CHAPTER 13 SUBROGATION

• Jurisdiction: United States

Subrogation is an equitable remedy available to an insurer who pays a debt of another. The courts consider it only fair—equitable—that the insurer step into the shoes of its insured and obtain all of the insured's rights against third parties.

The California standard fire policy provides:

Subrogation
This company may require from the insured an assignment of all right of recovery against any party for loss to the extent that payment therefor is made by this company.

In other words, subrogation is an equitable remedy where an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. It is also a right that is usually added as a condition of a policy of insurance.

In Dobbas v. Vitas, 191 Cal. App. 4th 1442 (Cal. Ct. App. 2011), an insurer's attempt to join in a case filed by the insured against the agent who was claimed to have failed to obtain sufficient insurance failed because it had no more rights than that of the agent it sued.

James Dobbas (Dobbas), the owner of a bull that escaped its pasture and caused a fatal automobile accident, sued his insurance agent, Fred Vitas, and Vitas Insurance Agency (Vitas), because the agent either failed to procure or cancelled excess liability insurance from CalFarm Insurance Company (CalFarm) to cover the owner's ranching operations. He also had an excess policy with American Guarantee Insurance.

In May 2002, Dobbas, a rancher living in Sierra County, California, contracted with Vitas to procure primary and excess insurance on his property, including his property in Sierra County. Through Vitas, Dobbas obtained a CalFarm primary liability policy that provided $1 million coverage for Dobbas's livestock husbandry activities. Vitas also procured a CalFarm excess policy for Dobbas that provided $3 million per occurrence, but it was not in effect at the time of the accident.

American Guarantee, who wrote a $7 million excess policy at the time of the accident, paid the claim of the injured and took an assignment from Dobbas. As his assignee, American Guarantee sought reimbursement of the amounts paid not from the party responsible for the automobile accident, but from the agent—Vitas—who failed to procure excess insurance to cover the accident.

The California Court of Appeal treated the case brought by American Guarantee as a subrogation action, even though it had all of the rights of Dobbas by assignment.

[The court found that an] insurer's right to subrogation is delimited by the application of equitable principles, and not by the law of assignments. "[O]ne who asserts a right of subrogation, whether by virtue of an assignment or otherwise, must first show a right in equity to be entitled to such subrogation, or substitution. . . ." Meyers v. Bank of America National Trust & Savings Ass'n, (1938) 11 Cal. 2d 92, 96. Equitable subrogation requires an insurer to establish that its equitable position is superior to the position of the party to be charged.

The trial court denied American Guarantee's request to intervene in the negligence and breach of contract action against Vitas on the ground that the insurer was not entitled to equitable subrogation because the agent had not caused the accident.

Where two parties are contractually bound to provide insurance for the same loss, the payment by one does not create superior equities.

At best, one party is entitled to, at most, a right to equitable contribution from the other. Since a federal court determined that the American Guarantee excess policy covered the accident in question, had Vitas not cancelled or failed to renew the excess policy with CalFarm, both policies would have been available to satisfy a judgment against Dobbas.

The court concluded:

Because the obligation of both American Guarantee and Vitas was to provide insurance to Dobbas to indemnify the same loss, American Guarantee's rights against Vitas parallels those of two equally situated insurers when one fails to pay a claim. The appropriate resolution of such facts is by application of the rules of equitable contribution. Equitable contribution apportions costs among insurers that share the same level of liability on the same risk.

The CalFarm excess policy that Vitas was alleged to have failed to renew was a $3 million excess policy. The American Guarantee policy was a $7 million excess policy. The arbitration award against Dobbas was $5 million. The amount of the award not covered by the underlying $1 million CalFarm policy was $4 million. By judgment of the federal district court, the American Guarantee policy covered the accident in question.

Noting that "the Supreme Court has determined that ‘one who asserts a right of subrogation, whether by virtue of an assignment or otherwise, must first show a right in equity to be entitled to such subrogation, or substitution," the California appellate court did not allow American Guarantee's action for subrogation and/or contribution to succeed because according to the application of equitable principles "an assignment will not confer upon one the right to be so substituted in an action at law upon the assignment."

American Guarantee's rights were "measured by the application of equitable principles in the first instance," and its recovery depended upon a right in equity and not because of an asserted legal right under an assignment.

Had Vitas kept the $3 million CalFarm excess policy, American Guarantee would have been entitled to proportional contribution from CalFarm to pay the $4 million excess of the primary policy. It sought contribution from the agent Vitas. The court reached its conclusion based upon the assumption that American Guarantee was suing Vitas as an insurer, and neither subrogation nor contribution applied since the two "insurers" owed the same debt.

The court may have erred, because Vitas is not an insurer but an agent. If it erred, American Guarantee as the assignee of the insured had the right to—and may still, if the statute of limitations has not...