Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc.

In Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc., the California Court of Appeal for the Fourth Appellate District held that an insurer was entitled to equitably subrogate a breach of express indemnity claim against its insured’s indemnitor.

Valley Crest Landscape Development (“Valley Crest”) was a general contractor for exterior improvements at St. Regis, a resort facility owned by CPH Monarch Hotel, LLC (“CPH”). Valley Crest subcontracted with Mission Pools of Escondido, Inc. (“Mission Pools”) to install a swimming pool on the St. Regis property. The subcontract provided that Mission Pools would defend and indemnify Valley Crest from any claims arising out of Mission Pools’ work. In 2007, Jeffrey Epp dived into the shallow end of the pool while intoxicated and sustained a severe spinal cord injury rendering him a quadriplegic. The following year, Epp and his wife filed suit against CPH, Valley Crest, Mission Pools, and other parties. The Epps alleged, as relevant to Mission Pools’ work, that the pool’s vertical tile depth markers were illegible because they were partially submerged and that the use of “French gray” plaster for the pool made it difficult to determine its depth.

Valley Crest tendered its defense and indemnity of the Epps’ lawsuit to Mission Pools under the subcontract’s indemnity provision and to Valley Crest’s general liability insurer, National Union Fire Insurance Company of Pittsburg (“National Union”). Mission Pools did not respond to the tender and National Union picked up Valley Crest’s defense. Valley Crest subsequently cross complained against Mission Pools for breach of the subcontract’s indemnity provision.

Both Valley Crest and Mission Pools filed motions for summary judgment against the Epps arguing, in part, that Mission Pools did not use French gray plaster to surface the pool and that the tile depth markers did not contribute to Mr. Epp’s injuries. The Epps filed oppositions and the trial court sustained Mission Pools’ objection to their evidence regarding the use of French gray plaster. Valley Crest did not properly object to that evidence. As a result, Mission Pools’ motion for summary judgment was granted, but Valley Crest’s motion was denied. The trial court also found that because Valley Crest’s motion was denied, Valley Crest was permitted to pursue its express indemnity claim against Mission Pools.

All the parties settled their claims against each other with the exception of Valley Crest’s indemnity claim against Mission Pools. National Union subsequently intervened as a cross-complainant and asserted causes of action for equitable subrogation and contribution against Mission Pools. Valley Crest and National Union sought to recover the amounts they expended in the defense and settlement of the Epps’ claims. (Valley Crest sought recovery of its payment of the self insured retention while National Union sought amounts it incurred in excess of that retention).

National Union’s equitable subrogation claim was tried in the first phase of a bench trial and the court found that Missions Pools was liable to National Union for all amounts it incurred on Valley Crest’s behalf. The trial court subsequently ruled in favor of Valley Crest on its express indemnity claim against Mission Pools. On appeal, Mission Pools argued that National Union was not entitled to be equitably subrogated to Valley Crest’s claims because National Union’s equitable position was, on balance, inferior to that of Mission Pools. In considering this argument, the court recognized that in order to succeed on an equitable subrogation claim, the plaintiff must establish that justice requires the loss be borne by the party with the inferior equitable position (the so called “balancing of the equities” element). The court, relying heavily on Interstate Fire v. Cleveland Wrecking Co.(2010) 182 Cal.App.4th 23, considered several factors in balancing the equities.

The first involved the party who caused the loss. The court observed that National Union did not cause the loss, but also recognized that any evidence indicating Mission Pools caused the loss was tenuous.

The second factor considered by the court was the nature of indemnity agreements. The court found that where an entity, such as Mission Pools, agrees to indemnify another party (here, Valley Crest), the primacy of the indemnitor’s liability is greater than that of an independent insurer of the risk.

The third factor involved receipt of premiums. The court found this factor was neutral because, while National Union did receive premiums in exchange for issuing the policy to Valley Crest, Mission Pools also received consideration in exchange for its agreement to indemnify Valley Crest.

The final factor, which the court concluded tipped the scale in favor of National Union, was compliance with contractual obligations. The court found that National Union had honored its contractual obligations to Valley Crest, while Mission Pools had not. Mission Pools urged the court to consider the fact that Valley Crest’s own failure to properly object to the Epps’ evidence regarding French gray plaster caused Valley Crest’s motion for summary judgment to be denied. Mission Pools argued it should not be responsible for Valley Crest’s litigation mistakes. The court was ultimately unpersuaded by this argument because Valley Crest would not have had to file a motion for summary judgment had Mission Pools honored its contractual obligations.

On appeal, Mission Pools also argued that Valley Crest’s express indemnity claim was barred by the statute of limitations set forth in California Code of Civil Procedure section 337.1. The court rejected this argument, finding that statute applied to construction defect claims, not to contractual indemnity claims.

Click here for the opinion.

This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority in California state courts.