In AMCO Ins. Co. v. All Solutions Ins. Agency (No. F070038, filed 2/8/16), a California Court of Appeal held that claims against an insurance broker for failure to procure requested coverage are assignable, and that express contractual assignments of such claims are not subject to the rule of superior equities that otherwise limits an insurer’s rights under the equitable subrogation doctrine.
In AMCO v. All Solutions, AMCO insured a restaurant in Sonora, California. An electrical fire in a neighboring building caused damage to the insured restaurant. The owner of the neighboring property where the fire originated was uninsured. When the restaurant owners sued the neighbor for property and business losses, he stipulated to judgment and assigned his rights against his insurance broker, who had allegedly failed to procure coverage for his property. AMCO paid the restaurant owners for property damage and filed its own subrogation action against the uninsured neighbor, who again stipulated to judgment and assigned his rights against the broker to AMCO.
The AMCO court first rejected an argument that claims against insurance brokers should not be assignable. The court noted that causes of action are generally assignable in California, the exception being “confined to wrongs done to the person, the reputation, or the feelings of the injured party, and to contracts of a purely personal nature, like promises of marriage.” (Citing Rued v. Cooper (1893) 109 Cal. 682, 693.) The AMCO court disagreed that a broker malpractice claim is analogous to a legal malpractice claim, which is one recognized exception, saying that “communications between a client and an insurance broker are not protected by a privilege of confidentiality and, given the standardized nature of insurance policies, the product ultimately delivered to the client cannot be regarded as highly or uniquely personal.”
The AMCO court then addressed the question whether assigned causes of action against an insurance broker are subject to the rule of superior equities. The court noted that confusion exists regarding the terms “subrogation” and “assignment,” saying that “[s]ubrogation has been called a sort of assignment by operation of equity and the equivalent of an equitable assignment. Conversely, voluntary assignment has been deemed a kind of subrogation  Thus, the broadest usage of the term ‘subrogation’ includes transfers of causes of action that are implemented by either (1) contract, which is a consensual arrangement, or (2) operation of law without the consent of the owner of the cause of action.”
The court clarified its intent stating that “This opinion seeks to avoid the ambiguity in the broad term ‘subrogation’ and its potentially confusing overlap with contractual relationships by using the term ‘equitable subrogation’ to refer to the transfer of rights against a third party that arises in equity and occurs only by operation of law because a party (i.e., the subrogee) has paid a loss of another (i.e., the subrogor).  In contrast, we use the term ‘contractual assignment’ to refer to the transfer of rights based on a voluntary agreement between the party transferring the rights (i.e., the assignor) and the party receiving the rights (i.e., the assignee).” In other words, the court was distinguishing between contractually-based and purely equitable claims.
Citing Patent Scaffolding Co. v. William Simpson Constr. Co. (1967) 256 Cal.App.2d 506, the AMCO court recited the elements for a pure equitable subrogation claim as: (1) The insured has suffered a loss for which the party to be charged is liable, either because the latter is a wrongdoer whose act or omission caused the loss or because he is legally responsible to the insured for the loss caused by the wrongdoer; (2) the insurer, in whole or in part, has compensated the insured for the same loss for which the party to be charged is liable; (3) the insured has an existing, assignable cause of action against the party to be charged, which action the insured could have asserted for his own benefit had he not been compensated for his loss by the insurer; (4) the insurer has suffered damages caused by the act or omission upon which the liability of the party to be charged depends; (5) justice requires that the loss should be entirely shifted from the insurer to the party to be charged, whose equitable position is inferior to that of the insurer; and (6) the insurer’s damages are in a stated sum, usually the amount it has paid to its insured, assuming the payment was not voluntary and was reasonable. The AMCO court focused on the fifth element, which reflects the “rule of superior equities.”
The AMCO court said that in certain situations California courts have applied the principles of equitable subrogation to bar a contractual assignee from pursuing the assigned cause of action. (Citing Dobbas v. Vitas (2011) 191 Cal.App.4th 1442 and Meyers v. Bank of America etc. Assn. (1938) 11 Cal.2d 92.) But the AMCO court found those cases limited to certain facts. Specifically, the AMCO court stated that “we conclude that the principles of equitable subrogation do not extend to situations where the contractual assignee was not a surety and does not occupy the role of potential equitable subrogee. The practical impact of Meyers and Dobbas is that a surety in the position of a subrogee cannot avoid the principles of equitable subrogation by obtaining an assignment of the cause of action to bolster its position.”
The court then evaluated the respective claims of the restaurant owners and of AMCO, to conclude that neither was subject to the requirement for proving superior equities in their situation. As to the restaurant owners, the issue was straightforward, in that they were not sureties, i.e., not insurers. Thus, the restaurant owners could proceed against the insurance broker without having to demonstrate superior equities.
For AMCO, the analysis was slightly different, in that AMCO was an insurer and therefore potentially within the court’s rule that a subrogating surety cannot bolster its position (and therefore escape having to prove superior equities) by obtaining an assignment. But the AMCO court avoided that problem by concluding that AMCO did not have a subrogor-subrogee relationship with the neighbor in the first instance. Thus, the neighbor’s assigned claim against his insurance broker was not duplicative of AMCO’s subrogation claim against the neighbor, but a wholly different cause of action. As a result, AMCO could also proceed against the insurance broker without having to prove the element of superior equities.
The AMCO court then reinforced its ruling by also holding that the broker had failed to establish that its position was equal or superior to AMCO’s. In particular, the court was swayed by the fact that in moving for summary judgment, the broker had failed to show undisputed material facts demonstrating that if he had procured insurance for the neighbor, it would not have affected allocation of the loss. That is, that AMCO would still have had to pay if he had procured coverage. The court said that the coverage of any insurance that the broker might have procured was speculative, and the court could not determine how that might have affected AMCO’s own coverage obligation. Consequently, the court could not determine relative equities as between the broker and AMCO.
Finally, the AMCO court held that the issue of whether the broker was, in fact, negligent in procuring, or failing to procure, insurance, was disputed and therefore, not capable of summary judgment. There was a factual dispute over whether the broker had failed to communicate a notice of nonrenewal and whether he had been requested to procure alternative coverage, as well as what that coverage might have been. Accordingly, the court remanded the case for trial on the broker’s negligence.
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