In Dobbas v. Vitas, No. C061494, 2011 WL 49581 (Cal. App. Jan. 7, 2011), the Third District Court of Appeal ruled that an insurer cannot sue its policyholder’s agent for “equitable subrogation” for failing to secure appropriate other insurance. While in some cases the insurer may have a claim for equitable contribution, in this case the court found the insurer did not as it did not pay more than its fair share under pro-rata-by-limits allocation.
FACTS & HOLDING
American Guarantee sought to intervene in an action between its policyholder and the policyholder’s agent, in a dispute over the agent’s failure to renew the policyholder’s excess insurance on a timely basis.
In its motion to intervene, American Guarantee claimed an interest in the litigation against the agent on a theory of equitable subrogation since it had a direct assignment of the policyholder’s claim against the policyholder’s agent. Equitable subrogation has six basic elements: (1) the insured has suffered a loss for which the party to be charged is liable; (2) the insurer has compensated the insured for the loss; (3) the insured has an existing cause of action which could have been asserted but for the insurer’s compensation; (4) the insurer has suffered damaged caused by the act of the other party; (5) justice requires the loss to be shifted entirely; and (6) the damages are in a stated sum.
The trial court held that American Guarantee failed to satisfy the first requisite of equitable subrogation. More fully, that element requires that the other party be either (a) the “wrongdoer whose act or omission caused the loss” or (b) “legally responsible to the insured for the loss caused by the wrongdoer” (for example, contractual indemnity agreements such as those binding lessors and consignees). The trial court ruled that this element was not satisfied because the agent was not the underlying wrongdoer.
The court of appeal focused on the fifth element, superior equities, finding that American Guarantee was not in a position of superior equities because “both [the agent] and American Guarantee agreed to provide insurance to [the policyholder].” Thus, the loss could not be shifted entirely to the agent, as would be required for equitable subrogation.
The court noted American Guarantee’s situation was akin to an insurer seeking equitable contribution from another insurer that covered the same loss. Under equitable contribution, American Guarantee would have to show that it paid more than its fair share. Applying a pro-rata-by-limits allocation, the court allocated 70% of the excess loss to American Guarantee because its share limits were $7 million compared to the $3 million limits of the excess policy that should have been renewed. 70% of the $4 million excess loss was $2.8 million, which was the amount for which American Guarantee settled. Since American Guarantee had not paid more than its fair share, it was not entitled to equitable contribution, it did not have a direct and immediate interest in the case, and therefore it did not have the right to intervene in the action between the policyholder and the policyholder’s agent.