Subrogation Alert: Insurer May Not File a Subrogation Action Against Third Parties if the Insured is a Suspended Corporation

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On November 30, 2018, the California Court of Appeal decided Travelers Prop. Cas. Co. of America v. Engel Insulation, Inc., 2018 WL 6259032.  The Court affirmed the granting of the defendant’s motion for judgment on the pleadings without leave to amend.  The Court found that Travelers was barred from pursuing its claim for subrogation under Revenue and Taxation Code Section 23301 because its insureds were suspended corporations under California law.

Travelers had defended the developers in a construction defect corporation as additional insureds under its policy.  Travelers then sued several subcontractors as the subrogee of the developers to recover the attorneys’ fees and costs of defending the developers, pursuant to the subcontractors’ agreements to defend and indemnify the developers.

The developers were suspended corporations under Revenue & Taxation Code Section 23301 for non-payment of taxes.  A suspended corporation cannot sue or defend a lawsuit while its taxes remain unpaid.

Based on the principle that the insurer stands in the shoes of its insured in pursuing a subrogation claim, the Court of Appeal held that an insurer does not have the ability to sue for subrogation if its insured is a suspended corporation which has no power to sue the tortfeasor.

Travelers had argued that an amendment to Revenue & Taxation Code Section 19719, subd. (b) provided an exception allowing an insurance company as a subrogee of the suspended corporation to pursue subrogation, contribution or indemnity rights against other persons or entities in the name of the suspended corporation.  The Court of Appeal disagreed.

The Court suggested that the insurer could only preserve its rights to pursue third parties if it intervened in the underlying lawsuit pursuant to Code of Civil Procedure Section 387 to protect itself against a default judgment against its insured that could then be enforced against the insurer directly under Insurance Code Section 11580, citing to Truck Ins. Exchange v. Superior Court (1997) 60 Cal.App.4th 342.  However, the Court did not expressly reach the issue:  “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.”

The Court rejected Travelers’ argument that the trial court abused its discretion in denying leave to amend because there was nothing in the record to suggest that the developers’ taxes had been paid or a certificate of revivor had been obtained for any of the suspended corporations.

The Travelers decision therefore raises another red flag for insurers dealing with insureds that are suspended corporations under California law.  California law holds that an insurer cannot defend a suspended insured.  Now, in order to preserve its rights to pursue another party, including a subcontractor or another insurer, the insurer may have to intervene directly in the underlying suit against its insured under Code of Civil Procedure Section 387 or undertake to obtain a revival of the insured’s status which may include paying the insured’s unpaid taxes.