Re: The Travelers Indemnity Company of Connecticut et al. v.
Airport Specialty Products, Inc. et al.
Superior Court Case No. Case No: 16 CECG 02919
Hearing Date: February 21, 2018 (Dept. 503)
Motion: By Kertel Communications for summary judgment or, in the
alternative, summary adjudication
Tentative Ruling:

To deem the Plaintiffs’ objections moot on the grounds that the objections are not material to the disposition of the motion. [CCP § 437c(q)]

To grant the motion for summary adjudication of the first, second, third and fifth causes of action on the grounds that there is no contractual relationship between the Plaintiffs and Kertel Communications. As a result, Plaintiffs lack standing to bring these causes of action.

To grant the motion for summary adjudication of the fourth cause of action for equitable subrogation on the grounds that policy considerations weigh against recognizing such a cause of action.

Explanation:

Background

On August 28, 2015, the owners of 40 homes located in the Colby Park/Oxford Commons subdivision in east Fresno filed suit against McMillin Colby Park, LLC and McMillin Oxford Commons, LLC seeking damages for construction defects in excess of $130,000 for each home. The action was filed as Case No. 15 CECG 02764—Yetter et al. v. McMillin.

In the instant case (16 CECG 02919), McMillin tendered the defense of the action to one or more of the subcontractors pursuant to the terms of their contracts. Two of the subcontractors, Champagne Landscape and Fresno Precision Plastics, tendered the claim to their insurers, Plaintiffs Travelers and St. Paul Mercury.

On September 7, 2016, these insurers filed a complaint against various subcontractors who allegedly worked on the Colby Park/Oxford Commons developments. The Plaintiffs allege that each of the contracts between McMillin and these subcontractors included a provision to defend and indemnify McMillin. The complaint alleges five causes of action:

1. Declaratory relief—duty to defend;

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2. Declaratory relief—apportionment of defense obligations;
3. Breach of contract—duty to defend;
4. Equitable subrogation; and
5. Contractual subrogation.

After the Court sustained the demurrer of Defendant Airport Specialty Products, Inc. without leave to amend, the Plaintiffs filed a First Amended Complaint. On June 1, 2017, the First Amended Complaint was stricken sua sponte pursuant to CCP § 436 on the grounds that it was filed in violation of CCP § 472 and without permission of the Court. Accordingly, the original complaint is the operative pleading.

Notably, on October 26, 2017, McMillin dismissed with prejudice its cross-complaint against both Champagne Landscape and Precision Plastics in the Yetter action. Five days later, on October 31, 2017, Kertel filed a motion for summary judgment, or in the alternative, summary adjudication. Opposition was filed by the Plaintiffs followed by a reply.

Merits

Construction Liability–Subcontractors’ Indemnification of Contractor

Given the expense of residential construction defect litigation, general contractors often require subcontractors to purchase commercial general liability policies and name the project owner and/or the general contractor as additional insureds under these policies. This is to offset the cost where the contractor’s liability is derivative. [Maryland Cas. Co. v. Nationwide Ins. Co. (1998) 65 Cal.App.4th 21, 33; see; Hartford Cas. Ins. Co. v. Mt. Hawley Ins. Co. (2004) 123 Cal.App.4th 278, 303]

As a result, a policy endorsement is issued to the subcontractor listing the additional insured parties. However, the actual endorsement is usually not sent to the third party. Instead, it is notified by way of a certificate of insurance. (Patrick J. O’Connor, Jr., Commercial General Liability Coverage (Apr. 1999) 19 Construction L. 5, 12–13.) “A certificate of insurance is merely evidence that a policy has been issued. (Ins. Code, § 384.) It is not a contract between the insurer and the certificate holder. [Citations.]” (Empire Fire & Marine Ins. Co. v. Bell (1997) 55 Cal.App.4th 1410, 1423, fn. 25.) Accord, Pardee Const. Co. v. Insurance Co. of the West (2000) 77 Cal.App.4th 1340, 1347, as modified on denial of reh’g (Feb. 23, 2000)

Relationship between McMillin and the Plaintiffs and McMillin and Kertel

In the case at bench, subcontractors Champagne Landscape and Fresno Precision Plastics purchased insurance from the Plaintiffs that required the Plaintiffs to defend McMillin Colby Park, LLC. See Exhibits 1-3 of the Plaintiffs’ Statement of Evidence in opposition. In addition, subcontractor Kertel was required by McMillin to purchase insurance naming McMillin as an additional insured such that it was entitled to indemnification and a defense. Exhibit 8 is a “multiple contract form” entitled Standard General Conditions, October 1, 2004 edition between McMillin and Kertel signed by the latter on September 20, 2005. Exhibit 9 is a “multiple contract form”

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entitled Standard General Conditions, December 15, 2005 edition between McMillin and Kertel signed by both parties in March of 2006.

But, none of the contracts submitted by the Plaintiffs as exhibits create a contractual relationship between the Plaintiffs and Defendant Kertel. The fact that Kertel was also required by McMillin to secure insurance which named McMillin as an additional insured and which required Kertel to defend and indemnify McMillin does not transmute the relationships between the parties. Accordingly, the Plaintiffs lack standing to maintain the causes of action for declaratory relief. As stated in a previous ruling, an action for declaratory relief does not lie when a complaint alleges no facts showing an enforceable contractual right in the plaintiff. [Dynamic Industries Co. v. City of Long Beach (1958) 159 Cal.App.2d 294, 300] This principle also applies to the cause of action for breach of contract and the cause of action for “contractual subrogation.” Therefore, the motion for summary adjudication of the first, second, third and fifth causes of action should be granted.

As for the fourth cause of action for equitable subrogation, the Plaintiffs present some interesting arguments in support. As stated in Herrick Corp. v. Canadian Ins. Co. of Calif. (1994) 29 Cal.App.4th 753, “[i]t is hard to imagine another set of legal terms with more soporific effect than indemnity, subrogation, contribution, co-obligation and joint tortfeasorship.” Id. At 756. “Equitable contribution,” “equitable indemnity” and “equitable subrogation” are separate remedies that apply in discrete situations. Different results may be reached depending on which remedy is invoked. [Hartford Cas. Ins. Co. v. Mt. Hawley Ins. Co. (2004) 123 Cal.App.4th 278 at 287-288] An insurer that seeks “equitable subrogation” against other insurers is said to “stand in the shoes of the insured” and is therefore subject to defenses that other insurers could have asserted if the insured had sued them directly (e.g., settlement, waiver, statute of limitations). On the other hand, an insurer seeking “equitable contribution” from other insurers may not be subject to these same defenses. [See Fireman’s Fund Ins. Co. v. Maryland Cas. Co. (1998) 65 Cal.App.4th 1279, 1288-1289.

But, as Plaintiffs admit in their Memorandum of Points and Authorities in opposition, McMillin cannot sure Kertel because McMillin has no standing to seek fees paid by Travelers. See Bramalea California Inc. v. Reliable Interiors (2004) 119 Cal.App.4th 468. They also admit that they cannot sue the subcontractors directly for equitable contribution because this remedy is available only between insurers. See Aerojet-General Corp. v. Transport Indem. Co. (1997) 17 Cal.4th 38, 72. Thus, this lawsuit presents a “first impression.” The Plaintiffs’ arguments are compelling given that they “stepped up to the plate” and defended McMillin. On the other hand, there are a number of arguments against “making new law” in this case.

First, many subcontractors are small businesses. It appears inequitable to require them to reimburse the insurers for defense costs over which they had no control. It could lead to bankruptcies.

Second, attempting to apportion defense costs among the numerous subcontractors on a residential construction project is an onerous task. Inequity would be the inevitable result.

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Third, an argument could be made that in such a situation, it would be better to wait until the construction defect lawsuit is ended. But, this raises the issue of substantial delay.

Finally, it is noted that the Legislature enacted Civil Code § 2782(d), effective
January 1, 2012. It states:

(d) For all construction contracts, and amendments thereto, entered into after January 1, 2009, for residential construction, as used in Title 7 (commencing with Section 895) of Part 2 of Division 2, all provisions, clauses, covenants, and agreements contained in, collateral to, or affecting any construction contract, and amendments thereto, that purport to insure or indemnify, including the cost to defend, the builder, as defined in Section 911, or the general contractor or contractor not affiliated with the builder, as described in subdivision (b) of Section 911, by a subcontractor against liability for claims of construction defects are unenforceable to the extent the claims arise out of, pertain to, or relate to the negligence of the builder or contractor or the builder’s or contractor’s other agents, other servants, or other independent contractors who are directly responsible to the builder, or for defects in design furnished by those persons, or to the extent the claims do not arise out of, pertain to, or relate to the scope of work in the written agreement between the parties. This section shall not be waived or modified by contractual agreement, act, or omission of the parties. Contractual provisions, clauses, covenants, or agreements not expressly prohibited herein are reserved to the agreement of the parties. Nothing in this subdivision shall prevent any party from exercising its rights under subdivision (a) of Section 910. This subdivision shall not affect the obligations of an insurance carrier under the holding of Presley Homes, Inc. v. American States Insurance Company (2001) 90 Cal.App.4th 571. Nor shall this subdivision affect the obligations of a builder or subcontractor pursuant to Title 7 (commencing with Section 895) of Part 2 of Division 2.

The Court is aware that the Yetter action involves contracts entered into before January 1, 2009 and thus, this provision does not apply. But, the policy considerations leading to the enactment of this provision are the same vis-à-vis permitting an insurer who defended the general contractor to recover the defense costs directly from a subcontractor via “equitable subrogation.” In the end, policy considerations compel the granting of the Defendant’s motion for summary adjudication of the fourth cause of action on the grounds that the Plaintiffs lack standing.

Pursuant to California Rules of Court, rule 3.1312(a) and Code of Civil Procedure section 1019.5, subd. (a), no further written order is necessary. The minute order adopting this tentative ruling will serve as the order of the court and service by the clerk will constitute notice of the order.

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Tentative Ruling A.M. Simpson 2-20-18
Issued By: on .
(Judge’s initials) (Date)