In American States Ins. Co. v. Nat. Fire Ins. Co. (No. DO57673 filed 12/14/11, ord. pub. 1/6/12), the Court of Appeal held that an action by one insurer that defended and indemnified a continuous and progressive loss against a successive insurer that did not participate is a contribution action subject to a two-year statute of limitations, not a subrogation action carrying a four-year statute of limitations.
During the 1990s, National Fire Insurance Company of Hartford succeeded American States Insurance Company insuring two contractors, who were subsequently sued for construction defects by a homeowners association. American States defended the contractors and settled the case. National Fire did not participate. Two years and one month after the settlement was consummated, American States sued National Fire for contribution. The trial court sustained National Fire's demurrer, on the ground that the two-year statute of limitations, for actions not founded on written contracts, had expired. (Code Civ. Pro. § 337(1).)
American States was granted leave and amended its complaint, adding a cause of action for subrogation, and including allegations that it had an assignment of rights from the insured contractors. Despite American States' argument that a subrogation claim is subject to the four-year statute of limitations (Code Civ. Pro. § 339), the trial court again sustained a demurrer.
The Court of Appeal affirmed, agreeing that the claim was only for contribution, and subject to the two-year limitations period. First, the court declined to follow Liberty Mut. Ins. Co. v. Colonial Ins. Co. (1970) 8 Cal.App.3d 427, which applied a four-year statute to contribution, saying that case was "wrongly decided." The American States court stated that although such disputes are ultimately founded on contracts, the right to contribution between insurers is purely equitable and, therefore, subject to the two-year statute.
The court went on to distinguish contribution from subrogation, ruling that one insurer suing another over indemnification for a continuous and progressive loss cannot meet the necessary elements for subrogation, even with an assignment from the insured.
In particular, the court pointed out that subrogation may only be afforded to a party not primarily liable for a loss, as against another party which is primarily liable for the loss. However, "[i]n cases involving progressive damages spanning several policy periods, each insurer is responsible for the full extent of the insured's liability up to the policy limits, not just for the part of the damage that occurred during the policy period" (citing Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.4th 1). Thus, according to the American States court, subrogation does not lie in such a situation, because each of the successive insurers is primarily liable for the loss.
Finally, the court held that American States' assignment from the insureds did not change the equation by giving American States superior equities to National Fire. The court pointed out that insureds had been fully defended and indemnified and, therefore, had suffered no loss.
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