of costs and his right to proceed with a malicious prosecution action was unreasonable, and thus, void.  The Court of Appeal held a presumption of unreasonableness was not created by the lack of a monetary offer.  Heck's offer was presumed reasonable because he prevailed.  It was Essex's burden to show otherwise. 

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This opinion is not final.  It may be modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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