California Court of Appeals Holds Subrogating Carrier Cannot Assert Claims of Its Suspended Insured

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In Travelers Prop. Cas. Co. of Am. v. Engel Insulation, Inc., 29 Cal. App. 5th 830 (2018), the Third District Court of Appeals of California addressed whether a subrogating carrier can assert the rights of its corporate insured while the insured is suspended and thus barred from doing so itself. The court rejected the argument that Cal. Rev & Tax Code § 19719(b) (1998), 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 Travelers’ claims were based solely on its derivative rights of subrogation and its corporate insured was suspended, the Court of Appeals affirmed the trial court’s ruling that Travelers had no right to bring its suit. The court’s holding reaffirms California case law that denies subrogating carriers any rights greater than those of their insureds. See Truck Ins. Exch. v. Superior Court, 60 Cal. App. 4th 342 (1997).

In Travelers, the underlying case was based on construction defects and was brought by a homeowner’s association against defendants Westlake Villas, LLC and Meer Capital Partners, LLC (collectively, Westlake). Several insurance carriers (collectively, Travelers) defended Westlake as additional insureds to their insurance policies. Travelers then filed suit against several subcontractors (collectively, Engel), based on contractual agreements to defend and indemnify between Engel and Westlake. The trial court, based on Westlake’s suspended status and case law prohibiting a subrogating insurer from pursuing subrogation while its insured is suspended, granted Engel’s motion for judgement on the pleadings without leave to amend. Travelers appealed, arguing that since Cal. Rev & Tax Code § 19719(b) was enacted after Truck, the enactment abrogated the Truck holding.

Pursuant to Cal. Rev & Tax Code § 23301 (1951), 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 have a more advantageous position than its insured.

Since Travelers’ action against Engel was based solely on the rights of Travelers’ insured, and not on an independent interest outside of subrogation, it fell within the Truck holding. Thus, the court held that Travelers was prohibited from bringing an action while Westlake was suspended.

The court found Travelers’ argument based on § 19719(b) unpersuasive, stating that the subdivision 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 case is a good reminder that while it may not always seem equitable, carriers pursuing recoveries through subrogation are limited to the rights of their insureds. If a carrier is in a situation such as Travelers, it would either have to support an action based on its own interests, separate from its rights as subrogee, or it would have to ensure its insured rehabilitates its suspended status before proceeding. A subrogation practitioner should be keenly aware of the status of their clients’ insureds as states like California will rigidly limit carriers’ rights to mirror those of their insureds.

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