Contractual Indemnification Claim To Which Insurer Subrogated Not Barred By Good Faith Settlment
In Interstate Fire and Casualty Insurance Company v. Cleveland Wrecking Company, No. A124920 (February 22), Division Five of the First Appellate District ruled on an appeal by Interstate after the trial court sustained, without leave to amend, Cleveland’s demurrer to its subrogation complaint. Cleveland was a subcontractor. Interstate insured Cleveland’s principal. Although Cleveland was contractually obligated to defend and indemnify Interstate’s insured and to obtain liability insurance covering its principal’s defense and indemnity, it did not. Nonetheless, the trial court held that Cleveland’s liability was disposed of by virtue of its good faith settlement of the underlying personal injury action. Interstate appealed, arguing that the trial court erred because (1) the subrogation complaint, based on its insured’s contractual indemnification claim against Cleveland, was not barred by Cleveland’s good faith settlement in the underlying litigation; and (2) Cleveland’s equities were not equal to or superior to those of Interstate as a matter of law because, contrary to what the trial court held, Interstate’s insured suffered damages as a result of Cleveland’s breach of its duty to defend.
The Court of Appeal agreed with Interstate. It found that a good faith settlement order, such as was entered in the underlying action, does not bar a non-settling tortfeasor from asserting an indemnification claim against the settling defendants based on an express contract. See Bay Development, Ltd. v. Superior Court (1990) 50 Cal. 3rd 1012, 1031-1032 and Plant Insulation Co. v. Fibreboard Corp. (1990) 224 Cal. App. 3rd 781, 790. Because an insurer stands in the shoes of its insured, the insurer can likewise pursue a cause of action against the settling tortfeasor for breach of an express contactual indemnification clause.
The Court also found that the balance of the equities favored Interstate. Interstate’s insured was damaged as a result of Cleveland’s breach of its contractual agreement with the insured. The fact that it was insured and therefore suffered no out-of-pocket loss does not change this. Under Cleveland’s theory, supported by the trial court, there would be no such thing as a viable subrogation action from an insurer pursuing its insured’s independent claim. Here Interstate accepted its insured’s defense and resolved the claim against it. Although contactually obligated to obtain insurance covering Interstate’s insured, Cleveland did not, and then refused to defend and indemnify Interstate’s insured under its contract with that insured. Further, Cleveland was allegedly a contributing party to the injuries alleged in the underlying litigation. Interstate’s equitable position, the Court held, was clearly superior.
February 22, 2010
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