United States: Travelers Property Casualty Company Of America v. Engel Insulation, Inc.

In Travelers Property Casualty Company of America v. Engel Insulation, Inc., 29 Cal. App. 5th 830 (2018), the Third Appellate District for the California Court of Appeal affirmed the trial court’s order granting judgment on the pleadings to Engel Insulation, Inc. (“Engel”), holding “[a]n insurer may not file its own action to assert claims solely as a subrogee of a suspended corporation.”

Travelers Property Casualty Company of America, the Travelers Indemnity Company of Connecticut, and St. Paul Fire and Marine Insurance Company (collectively, “Travelers”) agreed to defend developers Westlake Villas, LLC, and Meer Capital Partners, LLC (collectively, “Westlake”) in an underlying construction defect action, based on policies Travelers issued to various subcontractors on the project. Travelers reserved its rights to seek reimbursement of defense costs unrelated to its insureds’ scope of work.

Travelers filed the instant action against certain subcontractors, including Engel, to recover attorney’s fees and costs incurred in defending Westlake pursuant to the subcontractors’ agreements to defend and indemnify Westlake. The trial court granted Engel’s motion for judgment on the pleadings without leave to amend, explaining that Truck Insurance Exchange v. Superior Court, 60 Cal. App. 4th 342 (1997) barred an insurer “from asserting and prosecuting the affirmative claims of a suspended corporate insured as subrogee” and that Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc., 136 Cal. App. 4th 212 (2006) and the subsequent amendment to California Revenue and Tax Code section 19719 did not remove this bar. Travelers appealed.

According to California Revenue & Tax Code section 23301, a corporation’s powers, rights, and privileges may be suspended if it does not pay its taxes. Such suspension means “a suspended corporation cannot sue or defend a lawsuit while its taxes remain unpaid.” However, once the corporation pays the taxes and obtains a certificate of reviver, it may be allowed to carry on the litigation.

In Truck, supra, the Court of Appeal held that Truck, an insurer of a suspended corporation, could intervene in an action filed by other insurers against the insured, which sought to rescind their own insurance policies. The Truck Court permitted Truck to intervene based on its right to equitable construction, but explained that, if this right were based on subrogation, Truck would not have been permitted to intervene – “it cannot obtain a position more advantageous than its subrogor.”

The Court noted “Travelers seeks to avoid the application of this portion of Truck to its action by dismissing it as dicta.” The Court disagreed with Travelers’ position, referring to Truck as being “based on hornbook law” that a subrogated insurer “has no greater rights than the insured and is subject to the same defenses assertable against the insured.” While “Travelers admits its claims are based on subrogation to the rights of the suspended Westlake,” it argued Section 19719 “explicitly authorizes its action.” Section 19719 was amended to add subsection (b), which provides that the penalties provided in subsection (a) do not apply to an insurer or insurer retained counsel who pursues subrogation, contribution, or indemnity rights of a suspended corporation after providing a defense for a suspended corporation in a civil action. Travelers claimed it intervened in the underlying action on Westlake’s behalf because of its suspended status; while there were no citations to the record or allegations to support this, the Court assumed it was true because Travelers could be granted leave to amend to assert these facts.

After the addition of section 19719, subdivision (b), Reliance Ins. Co. v. Superior Court (2000) 84 Cal.App.4th 383 [100 Cal. Rptr. 2d 807] (Reliance) held that “where the insurer may be subject to a direct action under Insurance Code section 11580 by a judgment creditor who has or will obtain a default judgment in a third party action against the insured, intervention is appropriate.” [Citation.] The court contrasted the aforementioned portion of Truck discussing how a subrogated insurer stands in the shoes of its insured by explaining that the motion to intervene was not based on subrogation to the rights of the insured and the insurer “sought intervention to protect its own interests in any action brought by the [the plaintiffs] under Insurance Code section 11580.” [Citation.]

In Kaufman & Broad, this court held, based on Reliance, that “where there is a danger that a judgment will be entered by default, the insurance carrier is entitled to intervene in the underlying case to contest its insured's fault or the available damages.” [Citation.] We also explained that section 19719, subdivision (b), only exempts an insurer of a suspended corporation from criminal penalties. [Citation.] “[S]ection 19719 does not generally authorize the insurer to exercise the rights and powers of its corporate insured. This obviously includes the right to sue or defend a lawsuit or even to appear in the lawsuit. … Instead, the only manner in which the insurer may exercise those powers is by intervening in the lawsuit under Code of Civil Procedure section 387 and asserting any defenses on behalf of its insured.” [Citation.]

Travelers cites no authority permitting an insurer to bring its own action based on the subrogated rights of a suspended corporation under section 19719, subdivision (b), separate from what has been authorized under Truck, Reliance, or Kaufman & Broad. [Citations.] Nor are we convinced the inability of an insurer to do so renders any portion of section 19719 surplusage. Section 19719, subdivision (b) is a clear exemption to the penalty provision in subdivision (a). Thus, it clarifies that an insurer who, properly or improperly, prosecutes a subrogation claim will not be penalized for doing so. It would appear that Travelers itself may benefit from the provision, thereby illustrating the point. Moreover, we do not address whether an insurer who has intervened to protect its own rights could, in that context, essentially prosecute the subrogated rights of its suspended insured. [Citation.] This too lends value to section 19719, subdivision (b). Section 19719 does not, however, alter the substantive law regarding subrogation. Indeed, Truck itself makes no mention of section 19719. Truck mentions only section 23301 [citation], which appears in a separate part of the Revenue and Taxation Code and has not undergone any relevant amendments. Thus, an exception to the penalty provision in section 19719 does not disturb the foundation of Truck. Accordingly, Truck is still cited for the proposition that an insurer may not “pursue a subrogation recovery if the insured is itself barred from filing suit.” [Citation.] We decline to alter the settled law on this point.

The Court then turned to the trial court’s denial of leave to amend. Travelers relied on the policy that leave to amend should be granted liberally, and “argue[d] only that it could plead it revived Westlake’s corporate status, if it chose to do so.” However, the Court noted: “There is nothing in the record to suggest Westlake’s taxes have been paid or a certificate of reviver has been obtained, and Travelers did not raise this possibility or suggest to the trial court that there were any plans to address the status of the Westlake entities as suspended corporations.” The Court determined the trial court “was not compelled to grant an amendment upon the mere speculation that Travelers would somehow thereafter cure Westlake's legal disability in order to pursue litigation.”

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