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February 2012

American States Ins. Co. v. National Fire Ins. Co. of Hartford -- Equitable Contribution Cannot Be Transformed Into Equitable Subrogation

An Insurer Can Not Transform an Equitable Contribution Claim into a Claim for Equitable Subrogation When the Insurer is Also "Primarily" Liable for a Loss. Equitable Contribution is Subject to the Two Year Statute of Limitations.

(December 14, 2011) __ Cal.App.4th __; 12 C.D.O.S. 320

The California Court of Appeal, Fourth Appellate District, affirmed an order sustaining an insurer's demurrer without leave to amend where a claim for equitable contribution by another insurer was brought after the two year statute of limitations had elapsed.  The appellate court further found the complaining insurer could not state a claim for equitable subrogation when it was also primarily liable for the loss, and the insureds had already been fully defended and indemnified.

Plaintiff American States Insurance Company ("ASIC") issued general liability policies to insureds covering the period from 1993 through 1996.  Defendant National Fire Insurance Co. of Hartford ("National") issued general liability policies to the same insureds covering the successive periods to 2002.  Both insurers provided coverage for "property damage" during the policy period caused by an "occurrence."

A homeowners association filed suit naming the insureds in a progressive damages case.  In April 2007, the underlying action settled.  ASIC contributed $1,318,737.65 on behalf of the insureds to settle the underlying action, and National contributed nothing.  The insureds assigned their rights to ASIC for damages suffered as a result of National's failure to contribute to the settlement.

In May 2009, ASIC filed an action against National for equitable contribution.  National demurred on the grounds that the equitable contribution action was filed more than 2 years after accrual of the cause of action.  Before the hearing on demurrer, ASIC filed a first amended complaint alleging ASIC's cause of action was based on its assignee rights and the written policy National issued to its insureds pursuant to Code of Civil Procedure section 337, which provides for a four year statute of limitations for actions based on written instruments.  National again filed a demurrer, which the trial court sustained with leave to amend, noting that ASIC's cause of action was seeking equitable contribution, as opposed to subrogation rights.

ASIC filed a second amended complaint for equitable subrogation asserting that ASIC had a written assignment from the insureds, that the cause of action was founded on written instruments, i.e., the written policies issued by each insurer to the insureds and the written assignment from the insureds, and that ASIC had been damaged by settling the underlying action and paying for property damage occurring during National's policy period.  National again filed a demurrer alleging that ASIC's action remained a claim for equitable contribution which was barred by the two year statute of limitations.  National also argued that ASIC had no rights from the insureds because the insureds suffered no losses, and thus, had nothing to assign to ASIC.  The trial court sustained the demurrer without leave to amend and ASIC appealed.

In affirming the trial court's order, the appellate court found Century Indem. Co. v. Superior Court (1996) 50 Cal.App.4th 1115 ("Century") applicable, and applied the two year statute of limitations to an equitable contribution claim between co-insurers.  In Century, the court observed that an equitable contribution claim is not an action on contract between contracting parties who are in privity, but rather is based on equitable principles.  In reaching this conclusion, the Century court found Liberty Mut. Ins. Co. v. Colonial Ins. Co. (1970) 8 Cal.App.3d 427 which applied a four year statute of limitations to an equitable contribution claim, wrongly decided.

In addition, the appellate court found ASIC failed to state a cause of action for subrogation.  The appellate court first noted the differences between subrogation and contribution.  Under the former, the subrogee insurer is put in the position of the insured, and seeks to recover from the party primarily liable for the loss.  Under the latter, the insurer seeks to recover from a co-obligor who shares such liability. 

The appellate court next explained the elements of a subrogation claim, and found ASIC did not and could not plead a cause of action for subrogation because it could not allege ASIC paid for losses for which it was not primarily liable, and had compensated the insureds for losses for which National was primarily liable.  This is because in progressive damages cases, each insurer is responsible for the full extent of the insured's liability, not just for the part of damage that occurred during the policy period.  The amounts paid by ASIC were sums for which ASIC was primarily liable even though National may also have been primarily liable for some or all of those amounts.

Finally, the appellate court found ASIC could not show the claim against National assigned by the insureds was one the insureds could have asserted for their own benefit.  The appellate court observed that the insureds had already been fully defended and indemnified by ASIC and thus, had no remaining claim for damages against any nonparticipating insurers.  In reaching its conclusion, the appellate court distinguished Interstate Fire & Cas. Co. v. Cleveland Wrecking Co. (2010) 182 Cal.App.4th 23 finding that there, the insurer was seeking to subrogate against the wrongdoer who was liable for the loss, and not for which the insurer had been primarily liable.

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This opinion is not final. It may be withdrawn from publication, 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.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

Insurance

Elizabeth B. Vanalek


Insurance

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