By W. Burke Coleman, Demotech, Inc.
An interesting case recently emerged from California addressing whether a failure-to-procure claim against an agent or broker may be assigned to third parties. In AMCO Insurance Company v. All Solutions Insurance Agency, LLC, 2016 Cal. App. LEXIS 96 (Cal. App. 5th Dist., Feb. 8, 2016), a building owner found himself with no coverage after a fire in his building spread to a neighboring building. When the neighbors and their insurance company sued, the building owner asserted that his insurance broker failed to obtain the requested first party property and third party liability insurance and assigned his rights against his broker for failure to procure insurance to these third parties.
The broker disputed its negligence, arguing that it had presented two quotations for insurance to the owner to which he never responded. In addition, the broker argued that the client could not assign his failure to procure claim and that neither the insurance company nor the neighbors were in position to assume those rights.
First, the broker argued that the general rule allowing the assignment of causes of action should not be applied to insurance agents or brokers. California law generally favors the assignability of causes of action; except for certain causes of action against the person, like slander, assault and battery, and negligent personal injuries. In addition, legal malpractice claims are not assignable due to the personal and unique nature of legal services, and the confidentiality of the attorney-client relationship. The broker likened the failure to procure claim to a legal malpractice action and suggested that the court should treat claims against agents and brokers in the same way and prohibit their assignment. The appellate court disagreed with the broker’s assessment and, referencing the majority rule in other jurisdictions, found that a cause of action against an insurance broker was assignable.
Second, the broker argued that equitable principles of subrogation limited the rights of the insurance company and neighbors as assignees.
Typically, as the appellate court later noted, “subrogation allows the insurer to step into the shoes of the injured policyholder and pursue recovery from the third party wrongdoer” and it is intended to relieve the party who paid for the loss (e.g. an insurer) and place the burden for the loss on the wrongdoer who is actually responsible for it. Courts have recognized subrogation as a “sort of assignment by operation of equity and the equivalent of an equitable assignment.” The pertinent aspect of this case turned on the “rule of superior equities,” which says that before the right of equitable subrogation may be invoked against a third party, it must be determined that the third party is “guilty of some wrongful conduct that makes the party’s equity inferior to that of the surety or insurer.” The difference in equities justifies the shift of the financial burden.
The trial court was sympathetic to the broker’s arguments and found that the rule of superior equities proscribed the rights of the neighbors and their insurance company because they could not establish an equitable right superior to the position of the broker. The lower court said that the insurance company “could not prove it was entitled to equitable subrogation because its loss was not caused by Broker’s failure to maintain the policy, but by the fire, the fire being the very risk that [the insurer] assumed.” Likewise, the lower court held that that the neighbors’ loss “was caused not by Broker, but by a fire for which the assignor was responsible.” The trial court apparently thought the parties, as fire victims, close enough to the building owner to implicate the principles of equitable subrogation, but not close enough to the broker’s actions to stand in equitable right.
The appellate court, however, found a distinction between the principles of equitable subrogation and the contractual assignment that occurred between the owner and the neighbors and insurance company. The court noted that California law applies the limitations of equitable subrogation to contractual assignments only when the relationship between the assignor and assignee is also a potential subrogor-subrogee relationship. The court explained, “A surety in the position of a subrogee cannot avoid the principles of equitable subrogation by obtaining an assignment of the cause of action to bolster its position.” But here, the court said the assignment did not amount to equitable subrogation. First, the neighbors never occupied the position of a surety. And, second, while the insurance company acted as an equitable subrogee as to its insureds, the neighbors, that subrogor-subrogee relationship never extended to the insurance company’s assignee-assignor relationship with the building owner. “We have found no convincing policy reasons for extending the principles of equitable subrogation down the chain of relationships that arise after an insurer has successfully pursued its rights as an equitable subrogee.” The court found that the principles of equitable subrogation did not bar the assignment of the claim to the neighbors and their insurer, and was unwilling to otherwise limit the general rule favoring assignability.