The California Court of Appeal, First Appellate District, reversed an order denying a subcontractor’s motion to add two insurance companies as judgment debtors in an action after the insurers unsuccessfully prosecuted a contractual indemnity claim based upon an assignment of rights under a contract which included an attorneys’ fees provision.

In Hearn Pacific Corporation v. Second Generation Roofing, Inc. 2016 Cal. App. LEXIS 354 (May 2, 2016), a general contractor Hearn Pacific Corporation (“Hearn”) was sued for design and construction defects by the owner of a mixed-use building in 2007. Hearn filed a cross-complaint against several subcontractors who worked on the project, including Second Generation Roofing (“SGR”).

Two years later, in August 2009, Hearn executed an assignment of its rights under SGR’s subcontract to Hearn’s two insurers, North American Specialty Insurance Company (“North American”) and RSUI Group, Inc. (“RSUI”). Hearn assigned its insurers any obligation SGR owed to defend, indemnify or pay its attorneys’ fees in the action. Nevertheless, Hearn retained the right to recover any out-of-pocket defense costs which it had personally incurred. Hearn later settled the underlying action with the building owner and all of the cross-defendants, except for SGR.

In April 2012, Hearn filed an amended cross-complaint against SGR alleging, among other things, claims for breach of the duty to defend, equitable contribution, express indemnity, breach of contract to defend and equitable contribution. In the amended complaint, Hearn expressly acknowledged that it had assigned its rights to North American and RSUI and that they had elected to prosecute the cross-claims in Hearn’s name, rather than their own names, as permitted under California Code of Civil Procedure section 368.5.

During the course of the lawsuit, Hearn’s attorney filed a declaration in support of a motion for summary judgment against SGR which further confirmed that North American and RSUI were suing as assignees under the subcontract. SGR ultimately prevailed in the lawsuit on procedural grounds and was awarded its costs and attorneys’ fees as a prevailing party. Thereafter, SGR moved to amend the cost and fee orders to add North American and RSUI as judgment debtors in the action. However, the trial court denied SGR’s motion to amend based upon Hearn’s objections to evidence and its arguments on the merits.

The Court of Appeal reversed the ruling on several grounds. The appellate court found that the trial court had improperly sustained Hearn’s objections to the admission of its own attorney’s declaration which confirmed that Hearn’s insurers were prosecuting the action based upon the assignment. The appellate court also found that Hearn’s allegations in the cross-complaint constituted binding judicial admissions regarding its insurers’ role as real parties in interest in the lawsuit.

In addition, the Court of Appeal determined that the trial court had abused its discretion in refusing to add North American and RSUI as judgment debtors under California Code of Civil Procedure section 368.5. The appellate court held that the insurers’ ability to prosecute the action in the Hearn’s name under the statute did not insulate them from exposure. The appellate court similarly found that North American and RSUI should be added as judgment debtors even though they only received a partial assignment of rights from Hearn.

The Court of Appeal also rejected the trial court’s finding that Insurance Code section 11580 prevented SGR from suing North American and RSUI. Although Insurance Code section 11580 provided certain litigants with a means to sue third-party insurers for policy benefits, the appellate court found that there was no language in the statute which indicated that it provided an exclusive remedy against insurers who had prosecuted assigned rights under a contract. In so ruling, the Court of Appeal partially rejected the Ninth Circuit’s decision in Fireman’s Fund Ins. Co. v. City of Lodi, California (9th Cir. 2002) 302 F.3d 928 which broadly interpreted the statute.

The opinion in Hearn Pacific Corporation v. Second Generation Roofing, Inc. 2016 Cal. App. LEXIS 354 (May 2, 2016), 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.

Click here for the opinion.