Source: http://www.jdsupra.com, June 24, 2016
By: Joseph French, Low, Ball & Lynch
Hearn Pacific Corporation v. Second Generation Roofing, Inc.
Court of Appeal, First Appellate District (May 2, 2016)
It is not uncommon in construction defect and some other cases for an insurer of the general contractor to take an assignment of its insured’s indemnity claims against subcontractors and to continue to pursue the subcontractors in the name of the general contractor. This case considered the insurer’s exposure itself to the attorney’s fees of a subcontractor who successfully defeated any indemnity claims of the general.
Hearn Pacific Corporation (“Hearn”) was sued for design and construction defects by the owner of a mixed-use building in 2007. Hearn filed a cross-complaint against several subcontractors who worked on the project, including Second Generation Roofing (“SGR”). During the course of litigation, Hearn assigned its rights under its subcontracts to its insurers, North American Specialty Insurance Company (“North American”) and RSUI Group, Inc. (RSUI”). Hearn only retained the right to recover its out-of-pocket defense costs which it had previously incurred. Hearn subsequently amended its cross-complaint to plead causes of action for breach of the subcontractor’s duty to defend in the underlying action, equitable contribution and other causes of action. In the first amended complaint, Hearn expressly acknowledged that it had assigned its rights to North American and RSUI and that they had elected to prosecute the cross-complaints in Hearn’s name, rather than their own names as permitted under California Code of Procedure § 368.5.
SGR obtained a defense verdict against Hearn and moved the Court for an award of attorneys’ fees under the prevailing party attorneys’ fees provision in the subcontract. The lower Court granted the motion awarding SGR approximately $30,000 in costs in one order and $180,000 in fees in another. SGR moved to amend the judgment to name North American as a judgment debtor under Code of Civil Procedure (CCP) section 187 (which allows amendment of judgments) and section 368.5 (which allows a matter to proceed in the name of the original party following a transfer or assignment of rights) The trial court denied SGR’s motion to amend, claiming that statements in the first amended complaint admitting that the action was really being prosecuted by the insurers in Hearn’s name were not binding or evidence. It also denied the motion on the merits, ruling that under section 187 it could only add additional judgment debtors in “alter ego” cases. The trial court also ruled that the assignment did not extend any rights to the insurer that it did not already have, and that the partial assignment was still brought properly in only Hearn’s name. Finally, the court ruled that SGR’s only remedy was to sue the carriers in an Insurance Code section 11580 action. SGR appealed.
The Court of Appeal reversed. The Court considered section 187, and agreed that there was a dispute over whether it could be used to amend a judgment in situations other than under an alter ego or alias theory. However, section 187 provided the manner in which to proceed when there was not any other statute specifically covering the manner in which to bring in another party. Here, section 368.5 specifically addresses the manner in which to proceed with regard to bringing in or naming other parties. Under section 368.5 and its predecessor, trial courts have discretion to allow litigation to continue in the name of the original plaintiff rather than substitute the transferee. If the action then proceeds in the original party’s name, they are a nominal party, while the transferee is the real party in interest.
The Court of Appeal found that the trial court abused its discretion by not adding North American as a judgment debtor under CCP§ 368.5. According to the Court, an insurer’s ability to prosecute the action in Hearn’s name under CCP § 368.5 did not insulate them from exposure. The Appellate Court also found that North American should be added as judgment debtor even if there was only a partial assignment of Hearn’s rights, because the action was clearly being prosecuted on its behalf. The Court noted that the result would have been the same had the insurer pursued the action in its own name or on a subrogation theory. The Court pointed out that if North American, had proceeded with a separate subrogation action, it would step “into the shoes” of its insureds and if unsuccessful on the contractual claims, would assume the insured’s liability for contractual attorneys’ fees.
Hearn argued that the assignment was invalid, or that even if it was valid, it “only assigned a portion of the contract provisions, so that section 368.5 was not applicable. The Court of Appeal disagreed, based on Hearn’s own declarations and allegations regarding the nature of the assignment. Further, at oral argument, Hearn’s counsel effectively conceded that the cross-claims were litigated solely for the benefit of Hearn’s insurer after the settlement, and that Hearn itself might be judgment proof. For all those reasons, the Court of Appeal rejected Hearn’s argument that it remained the only party asserting claims against SGR.
The Court of Appeal also noted that the trial court was wrong in denying SGR’s motion on the grounds that its sole remedy was an action under Insurance Code section 11580. That is only applicable when the insurance policy coves the relief awarded in the judgment, and there was no record establishing even a potential remedy under section 11580, let alone a sole remedy.
COMMENT
This case makes clear that when a carrier chooses to pursue a contractual indemnity claim following an assignment of its insured’s rights against the parties, the carrier also takes the risk that an unsuccessful prosecution of the claim may expose the carrier, as well as the insured, to the defendant’s contractual attorneys’ fees.
For a copy of the complete decision, see: Hearn Pacific v Second Generation Roofing