Equities Favor Subrogating Insurer Over Subcontractor That Performed Defective Work

In Valley Crest Landscape v. Mission Pools (No. G049060, filed 6/26/15, ord. pub. 7/2/15), a California appeals court held that equities favor an insurer seeking equitable subrogation over a subcontractor that agreed to defend and indemnify claims arising out of its performance of work under the subcontract.

Valley Crest contracted to build a pool at the St. Regis Hotel in Dana Point. Valley Crest subcontracted with Mission Pools to perform the work. The master contract contained an indemnity clause in favor of St. Regis, and the subcontract contained an indemnity clause in favor of Valley Crest. An intoxicated guest who was rendered quadriplegic after diving in the shallow end of the pool sued the hotel, Valley Crest, Mission and others involved in the design, construction and operation of the pool. The suit included allegations that the pool depth was improperly marked; there was inadequate warning signage; and the pool finish caused the pool to appear deeper than it was. Valley Crest tendered its defense to Mission Pools under the subcontract’s indemnity agreement. When Mission did not respond, Valley crest filed a cross-complaint for indemnity. All parties ultimately reached a settlement with the injured plaintiff, leaving Valley Crest’s cross-complaint against Mission Pools.

Valley Crest was insured by National Union under a policy with a $250,000 self-insured retention (SIR), and National Union then intervened in Valley Crest’s remaining cross-complaint against Mission on theories of equitable subrogation and contribution, seeking recovery of the money it had paid to defend and settle the case over and above the policy’s SIR.

First, the court found that the claims were not time-barred by Code of Civil Procedure section 337.1, which imposes a four-year statute of limitations on suing for patent defects in construction. The court said that section 337.1 is inapplicable to express indemnity claims. The court declined to follow Wagner v. State of California (1978) 86 Cal.App.3d 922, which held that the time limitation for an indemnity claim is the same as for the underlying defect claim. Instead, the Valley Crest court said that not only is an express indemnity claim subject to the four-year statute applicable to contract claims generally (Code. Civ. Proc. § 337) , but does not accrue until the indemnitee sustains a loss by paying the money to be indemnified, which occurs when the defendant pays a judgment or settlement.

Next, the Valley Crest court relied on Interstate Fire & Casualty Ins. Co. v. Cleveland Wrecking Co. (2010) 182 Cal.App.4th 23, to conclude that National Union was entitled to reimbursement in equitable subrogation, on a theory that the equities favored the insurer. Because the subcontract promised to indemnify for claims arising out of the work, whereas National Union’s insurance policy was only a general contract of indemnity, “the equities tipped in favor of the insurer,” since “[a]n entity which . . . agrees to indemnify the other party to the underlying transaction has a liability of greater primacy than an independent insurer that insures against loss.”

That conclusion was further bolstered by the fact that Mission Pools had allowed its own insurance to be cancelled, in breach of the subcontract’s insurance provision.

The Valley Crest court also distinguished Patent Scaffolding Co. v. William Simpson Constr. Co. (1967) 256 Cal.App.2d 506, which Mission cited to argue that when “two parties are contractually bound by independent contracts to indemnify the same person for the same loss, the payment by one of them to his indemnitee does not create in him equities superior to the nonpaying indemnitor, justifying subrogation, if the latter did not cause or participate in causing the loss.” But the Valley Crest court stated that “[a]ge and subsequent appellate court opinions have not been kind to Patent Scaffolding.” Instead, the Valley Crest court said that “[t]he better policy, the Interstate Fire court explained, is to permit subrogation for an insurer that fulfilled its contractual obligations, even if the result was a windfall for the insurer. To whatever extent Patent Scaffolding might be relevant here, we decline to follow it.”

Although National Union was entitled to full reimbursement, Mission Pools did obtain a minor victory on its express indemnity claim against Valley Crest, which was seeking to recover the money it paid satisfying the National Union policy’s SIR. The trial court had refused Mission’s demand for a jury trial on the express indemnity claim, ruling that it was in the nature of claim for specific performance – specific performance of the express promise to indemnify – and therefore equitable, with no right to a jury. But the appeals court disagreed, pointing out that the relief requested was damages and “[b]y alleging, down to the penny, the precise amount of money sought to be recovered from Mission Pools, the first amended cross complaint disclosed the legal remedy of damages was adequate.” The claim was, therefore, for money damages and not equitable relief, and carried a right to trial by a jury.

Left untouched in the appeals court decision was the trial court’s ruling that by failing to accept the tender of defense when first made, Mission Pools had forfeited its right to seek allocation of the claimed attorney fees and settlement costs between the claims related to the work of Mission Pools and unrelated claims. In its statement of decision, the trial court had ruled that no apportionment would be made between attorney fees and costs related and unrelated to Mission Pools’ work, and there would be no apportionment of the moneys National Union paid in settlement as between amounts related and amounts unrelated to Mission Pools’ work. Thus, Mission had waived or forfeited any right to allocate whether amounts paid by National Union in defense and settlement did or did not arise out of Mission’s performance of work under the subcontract, which determination was not disturbed by the appeals court.

Ultimately, the case was returned to the trial court for a jury trial on Valley Crest’s express indemnity claim.

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July 7, 2015