The insurer of a developer whose corporate powers were “suspended” was barred from pursuing a subrogation action against the developer’s subcontractors. (Travelers Property Casualty Company of America v. Engel Insulation, Inc. (2018) 29 Cal.App.5th 830)
Facts
Westlake Villas, LLC was the developer of a housing project. Westlake hired various subcontractors, including Engel Insulation, Inc., to assist with the construction. The written subcontracts gave Westlake contractual indemnity rights against the subcontractors.
Following completion of the project, a homeowners’ association filed a construction defect action against Westlake. Westlake was an additional insured on general liability policies issued by Travelers Property Casualty Company of America, and Travelers thus defended Westlake in the construction defect action.
Travelers later filed a subrogation action against Engel and other subcontractors to recover attorneys’ fees and costs Travelers had incurred in defending Westlake in the construction defect action. All of Travelers’ causes of action were based on alleged contractual indemnity rights that its insured, Westlake, had against Engel and the other subcontractors.
During the course of the subrogation lawsuit, Engel discovered that Westlake had failed to pay state taxes and that Westlake’s corporate powers were thus “suspended.” Engel moved to dismiss Travelers’ lawsuit, arguing that because Westlake as a suspended entity could not sue Engel, Travelers as subrogee of Westlake likewise could not sue Engel. The trial court granted Engel’s motion and dismissed Travelers’ lawsuit. Travelers appealed.
Holding
The California Court of Appeal affirmed the dismissal of Travelers’ lawsuit. Pursuant to Revenue and Taxation Code section 23301, Westlake’s failure to pay state taxes had resulted in a suspension of Westlake’s corporate powers – including its power to prosecute or defend lawsuits. Travelers, as subrogee of Westlake, had no greater rights than Westlake. Thus, because Westlake was barred from suing Engel, Travelers was likewise barred from suing Engel.
Travelers sought to avoid dismissal by relying on Revenue and Taxation Code section 19719. That statute generally authorizes criminal penalties against anyone who attempts to exercise the powers of a suspended corporation, but contains an exception for “any insurer … who provides a defense for a suspended corporation … and, in conjunction with this defense, prosecutes subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.” The appellate court rejected Travelers’ argument that section 19719’s exception authorized Travelers to proceed with its subrogation action against Engel. According to the appellate court, section 19719’s exception merely means that an insurer who defends a suspended insured and/or pursues subrogation claims on behalf of a suspended insured will not face criminal penalties. However, that exception “does not … alter the substantive law regarding subrogation,” namely, that a subrogated insurer has no greater rights than its insured.
Comment
This case reiterates a basic principle of insurance law, which is that a subrogated insurer “stands in the shoes” of its insured. Because the insured, Westlake, had failed to pay taxes and could not prosecute litigation, its insurer, Travelers, was likewise barred from prosecuting any litigation to enforce Westlake’s rights.
Note that if a suspended entity (or someone on its behalf) pays the back taxes and obtains a “certificate of revivor,” the entity may be allowed to pursue litigation. However, that did not happen here. Neither Westlake nor Travelers paid the back taxes necessary for a certificate of revivor.