PULTE HOME CORPORATION, Cross-complainant, v. CBR ELECTRIC, INC., et al., Cross-defendants and Respondents; PRO COAT SYSTEMS, INC., Cross-defendant and Appellant; ST. PAUL MERCURY INSURANCE COMPANY, Intervener and Appellant.
E068353 (Super.Ct.No. MCC1300147)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA FOURTH APPELLATE DISTRICT DIVISION TWO
Filed 6/10/20
CERTIFIED FOR PUBLICATION
OPINION
APPEAL from the Superior Court of Riverside County. Craig Riemer, Judge. Reversed with directions.
The Aguilera Law Group, A. Eric Aguilera, and Raymond E. Brown for Intervener and Appellant.
Nicolaides Fink Thorpe Michaelides Sullivan, Jodi S. Green, Jeffrey N. Labovitch, and Kimberly A. Hartman for Cross-defendant and Appellant Pro Coat Systems, Inc., and Cross-defendants and Respondents CBR Electric, Inc. and The Jasper Companies.
Diem Law, Robin L. Diem; Hammons & Baldino, Ryan W. Baldino; Hammons & Associates, and Wallace W. Hammons for Cross-defendants and Respondents Masco Contractor Services of California, Inc. and Milgard Manufacturing, Inc.
No appearance for Cross-defendant and Respondent, Petersen-Dean,
This case involves the intersection of the legal principles governing an insurer‘s claim for equitable subrogation and a subcontractor‘s
We see two errors in the trial court‘s decision. First, the trial court incorrectly concluded that a cause of action based in subrogation required it to shift the entire amount of defense costs St. Paul incurred in the construction defect actions to defendants, on a joint and several basis. If that were the rule, we agree it would be unfair to burden only a small subset of the subcontractors that worked on a project with the entire cost of defending a construction defect action alleging defects in every trade. However, a cause of action based on equitable subrogation allows an insurer to step into the shoes of its insured and recover only what the insured would be entitled to recover from the defendants. (Rossmoor Sanitation, Inc. v. Pylon, Inc. (1975) 13 Cal.3d 622, 633-634 (Rossmoor) [“[a]n insurer on paying a loss is subrogated in a corresponding amount to the insured‘s right of action against any person responsible for the loss“].) Under the principles articulated in Crawford v. Weather Shield Mfg., Inc. (2008) 44 Cal.4th 541 (Crawford) and the subcontracts at issue here, defendants’ duty to defend the general contractor arose when the general contractor tendered its defense to them, and that duty covered the cost of defending claims related to their work. Under these circumstances, St. Paul is subrogated to the general contractor‘s entitlement to the portion of defense costs each defendant owed as a result of its duty to defend the general contractor. Because the general contractor could not recover the full amount of defense costs from any one of its subcontractors involved in the construction defect actions, neither can St. Paul.
Second, the trial court employed a flawed causation analysis when balancing the equities of this case (the seventh element of equitable subrogation). The appropriate inquiry is whether defendants’ failure to defend the general contractor caused St. Paul to incur the defense costs, not whether that failure caused the underlying lawsuits. Moreover, Patent Scaffolding, the case the trial court relied on for its causation analysis, is distinguishable because it involved a
We will therefore reverse the judgment (including the award of attorney fees to defendants as prevailing parties under
I
FACTS
A. The Parties, Contracts, and Developments
Pulte Home Corporation (Pulte) was the developer, owner, and general contractor of three single-family residential developments in Murrieta (the developments). Pulte hired various subcontractors to perform work on the developments. Among those hired were defendants—Milgard Manufacturing, Inc. (Milgard), Masco Contractor Services of California, Inc. (Masco), Pro Coat Systems, Inc. (Pro Coat), The Jasper Companies (Jasper), CBR Electric, Inc. (CBR), and Petersen-Dean, Inc.
Defendants entered into similar subcontracts with Pulte by which they agreed to indemnify and defend Pulte against “all liability, claims, judgments, suits, or demands for damages to persons or property arising out of, resulting from, or relating to” each defendant‘s scope of work.1 Milgard‘s scoрe of work covered the provision and installation of windows and sliding glass doors; Masco‘s covered cabinetry; Pro Coat‘s, coating for garage floors and exterior decking; Jasper‘s, block wall fencing; CBR‘s, electrical work; and Petersen-Dean‘s, roofing components.
In 2013 and 2014, two groups of homeowners filed lawsuits against Pulte, alleging construction defects at the developments. The allegations in the lawsuits related to nearly all aspects of the developments and covered each defendant‘s scope of work. Pulte tendered its defense to its subcontractors and their insurers. St. Paul, which had issued a commercial general liability policy to the subcontractor D.L. Long Landscaping (D.L. Long), accepted Pulte‘s tender and provided a defense in both lawsuits because Pulte qualified as an additional insured under the policy. Another insurer also accepted Pulte‘s tender and provided a defense until its policy exhausted.
Pulte filed a cross-сomplaint against 34 of the subcontractors that worked on the developments (including defendants) for express indemnification and breach of contract. The construction defect actions were consolidated, and ultimately Pulte and several subcontractors settled with the plaintiffs for approximately $80,000. Each defendant contributed to the settlement, except for Jasper, whom the plaintiffs dismissed with prejudice shortly after the settlement. Pulte contributed $23,000 to the settlement; D.L. Long, $13,242.36; Milgard, $2,500; Petersen-Dean, $2,250; Masco, $1,250; Pro Coat, $1,000; and CBR, $500.2
The defense costs leading up to settlement totaled approximately $253,000, of which St. Paul paid the lion‘s share, about $209,000.
C. The Subrogation Action
In the matter before us, St. Paul sued defendants for reimbursement of defense costs under an equitable subrogation theory, arguing it occupied the superior equitable position because, unlike defendants, it had not breached its duty to defend Pulte. St. Paul‘s complaint alleged defendants “failed to pay . . . their equitable share of Pulte‘s defense costs” and, as a consequencе, St. Paul “paid in excess of its equitable share” of Pulte‘s defense costs. At trial, St. Paul presented evidence that Pulte had sent letters to each defendant tendering its defense in the construction defect actions “for any claims arising from the scope of work or services provided by your company.” The letters cited Crawford and the duty-to-defend provision in defendants’ subcontracts, stating “[y]our company has a contractual obligation, upon proper tender, to immediately accept and assume its active defense against claims encompassed by the indemnity provision.” Pulte‘s counsel testified that none of the defendants responded to the tender letters or agreed to defend Pulte.
The trial court issued a statement of decision in favor of defendants. In denying St. Paul‘s claim, the court relied on Patent Scaffolding, an equitable subrogation case which held that a subcontractor was not entitled to reimbursement from the general contractor for damages caused by a fire at a construction site because the general cоntractor had not caused the fire and therefore had no “causal connection” to the damages. (Patent Scaffolding, supra, 256 Cal.App.2d at p. 514.) Analogizing to that case, the trial court concluded a causal connection was similarly lacking here, because defendants’ failure to defend Pulte had not “caused the homeowners to file their lawsuit[s] against Pulte and thereby necessitate th[e] defense costs to be incurred.” “Therefore, as in Patent Scaffolding, there is no causal relationship.”
The trial court also concluded subrogation was an all-or-nothing claim, meaning it required a shifting of the entire amount of defense costs (all $189,000) to defendants on a joint and several basis and did not allow for an apportionment of costs among defendants. The court explained: “Is it fair that St. Paul should bear the entire burden of defending Pulte instead? No, but that is not the issue when equitable subrogation is sought. . . . [E]quitable subrogation is not a cost-sharing mechanism; it shifts all of the costs, not just some. The issue in such a case is whether justice requires that the entire loss to be shifted from [St. Paul‘s] shoulders and onto the shoulders of the defendant[s.] [¶] . . . [¶] Equitable subrogation being the sole basis for St. Paul‘s request for relief at trial, it is not entitled to recover anything from the defendants.” (Italics added.)
St. Paul filed a timely appeal.
ANALYSIS
A. Standard of Review
“Equitable subrogation is, as the name suggests, based on equity,” and when a trial court exercises its equitable powers, “the appellate court reviews the judgment under the abuse of discretion standard“—that is, we ask whether the trial court‘s decision “exceed[s] the bounds of reason.” (Valley Crest, supra, 238 Cal.App.4th at p. 482.) “In applying the abuse of discretion standard, we determine whether the trial court‘s factual findings are supported by substantial evidence and independently review its legal conclusions.” (Ibid.) St. Paul argues the trial court committed legal error by misapplying the law to undisputed facts. We agree the relevant facts are not in dispute and this appeal hinges on the proper application of the relevant legal principles. Our review is therefore de novo.
B. Applicable Legal Principles
1. Equitable subrogation
“Subrogation is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt or claim. By undertaking to indemnify or pay the principal debtor‘s obligation to the creditor or claimant, the ‘subrogee’ is equitably subrogated to the claimant (or ‘subrogor‘), and succeeds to the subrogor‘s rights against the obligor. [Citation.] In the case of insurance, subrogation takes the form of an insurer‘s right to be put in the position of the insured in
order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid.” (Fireman‘s Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1291-1292.)
A general liability insurer that has paid a claim to a third party on behalf of its insured, like St. Paul did here, may have an equitable right of subrogation against: “(1) other parties who contributed to the harm suffered by the third party (joint tortfeasors) under an equitable indemnification theory, and (2) other parties who are legally liable to the insured for the harm suffered by the third party (such as by an indemnification agreement) under a contractual indemnity theory.” (Interstate Fire, supra, 182 Cal.App.4th at p. 32, italics added.) This case involves the second theory. St. Paul is not seeking reimbursement for the damages paid to the plaintiff homeowners under a theory defendants’ work was defective, rather it is seeking reimbursement for defense costs under a theory dеfendants are contractually liable for their “equitable share” of those costs.
the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer; [6] the insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends; [7] justice requires that the loss be entirely shifted from the insurer to the defendant, whosе equitable position is inferior to that of the insurer; and [8] the insurer‘s damages are in a liquidated sum, generally the amount paid to the insured.” (Interstate Fire, supra, 182 Cal.App.4th at pp. 33-34.)
2. A Subcontractor‘s Duty to Defend
St. Paul‘s equitable subrogation claim is based on the theory that defendants breached their contractual duty to defend Pulte. In Crawford, the California Supreme Court analyzed a subcontractor‘s duty to defend a general contractor under a contract essentially identical to the one here. That agreement required the subcontractor to indemnify the general contractor “against all claims for damages . . . growing out of the execution of [the subcontractor‘s] work,” and to “defend any suit or action brought against [the general contractor] founded upon the claim of such damage.” (Crawford, supra, 44 Cal.4th at pp. 547-548.) The Supreme Court construed this contractual language to require the subcontractor “to defend, from the outset, any suit” against the general contractor “insofar as” that suit included claims alleging damage or loss arising from the subcontractor‘s work on the residential project at issue. (Id. at p. 553.) The Court held this duty applies “even if it [is] later determined . . . [the subcontractor] was not negligent.” (Ibid.) The Court explained that the duty to defend is distinct from, and
broader than, the duty to indemnify. The latter requires reimbursement, “after the fact, for defense costs” within the scope of the indemnity. (Id. at p. 554.) The duty to defend, in contrast, requires the subcontractor to pay for defense costs relating to its work, as the costs arise, and even if it is later determined the allegations against the subcontractor were unsuccessful or even frivolous. (Id. at pp. 553-554, 559.)
Because the trial court concluded St. Paul could not satisfy the seventh element of equitable subrogation (commonly called “balancing the equities” because it asks which party, in fairness, should bear the loss), the court did not analyze the remaining elements of the claim. We conclude the court misapplied the law applicable to the seventh element and that St. Paul has in fact demonstrated its position is equitably superior to defendants‘. As a result, we analyze the other elements of equitable subrogation to determine whether St. Paul has satisfied those as well.
1. Element 1: Liability for the Loss
The first element requires St. Paul to demonstrate that its insured, Pulte, suffered “a loss for which [defendants are] liable.” (Interstate Fire, supra, 182 Cal.App.4th at p. 33.) The loss Pulte suffered is the amount of fees it incurred in defending against claims related to defendants’ work in the construction defect actions. Defendants are contractually liable for that loss under their subcontracts, which require them to defend Pulte against all “suits” or “claims” that “relate to” their work on the developments. The construction defect actions qualify as such suits because they contain allegations related
to defendants’ work. (See Crawford, supra, 44 Cal.4th at pp. 553-554, 559 [the duty arises immediately upon tender if the lawsuit contains claims or allegations relating to the subcontractor‘s work].)
Defendants argue St. Paul cannot satisfy this element because the “loss” at issue is the entire cost of defending Pulte in the construction defect actions, and they are contractually liable only for the defense costs related to their work. The trial court reached the same conclusion, interpreting subrogation as a cause of action that shifts all of thе defense costs, not just some. The court did not cite authority for this interpretation, and we are aware of none. Rather, the court‘s conclusion appears to have stemmed from its interpretation of the seventh element of equitable subrogation, which asks whether “justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer.” (Interstate Fire, supra, 182 Cal.App.4th at pp. 33-34, italic added.) But the word “entirely” in that context refers not to the total amount the plaintiff (or subrogee) paid, but refers instead to “the claimed loss” (in the second element) that the subrogee is seeking from the defendant on the ground the defendant is primarily liable (third element) for that loss. (Id. [the second element of subrogation requires subrogee to prove “the claimed loss was one for which the insurer was not primarily liable” and the third element requires subrogee to prove the defendant was “primarily liable” for the claimed loss].)
The right of subrogation is “purely derivative.” (Bank of New York Mellon v. Citibank, N.A. (2017) 8 Cal.App.5th 935, 948) “[A]n insurer on paying a loss is subrogated in a corresponding amount to the insured‘s right of action against any person responsible for the loss.” (Valley Crest, supra, 238 Cal.App.4th at p. 483, quoting Rossmoor, supra, 13 Cal.3d at pp. 633-634, italics added.) “The subrogated insurer is said to ‘stand in the shoes’ of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured.” (Interstate Fire, supra, 182 Cal.App.4th at p. 32.) Thus, the amount of defense costs an insurer may seek depends on what the subrogor (here, Pulte) would be entitled to. If Pulte could not recover the entire costs of defense from defendants, neither can St. Paul. (Fireman‘s Fund Ins. Co. v. Maryland Casualty Co., supra, 65 Cal.App.4th at p. 1292 [“an insurer
cannot acquire by subrogation anything to which the insured has no rights, and may claim no rights which the insured dоes not have“].) Here, Pulte‘s recovery against defendants is defined by the duty to defend in the subcontracts. That duty renders defendants responsible not for the entire cost of defending the construction defect actions, but only for the costs of defending claims related to their work. (Crawford, supra, 44 Cal.4th at pp. 547-548.)
Our conclusion finds support in Crawford, where the Court approved of an after-the-fact allocation of defense costs among multiple subcontractors that breached their duty to defend. During the trial in that case, the general contractor had presented evidence it had incurred $375,069 in attorney fees to defend the homeowners’ claims, and that 70 percent of the homeowner settlement amount “was attributable to . . . window problems.” (Crawford, supra, 44 Cal.4th at p. 549.) Concluding the two window subcontractors were together liable for that percentage of the general contractor‘s costs (i.e., $262,548), the trial court “apportioned th[at] amount equally between [the two window subcontrators].” (Ibid.) Only one of the window subcontractors appealed, and it did not contest the amount it had been apportiоned, only whether it was liable for the claimed costs at all. But even though the apportionment was not at issue, our high court noted that the trial court‘s
the contracts at issue include a duty to defend, and, if so, whether the underlying suit or proceeding as to which a defense is sought falls within the scope of any of the parties’ contractual duty to defend. If the court finds that an ongoing duty to defend is owed by one or more parties, but the affected parties, acting in good faith, then cannot agree on how such a defense should be provided or financed, the court may, in its discretion, permit the underlying litigation to proceed with counsel chosen and paid by the pаrty to whom the duty is owed, subject to a later determination of how damages for breach of the duty to defend should be apportioned among the breaching parties.” (Crawford, supra, 44 Cal.4th at p. 565, fn. 12, italics added.) Although Crawford did not involve a subrogee‘s claim for reimbursement of defense costs (instead, the claim was brought by the general contractor against the subcontractor), the case is nevertheless instructive because it involved the very type of claim St. Paul seeks to subrogate to in this case—an indemnitee‘s right to indemnification from its indemnitor.
Here, St. Paul‘s complaint alleged defendants failed to pay their “equitable share” of Pulte‘s defense costs, and St. Paul presented evidence at trial as to what each defendant‘s equitable share was. In other words, the loss in the first element is different for each defendant; it is the amount of defense costs for which each is liable under its subcontract with Pulte. This element is satisfied.3
2. Elements 2 and 3: Primacy of Liability
The second and third elements are closely related. To satisfy the second element, St. Paul must demonstrate it was not “primarily liable” for “the claimed loss,” which, as just discussed, is defendants’ equitable share of the defense costs. (Interstate Fire, supra, 182 Cal.App.4th at p. 33.) The third element requires St. Paul to show it compensated Pulte “in whole or in part” for “the same loss” for which defendants are “primarily liable.” (Ibid.)
owner‘s liability for the value of jewelry stolen from its store was of greater primacy than the general liability insurer‘s liability because the consignment agreement assigned the risk of the specific loss that occurred to the shop owner].)
Here, St. Paul is a general liability insurer uninvolved in the underlying residential developments. Its commercial general liability policy with D.L. Long obligated it to “pay amounts any protected person is legally required to pay as damages for covered . . . property damage,” which is defined as “physical damage to tangible property of others, including all resulting loss of use of that property; or loss of use of tangible property of others that isn‘t physically damaged.” The policy also obligated St. Paul to “defend any protected person against a claim or suit for . . . damage covered by this agreement.” It is undisputed Pulte qualified as a “protected person” or additional insured under the policy. Defendants, in contrast, were directly involved in the developments and entered agreements obligating them to defend Pulte in any lawsuits related to their work. Defendants аre therefore primarily liable for the claimed loss—that is, their equitable share of the defense costs.
Defendants’ reliance on Maryland Casualty is misplaced. That case stands for the proposition that subrogation is not proper between two insurance companies that “share the same level of liability on the same risk as to the same insured.” (Maryland Casualty, supra, 81 Cal.App.4th at p. 1089.) In such cases, contribution, not subrogation, is the appropriate cause of action, because the insurance companies are co-obligors and neither has a more primary liability for the insured loss. (Ibid.) This legal principle has no
bearing on a case like this, where an insurance company seeks subrogation
3. Elements 4, 5, 6, and 8
Defendants correctly concede St. Paul has satisfied the fourth, fifth, sixth, and eighth elements. The fourth element has been satisfied because Pulte qualified as a “protected person” under St. Paul‘s policy with D.L. Long, which means St. Paul paid for Pulte‘s defense costs to protect its own interest, not as a volunteer. (State Farm & Casualty Co. v. Cooperative of American Physicians, Inc. (1984) 163 Cal.App.3d 199, 203 [insurance carrier that provides a defense in response to a tender from its insured is not a volunteer].) The fifth element “asks whether [Pulte] would have an assignable cause of action against [defendants] ‘had it not been compensated for its loss’ by [St. Paul].” (Interstate Fire, supra, 182 Cal.App.4th at p. 36.) This element is met because Pulte
could have sought defense costs from defendants under the subcontracts had St. Paul not paid those costs on Pulte‘s behalf. The sixth element—that St. Paul has suffered damages as a result of defendants’ breach of their duty to defend—is easily met. Had defendants made the payments, St. Paul would not have had to make them. (Ibid.)
And finally, St. Paul has satisfied the eighth element by proving damages in a liquidated sum. At trial it presented evidence that it spent $102,291 on a general or “mixed” defense of the lawsuits, which relates to the work of all subcontractors and is therefore indivisible. St. Paul also presented evidence it spent smaller, specific sums on each defendant‘s defense (i.e., $1,650.75 on Milgard, $1,118.75 on Masco, $1,467 on Petersen-Dean, $2,262.50 on CBR, $1,747 on Pro-Coat, and $2,182.50 on Jasper).
The seventh element asks whether justice requires that the claimed lоss “be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer.” (Interstate Fire, supra, 182 Cal.App.4th at pp. 33-34.) As courts have observed, “there is no facile formula for determining superiority of equities, for there is no formula by which to determine the existence or nonexistence of an equity except to the extent that certain familiar fact combinations have been repeatedly adjudged to create an equity in the surety or the third party.” (E.g., State Farm General Ins. Co. v. Wells Fargo Bank, N.A. (2006) 143 Cal.App.4th 1098, 1112, quoting Hartford Acci. & Indem. Co. v. Bank of America (1963) 220 Cal.App.2d 545, 558.)
St. Paul contends Interstate Fire and Valley Crest articulate the relevant test under these circumstances because they involve the same fact pattern as this case. That is, those cases involve a general liability insurer‘s claim for reimbursement of defense costs paid on behalf of the general contractor from subcontractors that owed and breached a duty to defend the general contractor. We agree those cases provide the test applicable to these facts.
Interstate Fire involves an insurance company‘s subrogation complaint against a subcontractor, at the demurrer stage. The insurer‘s complaint alleged that the general contractor had hired a subcontractor (subcontractor 1) to work on a construction project. Their agreement obligated subcontractor 1 to defend and indemnify the general contractor against claims related to subcontractor 1‘s work. (Interstate Fire, supra, 182 Cal.App.4th at p. 28.) While working on the project, the employee of a different subcontractor (subcontractor 2) suffered serious injuries allegedly caused, at least in part, by subcontractor 1‘s work. (Id. at p. 29.) The employee sued the general contractor and subcontractor 1 for negligence, and the general contractor tendered its defense to subcontractor 1 under the express indemnification provision of their agreement. Subcontractor 1 rejected the tender. Subcontractor 2‘s insurance company accepted the tender because the general contractor was an additional insured under its policy with subcontractor 2. After spending $152,000 in attorney fees and costs to defend the personal injury lawsuit and $575,000 to settle it, the insurance company sought reimbursement for both the defense and settlement costs from subcontractor 1 under an equitable subrogation theory. The appellate court reversed the trial court‘s order sustaining subcontractor 1‘s demurrer, concluding that the pleaded facts, if true, entitled the insurer to subrogation.
In Valley Crest, a general contractor had hired a subcontractor to build a pool at a hotel. (Valley Crest, supra, 238 Cal.App.4th at pp. 473-474.) Their
In balancing the equities and determining which party, in fairness, should bear the claimed loss—the insurer or the subcontractor—Interstate Fire and Valley Crest considered four factors. We take each in turn.
a. Cause of the loss
The first factor asks, as between the parties to the subrogation action, which has the greater causal connection to the loss. In both Interstate Fire and Valley Crest, the courts concluded the subcontractors had a greater causal connection to the loss because they were at least alleged to have been negligent in the underlying actions in which the defense and settlement costs were incurred, whereas the insurance companies were not alleged to have done anything wrong. (Interstate Fire, supra, 182 Cal.App.4th at pp. 40-41; Valley Crest, supra, 238 Cal.App.4th at pp. 487-488.)
In Interstate Fire, the court reasoned that allegations of negligence in the underlying lawsuit, whether ultimately proven or not, are nevertheless “relevant to the [parties‘] respective equities.” (Interstate Fire, supra, 182 Cal.App.4th at p. 39.) The court concluded the allegations in the underlying lawsuit that the subcontractor had been negligent “tip[ped]” the equities in the insurer‘s favor because those allegations were what “precipitated the lawsuit . . . [and] made it necessary for [the general contractor] to incur the costs of defense and settlement.” (Id. at p. 40.)
In Valley Crest, the court noted that the insurer “did not cause the loss or have anything to do with causing [the plaintiff‘s] injuries,” whereas the
Applying these principles herе, we conclude the equities tip slightly in St. Paul‘s favor because it had nothing to do with causing the plaintiff homeowners’ property damage, whereas defendants’ work was at least alleged to have contributed to the damage—and those allegations are what precipitated the defense costs. While it is true there was no determination of fault in the underlying construction defect actions because the cases settled, that fact is not relevant here because St. Paul is not seeking settlement costs like the insurers in Interstate Fire and Valley Crest.
In its statement of decision, the trial court concluded St. Paul‘s reliance on Interstate Fire was misplaced because that case took place at the demurrer stage, which concerns the sufficiency of the pleading only, not proof of necessary facts. The trial court stated: “Here, by contrast, we are long past the time for challenges to the pleadings . . . . In the instant case, . . . there was no persuasive evidence at trial (if any evidence at all) that the defendants’ work had been negligently pеrformed.”5 In so reasoning, the trial court conflated the allegations in the insurer‘s subrogation complaint with the allegations in the prior or underlying personal injury lawsuit. In Interstate Fire, the insurer‘s subrogation complaint alleged that the personal injury complaint had alleged the subcontractor‘s negligence caused the injury. The court concluded that if the insurer could prove that allegation (that is, the allegation about what the underlying personal injury complaint had alleged), then that fact would tip the equities in the insurer‘s favor. Here, St. Paul did prove that the construction defect actions alleged defendants’ work was defective, by submitting the two complaints into evidence. As a result, the trial court incorrectly concluded Interstate Fire was inapplicable to this case.
b. Nature and scope of contractual promises
This factor compares the nature and scope of the relevant contractual promises (here, the duty to defend), and as such, is similar to the second and
c. Receipt of premiums
In other subrogation contexts, courts have concluded that an insurer‘s receipt of premiums to insure the risk of loss would result in an unfair windfall to the insurance company if subrogation were permitted. (E.g., Patent Scaffolding, supra, 256 Cal.App.2d at p. 516.) However, in the same factual setting as the one here, the Interstate Fire and Valley Crest courts found the insurer‘s receipt of premiums was a neutral factor in the comparison of equities, because the subcontractor defendants were also “compensated for undertaking the risk of loss” by accepting consideration for the performance of their obligations under their subcontracts. (Interstate Fire, supra, 182 Cal.App.4th at p. 45; Valley Crest, supra, 238 Cal.App.4th at p. 488.) The same reasoning applies here, making this a neutral factor in our analysis.
d. Public policy
Up to this point, the equities have tipped only slightly in St. Paul‘s favor, but that changes with the final factor, which asks whether public policy should play a role in the fairness analysis. In both Interstate Fire and Valley Crest, the courts concluded public policy counseled in favor of granting the insurers’ claims, as denying subrogation would incentivize subcontractors to breach their agreements with general contractors. The courts explained: “In our view, it is not a good idea to reward parties who refuse to fulfill their
Both courts noted that the subcontractors, which had allegedly contributed to the losses, had not fulfilled their contractual obligations to their general contractors, while the insurers, which had nothing to do with the incidents leading to the losses, abided by their contractual obligation to pay for them. (Valley Crest, supra, 238 Cal.App.4th at p. 487.) “The comparison, therefore, is between one party who had nothing to do with causing the loss but abided by its contractual obligation to pay for it, and another party who caused the loss and then shunned its contractual obligation to pay it.” (Ibid.) The same reasoning applies here. St. Paul fulfilled its contractual duty to pay Pulte‘s defense costs, while defendants did not. We agree with Interstate Fire and Valley Crest that the better public policy is to reward the party that fulfilled its contractual responsibilities, rather than incentivize future breaches of the duty to defend.
5. The Trial Court‘s Reliance on Patent Scaffolding
The trial court‘s conclusion that the equities did not tip in St. Paul‘s favor was based on two grounds—its determination that subrogation requires a shift of all of the defense costs to defendants (which, as we explained above, was incorrect) and its misapplication of Patent Scaffolding. We now explain the second legal error in the trial court‘s decision.
In Patent Scaffolding, a general contractor had hired a subcontractor to perform work on a building. (Patent Scaffolding, supra, 256 Cal.App.2d at p. 508.) Their contract required the general contractor to obtain fire insurance on the subcontractor‘s property at the jobsite, but the general contractor failed to do so. (Ibid.) After a fire of unknown origin destroyed some of the subcontractor‘s property, the subcontractor‘s fire insurers paid the subcontractor for the loss. The insurers then sought to subrogate to the subcontractor‘s rights against the general contractor for indemnification of the property
The appellate court reversed, holding the insurers were not entitled to subrogation because the general contractor‘s failure to obtain fire insurance had not caused the fire. (Patent Scaffolding, supra, 256 Cal.App.2d at p. 512.) “The insurers’ loss was not caused by [the general contractor]‘s failure to get insurance or to indemnify [the subcontractor]. The insurers’ loss was caused by the fire, the very risk which each assumed, and [the general contractor]‘s failure to perform its contractual duty had nothing to do with the fire.” (Ibid.) The court held 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.” (Id. at p. 514.) It added that if subrogation were permitted, “the insurers who have accepted premiums to cover the very loss which occurred [would] receive a windfall.” (Id. at p. 516.)
Analogizing to Patent Scaffolding, the trial court stated: “Applying [Patent Scaffolding‘s] analysis here, the relevant facts are these: the wrongdoers are the defendants; their wrongful conduct consists of their breaches of their contractual obligations to defend Pulte . . . and the loss to Pulte was the expense of defending against that suit. The question presented by the instant case, therefore, is whether the defendants’ breaches of contract caused the homeowners to file their lawsuit against Pulte and thereby necessitate those defense costs to be incurred. Obviously, the answer is, ‘No.’ Therefore, as in Patent Scaffolding, there is no causal relationship.” (Italics added.)
The trial court‘s analysis was correct up until the italicized language, which asks the wrong causation question. Rather than ask whether defendants’ failure to accept Pulte‘s tender caused Pulte (and later St. Paul) to incur those costs, the trial court instead asked whether defendants’ failure to accept Pulte‘s tender caused the construction defect actions themselves. Under such a causation analysis, a subcontractor‘s breach of its duty to defend could never have a causаl connection to defense costs. This is because its duty to defend does not arise until after the general contractor is sued and tenders its defense. Such an analysis would have the undesirable result of cloaking subcontractors with impunity for breaching their contractual duties. The proper inquiry is whether defendants’ breach caused Pulte to incur the loss St. Paul is claiming in this litigation (i.e., defendants’ share of the defense costs). The answer to that question is yes.
Whether or not Patent Scaffolding was correctly decided, we agree with the Interstate Fire court that the case is “plainly distinguishable” on its facts. This is because it did not involve a situation (like ours and those in Interstate Fire and Valley Crest) where the defendant “was alleged to have caused the loss” and had “expressly promised to indemnify (not just to obtain insurance) in a contract related to the project from which the underlying loss occurred.” (Interstate Fire, supra, 182 Cal.App.4th at p. 38.) Put differently, the loss in Patent Scaffolding was property damage for which the general contractor had not expressly agreed to indemnify the subcontractor. Here, in contrast, the loss is the defense costs defendants expressly agreed to bear under their subcontracts with Pulte.
6. Defendants’ Equitable Portion of Defense Costs
St. Paul argues there is no need to remаnd this case to the trial court to determine the amount for which each defendant is liable. St. Paul argues we can determine those amounts on appeal based on the trial record because it presented evidence of how much it spent on (a) defending the case in general (i.e., the “mixed” defense costs) and (b) defending each defendant in particular. Defendants respond that if we conclude (as we have) that St. Paul is
As an initial matter, defendants are not entitled to a jury trial on the amount each owes St. Paul in subrogation. “The right to a jury trial is guaranteed by our Constitution.” [Citation.] ‘The right to trial by jury guaranteed by the Constitution is the right as it existed at common law at the time the Constitution was adopted. [Citation.]‘” (Jogani v. Superior Court (2008) 165 Cal.App.4th 901, 905.) “It is well settled in California that there is no right to a jury trial in civil actions that are equitable in nature. It is only when issues of law are involved that the right to a trial by jury attaches.” (Meyer Koulish Co. v. Cannon, supra, 213 Cal.App.2d at pp. 430-431.)
“[E]quitable subrogation. . . . [is] a proceeding in equity [and] the matter would ordinarily be determined by the court.” (St. Paul Fire & Marine Ins. Co. v. Murray Plumbing & Heating Corp. (1976) 65 Cal.App.3d 66, 72.) “““‘Subrogation is equity‘s second method of compelling the ultimate payment by one who in justice and good conscience ought to make it—of putting the charge where it justly belongs. [Citation.] It is not an absolute right, but depends upon the superiority of the equities of him who asserts it over those of the one against whom it is sought.’ . . .” [Citation.]” (Fireman‘s Fund Ins. Co. v. Morse Signal Devices (1984) 151 Cal.App.3d 681, 686.) We conclude the trial court correctly denied defendants’ request for a jury trial at the outset of this case, and our decision that St. Paul is entitled to subrogation does not alter the analysis. Contrary to Pro Coat‘s assertion, it does not matter that St. Paul is seeking monetary damages and not a traditionally equitable remedy like declaratory relief. If, as here, “the action is essentially one in equity and the relief sought depends upon the application of equitable doctrines, the parties are not entitled to a jury trial.” (American Motorists Ins. Co. v. Superior Court (1998) 68 Cal.App.4th 864, 871.)
Turning to the issue of which court should decide what portion of the defense costs each defendant should pay, we conclude the more prudent course is to remand to the trial court to exercise its discretion in the first instance. If St. Paul were seeking only the defense costs specifically related to each individual defendant—that is, if it were seeking only $1,650.75 from Milgard, $1,118.75 from Masco, $1,467 from Petersen-Dean, $2,262.50 from CBR, $1,747 from Pro-Coat, and $2,182.50 from Jasper—there would be no need to remand to the trial court because no discretion would be involved.
7. Attorney Fees
The trial court‘s postjudgment award of attorney fees to each defendant was based on its conclusion St. Paul was not entitled to subrogation and, as a result, defendants were “prevailing parties” under
III
DISPOSITION
We reverse the judgment and the postjudgment orders awarding fees and costs to defendants. On remand, the trial court shall enter judgment in St. Paul‘s favor and determine the amount of defense costs to shift to each defendant. St. Paul is entitled to costs on appeal.
CERTIFIED FOR PUBLICATION
SLOUGH
J.
We concur:
MILLER
Acting P. J.
MENETREZ
J.