Public Service Mutual Insurance v. Liberty Surplus Insurance
Docket: No. 2:14-cv-00226-MCE-KJN
Court: District Court, E.D. California; September 30, 2014; Federal District Court
Plaintiff Public Service Mutual Insurance Company (PSMIC) seeks equitable indemnification from Liberty Surplus Insurance Corporation (LSIC) for defense and indemnification costs related to claims against its insureds, Fair Oaks Fountains, LLC (FOF), and FPI Management Company (FPI). PSMIC asserts that LSIC is responsible under its policy with Gala Construction, which named FOF and FPI as additional insureds, and that LSIC's policy is primary concerning the underlying loss. The incident involved Diana Balfour, a tenant injured due to water intrusion linked to Gala's negligence during repairs at the FOF-owned apartment complex. The construction contract between Gala and FOF required Gala to indemnify FOF for liabilities arising from Gala's work and mandated that FOF be added as an additional insured on Gala's liability insurance. The LSIC policy included an endorsement naming FOF as an insured and specified that coverage was primary relative to any other insurance held by the additional insureds. LSIC's motion to dismiss PSMIC's complaint under Rule 12(b)(6) and to strike references to punitive damages under Rule 12(f) is partially granted and partially denied.
Plaintiff, as the general liability carrier for FOF and FPI, asserts that it made at least eight attempts to tender the defense of Ms. Balfour's claim to LSIC from November 12, 2008, to April 8, 2011. Despite these attempts, LSIC allegedly refused to accept the tender, even though Plaintiff argues that the injuries and damages claimed by Ms. Balfour are connected to the work performed by Gala and its affiliates under the construction contract, which LSIC’s policy describes as providing primary coverage. Consequently, PSMIC claims it had to defend FOF and FPI and settle with Ms. Balfour in April 2013, incurring a payment of $50,000 on their behalf. Initially filing suit against LSIC in FOF and FPI's name, PSMIC dismissed the lawsuit after discovering that FOF and FPI were not damaged. It subsequently filed the current action for equitable subrogation to recover its expenses. The complaint includes claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. LSIC has filed a Motion to Dismiss, challenging all claims and asserting that any request for punitive damages should be stricken. The excerpt also outlines the legal standards for a Motion to Dismiss under Federal Rule of Civil Procedure 12(b)(6), emphasizing that allegations of fact must be accepted as true and that a complaint must contain sufficient factual content to support a plausible claim for relief. The court must consider whether to allow leave to amend the complaint, with such leave being granted freely unless there are specific issues like delay, bad faith, or futility.
The Court has the authority to strike any insufficient defense or redundant, immaterial, impertinent, or scandalous matter from pleadings under Rule 12(f) to prevent unnecessary litigation costs. Immaterial matter lacks a significant relationship to the claims or defenses, while impertinent matter does not relate to the relevant issues.
In the analysis of PSMIC's complaint for breach of contract and related claims, the case is based on equitable subrogation. PSMIC asserts it has subrogated rights to FOF and FPI after defending them and settling Ms. Balfour's personal injury claim. LSIC contends that as a co-insurer, PSMIC cannot claim subrogation for defense costs and should instead pursue equitable contribution, which PSMIC has not alleged. The Court must determine whether the claims fall under subrogation or contribution, noting the confusion surrounding these doctrines.
The distinction hinges on whether PSMIC and LSIC cover the same risks or if their policies are classified as primary and excess. PSMIC argues that LSIC's motion overlooks this distinction, as LSIC's policy specifies that its coverage for additional insureds like FOF and FPI is primary and does not contribute with other insurance. Courts typically uphold the terms of insurance policies regarding coverage allocation. Furthermore, comparisons between the policies reveal that LSIC and PSMIC insure different risks: LSIC's coverage pertains to FOF and FPI's vicarious liability for Gala’s work, while PSMIC’s policy is a general liability policy not restricted to Gala’s specific activities. The nature of the underlying claim supports LSIC's primary coverage as it relates to the work performed by Gala for FOF and FPI.
Balfour's injuries, as presented in the Complaint, are attributed solely to the negligence of Gala, with no direct negligence by FOF or FPI alleged. This indicates that the LSIC policy provides primary coverage for vicarious liability, while the PSMIC policy only applies in an excess capacity. Since both insurers do not share the same level of liability and are not obligated to defend the same claim, equitable contribution is not applicable. However, PSMIC, as the excess insurer, can pursue equitable subrogation against LSIC, the primary insurer. Subrogation allows PSMIC to recover costs it incurred by stepping into the insured's position after compensating them for losses related to Gala's negligence. To succeed in a subrogation claim, PSMIC must demonstrate several elements: that Balfour suffered a loss covered by LSIC, that PSMIC was not primarily liable, that it compensated Balfour without being a volunteer, that Balfour has a valid claim against LSIC, and that PSMIC suffered damages due to LSIC's actions. The court has determined that LSIC's policy is primary based on the Complaint's allegations, confirming that LSIC covers FOF and FPI's vicarious liability for Balfour's injuries. PSMIC has already paid for the defense and indemnification of its insureds in the related lawsuit. The assessment of damages for subrogation considers whether the damage would have occurred without PSMIC's intervention.
Damage is established, with PSMIC's subrogated damages being liquidated as they consist of specific defense costs and a fixed sum paid. The key issue is whether LSIC should solely bear the defense and indemnification costs, which hinges on assessing the equities involved. Courts typically evaluate the role of the indemnification-seeking party in causing the accident and whether the defendant insurer had a contractual obligation to defend and indemnify. In this case, there is no evidence that PSMIC or its insureds, FOF and FPI, contributed to the underlying loss. LSIC’s policy explicitly covers FOF and FPI for damages resulting from Gala's negligence during work at the apartment complex. Gala has also agreed to defend and indemnify FOF and FPI for losses stemming from its negligence. Therefore, the equities suggest that LSIC should assume responsibility for the defense and indemnification costs.
Regarding the breach of contract claim against LSIC, PSMIC faces two arguments for dismissal. First, LSIC contends that PSMIC lacks privity of contract with it, precluding a breach claim. Second, LSIC argues that since FPI and FOF did not incur damages (as their costs were covered by PSMIC), there can be no subrogation claim. However, both arguments are found unpersuasive. In subrogation, privity of contract between insurers is unnecessary, as subrogation is based on the indemnity nature of insurance rather than contractual relationships. Moreover, the insured does not need to demonstrate damages for the insurer to pursue subrogation for incurred expenses. This aligns with case law, such as in Cleveland, where the court determined that the measure of damages for subrogation purposes reflects whether the party would have had a viable claim if not compensated, rejecting the argument that compensation negates subrogation claims.
In Northwestern Mutual Ins. Co. v. Farmers' Ins. Exch., the court clarified that equitable subrogation does not require the subrogor (FOF and FPI) to have suffered actual loss; it suffices that they would have incurred loss if the subrogee (PSMIC) had not paid the liability. The court found PSMIC had a valid breach of contract claim through equitable indemnity, resulting in the denial of LSIC’s motion to dismiss this claim. The defendant's reliance on Maryland Casualty v. Nationwide Mutual Ins. Co. was deemed irrelevant, as that case involved both carriers being primarily liable, unlike the current situation. Additionally, in American States Ins. Co. v. National Fire Ins. Co. of Hartford, equitable subrogation was denied due to both carriers having general liability policies covering different time periods, leading to primary liability for each carrier. The court rejected the defendant's argument that equitable subrogation was precluded because PSMIC's policy was not labeled as excess insurance, emphasizing that the nature of the policies did not alter the outcome, as seen in Northwestern Mutual.
Regarding the breach of the covenant of good faith and fair dealing, insurers can be sued for tort if they unreasonably refuse to provide a defense or delay payment of benefits, as this covenant imposes a heightened duty on insurers to act in good faith. Defendants contended that without a contractual relationship between LSIC and PSMIC, no implied covenant exists, and even if it did, PSMIC could not claim damages in the absence of loss to the insureds (FOF and FPI).
Plaintiff's implied covenant claim is valid despite challenges regarding privity of contract, as it is based on equitable subrogation, which does not require such privity; instead, it focuses on the indemnity nature of insurance. FOF and FPI, being named additional insureds, qualify as at least third-party beneficiaries, allowing them to enforce the insurer's obligations, including good faith in claims handling. The assertion that insureds suffered no loss that would impede subrogation is unfounded; the insured need not prove damages for the excess insurer to pursue subrogation for expenses incurred on their behalf. This enables PSMIC to sue the primary insurer for bad faith failure to protect the insured's interests. Previous cases cited by Defendants are not applicable as they involve different contexts or parties. Additionally, Plaintiff seeks declaratory relief regarding the obligation of Defendants to provide defense and indemnity to FOF and FPI, clarifying that PSMIC has already incurred costs of approximately $50,000 for these purposes. However, since declaratory relief is meant to address future rights rather than past grievances, and PSMIC has a matured cause of action for damages, the claim for declaratory relief is considered redundant and inappropriate.
Plaintiff's request for declaratory relief is dismissed as unnecessary since the underlying case has been settled, and the Plaintiff is instead seeking damages related to incurred expenditures. The court finds this request superfluous. Regarding punitive damages, Defendant argues that such damages are not assignable and should be stricken if Plaintiff's claim for breach of the covenant of good faith and fair dealing is not dismissed. However, the court rejects this argument, clarifying that punitive damages are a remedy associated with a claim, not a separate cause of action, and can be included in subrogation claims. Consequently, the motion to strike punitive damages is denied. The court partially grants and partially denies Defendant's motion to dismiss. It denies the dismissal of Plaintiff's claims for Breach of Contract and Breach of the Covenant of Good Faith and Fair Dealing, and also denies the request to strike punitive damages. However, it grants the dismissal of the declaratory relief claim due to the lack of a prospective controversy, with no leave to amend permitted. The court has determined that oral argument was unnecessary and has decided the matter based solely on submitted documents.
