Subrogating Insurance Carrier Could Only Assert the Rights of its Corporate Insured and No More Against Subcontractor

Construction and Procurement Law News

Firm Alert

Author(s)

A decision from the Third District Court of Appeals of California affirmed previous California decisions when it addressed whether a subrogating insurance carrier may assert the rights of its corporate insured, specifically, when the insured corporation is a suspended corporation incapable of asserting legal rights itself. The Court addressed and rejected arguments that California Revenue and Taxation Code § 19719(b), which exempts subrogating carriers from the penalties for asserting the rights of a suspended corporation set forth in its own subsection (a), eliminated the prohibition against carriers bringing an action based on the subrogation rights of its suspended insured. Because the Plaintiffs’ claims were based solely on their derivative rights of subrogation and their corporate insured was suspended, the court found that the Plaintiffs had no right to bring its suit. This case reaffirms California case law that consistently denies subrogating insurance carriers any rights greater than those of their insureds.

The underlying case in Travelers was based on construction defects and was brought by a homeowner’s association against defendants Westlake Villas, LLC and Meer Capital Partners, LLC (collectively, “Insured”). Several insurance carriers (collectively, the “Insurers”) defended their Insured as additional insureds to their insurance policies. The Insurers then filed suit against several subcontractors (collectively, “Engel”), because of contractual agreements to defend and indemnify between Engel and the Insured. Based on the Insured’s suspended status and a 1997 Fourth District Court of Appeals of California decision, Truck Ins. Exch. v. Superior Court, the trial court granted Engel’s motion for judgment on the pleadings without leave to amend. The Insurers appealed, arguing that since California Revenue and Taxation Code § 19719(b) was enacted after Truck, the enactment repealed the Truck holding.

Under California Revenue and Taxation Code § 23301, a suspended corporation cannot sue or defend a lawsuit while taxes remain unpaid. The court in Truck allowed the plaintiff carrier to intervene in an action by other carriers because the plaintiff carrier had its own interest in seeking equitable contribution from the other insurers. Thus, the carrier’s action was not based on its subrogation rights. Truck further held that if the action was based on the subrogation rights of the carrier’s insured, the carrier would be prohibited from bringing suit since the carrier could not assume rights that its own insured did not have, namely the right to bring or defend a lawsuit.

The Insurers’ action against Engel was based solely on their derivative subrogation rights and not on an independent interest. Therefore, it fell within the Truck holding.

The court held that the Insurers were prohibited from bringing an action while the Insured was a suspended corporation. The court found the Insurers’ argument based on § 19719(b) unpersuasive, stating that § 19719(b) only exempts carriers from the penalties set forth in subdivision (a) for prosecuting a claim while its corporate insured was suspended. This exemption from statutory penalties does not create a new right for a subrogating carrier to pursue recovery when its insured is barred from doing so.

The Travelers decision stands as a reminder to insurance carriers in California – when pursing recovery through subrogation you are limited to the rights of your insured. This is not to say that insurance carriers are left without any avenue for recovery if they find themselves in a situation like Travelers. First, carriers can assert their own interests, so long as those interests are not the rights of a subrogee. Second, carriers can insist their insured correct its suspended status, and then proceed with a subrogation action.

This article, "Subrogating Insurance Carrier Could Only Assert the Rights of its Corporate Insured and No More Against Subcontractor" was published in the Bradley Construction and Procurement Law Newsletter for the second quarter of 2020.