Texas Appellate Court Enforces Appraisal Provision

In a recent decision, the Court of Appeals of Texas for the Fourteenth District revisited the scope of the appraisal process in light of the prior holding in State Farm Lloyds v. Johnson, 290 S.W.3d 886 (Tex. 2009).

In In re Tex. Windstrom Ins. Ass’n, 2013 Tex App. LEXIS 11497, a homeowner, Joseph Hayden, sued Texas Windstorm Insurance Association (“TWIA”) to recover for property damage under an insurance policy it issued to him. Hayden alleged that his roof was damaged by hail and wind in April 2012. TWIA retained an independent adjuster to inspect Mr. Hayden’s roof, and the adjuster concluded that the damage was caused solely by wind.  TWIA subsequently advised Hayden that the damage did not exceed the deductible applicable to wind damage, and that as a consequence, Hayden would not receive policy benefits. Hayden’s insurance agent told TWIA in June 2012 that a contractor had inspected the roof and found more damage that would cost almost $15,000 to repair. TWIA retained an engineering firm in August 2012, and another inspection was conducted. Following this inspection TWIA advised Hayden that no policy benefits would be paid.  Hayden therefore advised of its intention to sue, and in response, TWIA demanded the roof first be appraised, relying on a policy provision which stated:

10.       Appraisal. If you and we fail to agree on the actual cash value, amount of loss, or cost of repair or replacement, either can make a written demand for appraisal.

Hayden refused TWIA’s appraisal demand and filed suit. TWIA filed a motion in the district court to compel appraisal, but the motion was denied. TWIA appealed the trial court’s denial of its motion to compel.

Hayden argued that appraisal was not appropriate because the dispute was over what caused the damage to the roof; a coverage issue for a court to determine. The Court disagreed, noting that TWIA also disputed the amount of loss. The court relied on State Farm Lloyds and concluded that the implication of a coverage issue pertaining to the claim did not automatically preclude appraisal. In its analysis the court explained that the appraisal provision could not be disregarded simply because coverage issues overlapped with the value of the loss.  The Court held that the trial court “clearly abused its discretion” when it denied TWIA’s motion to compel appraisal, and required the parties to appraise the loss.

Eighth Circuit Holds Customer Funds Exclusion Applicable

In its recent decision in Bethel v. Darwin Select Ins. Co., 2013 U.S. App. LEXIS 23183 (8^th Cir. Nov. 18, 2013), the United States Court of Appeals for the Eighth Circuit, applying Minnesota law, had occasion to consider the application of a customer funds exclusion in a professional liability policy.

Darwin insured Zen Title, a title insurance agency, under a claims made and reported professional liability policy.  One of Zen Title’s clients was United General Title Insurance Company ("UGT"), for whom Zen Title had responsibility for recording mortgages, deeds, and mortgage satisfactions and for paying fees associated with those recordings.  Zen Title’s responsibilities also including paying off mortgages on behalf of UGT and its customers in connection with mortgage refinancing transactions.  During the policy period, UGT terminated its relationship with Zen Title and brought suit against the company and its three principals. The court described the underlying complaint as alleging:

… a wide-ranging fraudulent scheme to misappropriate the funds entrusted to Zen Title by UGT. UGT alleged that "Zen, and the other Defendants associated with Zen and acting for same, deliberately chose to delay the recording [of mortgage instruments] so as to benefit from the pool of cash escrowed for the purpose of paying recording fees." In addition, Zen Title allegedly failed to use escrowed funds to pay off existing mortgages in mortgage refinancing transactions. The gravamen of UGT's allegations was that the defendants delayed recording mortgage instruments in order to retain and use funds that had been escrowed to pay fees associated with those recordings.

The complaint alleged several causes of action, including one for negligent failure to file various mortgage instruments in breach of Zen Title’s duties owed to UGT.

Zen Title tendered the suit to Darwin, and Darwin denied coverage on the basis of its policy’s customer funds exclusion, which barred coverage for “any Claim . . . based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any  way involving . . . any actual or alleged . . . loss, disappearance, pilferage or shortage of, or commingling or improper use of, or failure to segregate or safeguard, any client or customer funds, monies, or securities.”  In the ensuing coverage litigation, the United States District Court for the District of Minnesota granted summary judgment in favor of Darwin, concluding that the allegations in underlying complaint fell entirely within the exclusion.

On appeal, Zen Title argued that the cause of action for negligence potentially fell outside of the customer funds exclusion, such that Darwin at least had a duty to defend.  Darwin countered that when read in the context of the complaint, the cause of action for negligence was related to Zen Title’s alleged scheme of misappropriating escrow funds, and thus arose out of the excluded conduct.  The court agreed with Zen Title, observing that:

As described in UGT's complaint, the insureds failed to record mortgage instruments precisely so that they could divert the funds that would have had to be paid as filing fees at the time of recording. Thus, as alleged, the insureds failed to record mortgage instruments only because it constituted a necessary component of the broader scheme to misappropriate funds escrowed for filing fees. As such, there is a direct cause-and-effect relationship between all actionable conduct alleged in UGT's complaint and the loss or improper use of customer funds.

In reaching its holding, the Eighth Circuit rejected the insured’s attempt to divorce the cause of action for negligence from its context within the rest of the complaint.  While the court agreed that plaintiff could have filed a cause of action for negligence that had nothing to do with the alleged fraudulent scheme, the court could not ignore the actual allegations in the complaint.  As the court explained, “Minnesota's notice pleading rules did not require UGT to identify the specific circumstances under which each failure to record occurred, and so UGT's claims could possibly be premised on unspecified failures to record that are unrelated to the fraudulent scheme. This argument underestimates the significance of what UGT actually included in its complaint. UGT did specifically allege that the defendants failed to record mortgage instruments in order to facilitate the misappropriation of customer funds. UGT did not specifically allege any other failures to record.” 

The Eighth Circuit also rejected the insured’s argument that the customer funds exclusion rendered the policy’s coverage illusory, noting that the exclusion would not bar coverage for simple acts of negligence, such as failing to file a mortgage instrument or erring in doing so, since in such scenarios, the underlying actions would not involve the misappropriation of customer funds.  The court also rejected the argument by two of Zen Title’s principals that the wrongful acts of a third principal should not be attributed to them. The court held that the application of the exclusion did not depend on who committed the wrongful act, but instead on what gives rise to the underlying claim.  As the court explained:

The plain language of the exclusion makes clear that it applies regardless of whose conduct caused the loss or improper use of customer funds. … the Customer Funds Exclusion applies to any claim that arises out of any loss or improper use of client funds caused by anyone, be they a "guilty" insured, an "innocent" insured, or even a non-insured. It is irrelevant whether [the individual principals] participated in the wrongful conduct that triggered the Customer Funds Exclusion, so long as UGT's claims arose from some loss or misuse of customer funds.

Illinois Appellate Courts Issue Conflicting Additional Insured Decisions

Recently two different appellate courts in Illinois examined the issue of whether a subcontractor’s insurer is obliged to defend a general contractor as an additional insured. 

In Pekin Ins. Co. v. United Contr. Midwest, Inc., 2013 IL App 3d 120803, an employee of a Durdel & Sons Tree Service and Landscaping Inc. was injured when machinery that he was operating struck overhead power lines and electrocuted him. At the time, Durdel was operating as a subcontractor under Cullinan & Son, Inc., the general contractor. The injured employee filed suit against Cullinan for construction negligence and general negligence. Cullinan, in turn, filed a third party complaint alleging negligence against Durdel. Under the insurance policy issued to Durdel by Pekin Insurance Co., Cullinan was an additional insured, but only for vicarious liability as a result of Durdel’s work. Pekin denied coverage claiming the policy covered Cullinan for vicarious liability only and did not cover negligence resulting from Cullinan’s own actions. The trial court found in favor of coverage and Pekin appealed.

In Ill. Emasco Ins. Co. v. Waukegan Steel Sales, Inc., 2013 IL App (1st) 120735, an employee of I-Maxx Metal Works, Inc. was injured when a cable protection failed and caused him to fall. I-Maxx was a subcontractor of Waukegan Steel Sales, the general contractor. The employee brought suit against Waukegan and two other subcontractors for negligence. Those subcontractors then brought a third-party claim against I-Maxx, asserting contributory negligence. Under I-Maxx’s policy, issued by Emasco, Waukegan was named as an additional insured. Similar to the facts in Pekin, Emasco’s additional insured coverage was limited to vicarious liability. Emasco denied coverage stating that the allegations against Waukegan were for its own negligence. The trial court found that Emasco had a duty defend Waukegan as it could be found vicariously liable for the employee’s injuries.

Despite the relatively similar set of facts in these two cases, the courts arrived at different outcomes. In Pekin, the appellate court in the Third District refused to consider the third-party complaint filed by the putative additional insured. The opinion noted thatthe employee’s complaint against Cullinan did not allege direct negligence against the employer, and as a result, there could be no theory of vicarious liability against Cullinan. While the trial court looked beyond the underlying complaint to Cullinan’s third-party complaint, the appellate court refused to extend their analysis to Cullinan’s “potentially self-serving, third party complaint.”

The appellate court in the First District, however, did extend their analysis to the third-party complaints, reasoning that those claims were not brought by the putative additional insureds solely to bolster their demands for coverage. The court agreed that looking only to the employee’s complaint, there would be no additional insured coverage for vicarious liability under the Emasco policy. Extending the analysis beyond the underlying complaint, however, the court concluded that both of the third party complaints alleged negligence on the part of I-Maxx, for which Waukegan would potentially be vicariously liable. The court therefore held that Emasco had a duty to defend based on that potential.

Texas Court Holds Department of Insurance Proceeding Is a “Claim”

In its recent decision in Regency Title Co. v. Westchester Fire Ins. Co., 2013 U.S. Dist. LEXIS 162772 (E.D. Tex. Nov. 15, 2013), the United States District Court for the Eastern District of Texas had occasion to consider the date on which a claim was first made for the purpose of triggering coverage under a professional liability policy.

Westchester insured Regency Title Company (“Regency”) under a claims made and reported errors and omissions policy.  The policy defined the term “claim” to include:

1.   a written demand against any Insured for monetary or non-monetary damages;

4. a civil, administrative, or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order, or similar document.

Subsequent to the policy’s issuance, Regency was named as a defendant in a lawsuit for alleged improper withdrawal of escrow funds in connection with an underlying real estate transaction.  A year prior to filing suit, however, plaintiff in the underlying action filed a complaint with the Texas Department of Insurance (“TDI”).  The TDI complaint involved the same facts as the later filed lawsuit, and it demanded payment of $100,000 or specific performance.  Subsequent to the filing of complaint with the TDI, but prior to the policy’s issuance, the TDI sent a letter to Regency advising of the complaint and of Regency’s opportunity to respond to the complaint.  Regency, in fact, answered the TDI complaint, and nearly a year prior to the inception of the Westchester policy, the TDI completed its investigation, concluding that Regency had not committed a violation of Texas Insurance Code. 

Westchester denied coverage to Regency for the underlying lawsuit on the basis that the claim was first made with the filing of the complaint with the TDI, and that the claim was made prior to the policy’s inception date.  In considering whether Westchester had a duty to defend Regency in the underlying matter, the court likened the “claims made” requirement to an exclusion that must be construed narrowly.  As such, explained the court, if there was any potential that the TDI complaint was not a “claim” as defined by the Westchester policy, then Regency would at the very least be entitled to a defense.

Regency argued that the TDI  complaint did not fall within the first definition of “claim,” of a written demand against any Insured for monetary or non-monetary damages, because the underlying plaintiff filed its complaint with the TDI and did not send any correspondence directly to Regency.   Specifically, Regency argued that “since the complaint was sent to a third party, the complaint does not constitute a ‘demand against an insured.’”  The court rejected this contention, noting that the policy’s first definition of claim only required a written demand “against any Insured,” not a written demand “sent to an insured.”  The court refused to read such an element into the definition of “claim,” finding it to be plain and unambiguous, explaining:

Regency is asking the court to add additional requirements to the definition in the policy. The policy does not indicate that the demand must be made directly to the insured. … The Exhibits indicate that Tower Custom Homes sent TDI a demand for money from Regency … that TDI sent that demand to Regency … that Regency responded directly to the demand … and that TDI sent Regency's response to Tower Custom Homes … .  Tower Custom Homes made a demand against Regency, Regency was informed of the demand, and Tower Custom Homes was informed that Regency was informed of its demand. Had Tower Custom Homes sent the demand to Regency through the U.S. mail with a return receipt requested, the exact same results would have occurred, except that Regency may or may not have sent Tower a response.

The court further observed that even if the TDI complaint did not constitute a written demand made against any insured, then it fell within the fourth definition of “claim” as a civil, administrative or regulatory investigation filed against the insured.  Regency argued that the TDI complaint did not fall within this definition of “claim” because TDI’s actions did not constitute an “investigation” within the meaning of the policy.  Specifically, Regency pointed to a phrase in TDI’s letter to Regency advising that it was “evaluating” whether Regency had committed a violation of the Texas Insurance Code.   Regency also argued that the brevity of TDI’s involvement (its file was closed within a matter of weeks) precluded its evaluation from being considered a formal investigation.  The court rejected this parsing of TDI’s actions, noting that the TDI’s letters made several references to its investigation, and that the duration of its investigation was irrelevant, since “the policy does not indicate that a detailed investigation or an exhaustive investigation must take place, but merely that there is an investigation.”  With this in mind, the court easily concluded that TDI’s actions came within the definition of “claim,” explaining:

…  TDI's actions are consistent with an investigation. TDI sent a letter to Regency asking specifically for information from Regency and that Regency supply TDI with "supporting documentation". … TDI was attempting to obtain information from Regency. Such an action could naturally be considered the first step in a "systematic examination", which is one definition for "investigation" that Regency has put forward. … Moreover, the very fact that TDI found no violation of the Texas insurance laws indicates that TDI must have conducted some type of investigation in order to make such a finding.

Accordingly, the court agreed that TDI action constituted a “claim,” and that as such, the “claim” against Regency was first made prior to the policy’s inception date.  The court, therefore, granted Westchester’s motion to dismiss, holding that it had no duty to defend or indemnify Regency in connection with the underlying lawsuit.

Louisiana Court Dismisses Excess Insurer’s Claim Against Primary Insurer

In its recent decision in RSUI Indem. Co. v. American States Ins. Co., 2013 U.S. Dist. LEXIS 161805 (E.D. La. Nov. 13, 2013), the United States District Court for the Eastern District of Louisiana had occasion to consider the duties owed by a primary insurer to an excess insurer.

Ameraseal was insured under a $1 million primary commercial auto policy issued by American States Insurance Company (“ASIS”) and a $5 million excess policy issued by RSUI.  Following an auto accident involving a vehicle owned by ASIS and being operated by an Ameraseal employee, a personal injury suit was filed against Ameraseal, the employee and ASIS.  RSUI was not named as a defendant.  Plaintiff settled with ASIS for the policy’s $1 million limit of liability, and a week later RSUI settled on behalf of its insureds, and itself, for $2 million.  As a result of the settlements, the matter never had to go to trial.

RSUI later brought suit against ASIS alleging bad faith failure to properly defend Ameraseal and the employee in the underlying matter.  RSUI claimed that had ASIS properly defended the case, then the loss would have remained in the primary insurance layer and RSUI would not have been required to pay $2 million.  ASIS countered that RSUI’s lawsuit was an impermissible means of stating legal malpractice claim against ASIS’ defense counsel.  ASIS further argued that it could not be liable in excess of its policy’s $1 million limit of liability since there was never an opportunity to settle the underlying matter within the policy’s limit of liability and since there was no excess verdict.  The court only considered ASIS’ latter argument.

Citing to Great Southwest Fire Insurance Co. v. CNA Insurance Companies, 557 So. 2d 966, 967 (La. 1990), the court acknowledged that under Louisiana law, a primary insurer owes a duty to an excess carrier to defend and to conduct settlement negotiations in good faith.  The court further noted, that while there was no controlling case law from Louisiana’s highest court as to whether such a claim can exist in the absence of a jury verdict, case law from the federal court level, including the Fifth Circuit, has consistently held that a verdict is a predicate for such a claim. RSUI argued that this case law was distinguishable, since its bad faith theory was not premised on a failure to settle, but instead was based on ASIS’ failure to properly defense the underlying suit, which resulted in a settlement value higher than necessary.  The court rejected RSUI’s theory, holding that even if such a distinction was relevant, RSUI would still be required to demonstrate an excess judgment as a necessary element of a bad faith claim against the primary insurer.

Florida Court Holds Criminal Conduct Exclusion In E&O Policy Applicable

In its recent decision in Certain Interested Underwriters at Lloyd’s v. AXA Equitable Life Insurance Company, 2013 U.S. Dist. LEXIS 159639 (S.D. Fla. Nov. 7, 2013), the United States District Court for the Southern District of Florida had occasion to consider the application of a criminal conduct exclusion in an insurance brokers professional liability policy.

Certain Interested Underwriters at Lloyd’s (“Lloyd’s”) insured Steven Brasner, an independent insurance broker, under an errors and omissions policy.  The underlying matter involved Mr. Brasner’s efforts to place life insurance coverage for his client, Geoffrey Glass.  Mr. Brasner proposed the purchase of two life insurance policies, one for $10 million and the other for $20 million, both of which would be purchased through insurance trusts established by Mr. Glass.  Mr. Brasner assisted with the processing of the policy applications, both of which were presented to AXA.  Among other things, both applications asked whether “Do you, the owner, intend to use or transfer the policy for any type of pre-death financial settlement, such as viatical settlement, senior settlement, life settlement, or for any other secondary market?”  Both applications answered this question in the negative.  AXA subsequently issued the two policies.  Only a few months later, however, the insurance trusts sold the policies to another entity – GIII – as investment vehicles.  It was later determined that Brasner, in fact, had falsified information on the applications, and had regularly done so, “to induce insurance companies to issue life insurance policies which would be held beyond the contestability period and then offered for sale on the secondary market.”

When Brasner’s schemes were discovered, AXA and other life insurance companies that had issued policies to Brasner’s clients, brought suits to rescind the policies.  The State of Florida also brought a criminal proceeding against Brasner.  Brasner ultimately pled guilty to several counts, including one that he had defrauded AXA by providing materially false information in the applications, including the applications submitted on behalf of Glass.  Several civil suits eventually followed, including one by GIII based on theories of negligent misrepresentation.  Brasner tendered the GIII matter to Lloyd’s, but Lloyd’s disclaimed coverage based on grounds.  Brasner and GIII later entered into a consent judgment for $1.45 million and an assignment of Brasner’s rights under the policy.

The first coverage defense asserted by Lloyd’s was that the conduct alleged did not fall within its policy’s definition of covered professional services, defined as “the marketing, sale or servicing of insurance products . . . .”  Lloyd’s argued that rather than selling insurance products, the GIII lawsuit related to Brasner’s sale of investment products.  The court found that while this argument might otherwise have merit, Lloyd’s failed to offer any evidence in support of this argument, thus precluding its right to summary judgment.

Lloyd’s also relied on a policy exclusion barring coverage for any claim:

… based upon, arising out of, directly or indirectly relating to or in any way involving . . . Falsification of any offer of an insurance contract or document, including but not limited to quotes, binders, indications or policies.

Lloyd’s argued that this exclusion should be read broadly enough to encompass falsification of any document, including insurance applications.  GIII, on the other hand, contended that documents identified in the exclusion, i.e., quotes, binders, indications, and policies, are all documents issued by insurers rather than by brokers, and that as such, the exclusion applied only to insurer communications.  The court found both interpretations of the exclusion to be reasonable, meaning that the term “document” as used in the exclusion was necessarily ambiguous and therefore must be construed in favor of coverage.

Finally, Lloyd’s relied on a policy exclusion barring coverage for claims:

… based upon, arising out of, directly or indirectly relating to or in any way involving . . . Conduct which is fraudulent, dishonest, criminal, willful, malicious, intentionally or knowingly wrongful, or otherwise intended to cause damage or injury to personal property; however, this exclusion shall not apply . . . unless there is a finding or adjudication in any proceeding of such conduct or an admission by an Insured of such conduct . . . .

Lloyd’s pointed to Brasner’s entry of a guilty plea, specifically with respect to the AXA policies, as to the basis for this exclusion’s application.  Looking to the plea deal, the court concluded that “[t]he totality of admissible evidence establishes conclusively that Brasner victimized AXA by making false and material misrepresentations on insurance applications.”  The court also found notable a portion of the plea agreement that allowed Brasner to continue receiving income from other prior placed policies, but prohibited him from receiving income the policies issued to Glass, thus further evidencing the fact that the Glass policies were part of Brasner’s scheme to defraud.  As such, and because these misrepresentations were central to Brasner’s efforts to resell the Glass policies to GIII, the court found the criminal conduct exclusion applicable to GIII’s lawsuit, and thus precluded coverage.

California Court Holds Insurer Entitled to Reimbursement of Defense Costs

In its recent decision in Great Am. Ins. Co. v. Chang, 2013 U.S. Dist. LEXIS 159197 (N.D. Cal. Nov. 6, 2013), the United States District Court for the Northern District of California had occasion to consider an insurer’s right to reimbursement of defense costs advanced to its insured for noncovered claims.

Great American insured Michael Chang under a series of general liability policies for his operation of a dry cleaner from 1977 through 1983.  Chang later sold the property to a third party and the property was converted to a restaurant.  That third party later brought suit against Chang when cleaning solvents were discovered on the property.  Great American agreed to prove Chang with a defense in the underlying suit, subject to a reservation of rights, including its right to seek reimbursement of defense costs associated with noncovered claims.  Great American ultimately paid $692,416 in defending the underlying suit, plus an additional $121,259 to perform a site investigation.  Great American also paid $70,426 in costs associated with defending Chang in connection with litigation with the California Regional Water Quality Control Board over whether the site remediation costs should be funded by California’s Underground Tank Storage Fund.  These legal fees were shared, in part, by Chang’s other insurers – Fireman’s Fund and Farmers – both of whom advanced defense costs pursuant to a reservation of rights.

Great American and Chang subsequently engaged in coverage litigation, and the court granted summary judgment in Great American’s favor as to its duty to defend and indemnify.  As a result of this decision, Great American moved for summary judgment on its right to reimbursement of the $884,000 in defense costs it advanced to its insured. 

Chang argued that Great American was not entitled to reimbursement of defense costs because its policies contained no language to this effect.  Chang argued in the alternative that Great American should be required to seek reimbursement of defense costs from Fireman’s Fund and Farmers.  Citing to Buss v. Superior Court, 939 P.2d 766 (Cal. 1997), the court rejected Chang’s first argument, observing that California law permits reimbursement of defense costs following a determination of noncoverage regardless of express policy language.  With respect to the second argument, the court noted that because Farmer’s and Firmeman’s Fund both had reserved rights, thus raising a question as to whether they ultimately had a duty to defend, Great American was entitled to recover directly from Chang.  As the court explained, “Great American should not have to seek reimbursement from third-party insurers, and potentially file another coverage action against those insurers, to recover costs that it advanced to the Changs.”  Thus, the court held that Great American was entitled to reimbursement of all defense costs plus prejudgment interest running from the date such amounts were paid.

California Court Addresses Superior Equities Rule

In its recent decision in San Diego Assemblers, Inc. v. Work Comp For Less Insurance Services, Inc., 2013 Cal. App. LEXIS 873 (Cal. App. 4^th Dist. Oct. 4, 2013), the California Court of Appeals had occasion to consider the application of the “superior equities rule” in an insurer’s subrogation action.

San Diego Assemblers, Inc. (“SDAI”), was a remodeling contractor that performed work for a restaurant in 2004.  In 2008, an explosion and fire occurred at the restaurant, resulting in property damage.  The restaurant’s property insurer (“Golden Eagle”) covered the claim, and promptly sued SDAI.  SDAI tendered the suit under its 2004 and 2008 liability policies, each issued by different general liability, but obtained through the same broker.  One of the policies, issued in 2004, contained a manifestation endorsement limiting to injury or damage first manifested during the policy period.  The other policy, issued in 2008, contained a prior completed work exclusion.  Both insurers, therefore, denied coverage.  A default judgment was obtained against SDAI, and SDAI subsequently assigned to Golden Eagle its rights against its broker. 

In the ensuing subrogation lawsuit, the broker argued that Golden Eagle’s subrogation claim was barred by the “superior equities rule,” which states that “‘one who asserts a right of subrogation, whether by virtue of an assignment or otherwise, must first show a right in equity to be entitled to such subrogation, or substitution.” Under this doctrine, explained the court, an insurer cannot establish a superior equitable position against a third party, if that third party is not the wrongdoer or legally responsible for the underlying loss.  The court therefore concluded that because the broker did not cause the underlying fire, and because the broker did not otherwise have an obligation to indemnify SDAI for the underlying loss Golden Eagle’s subrogation claim was barred by the superior equities doctrine.  That the claim was assigned by SDAI did not change the court’s analysis, since an assignment of rights cannot overcome the superior equities rule.  Relying on prior California case law on the issue, the court explained:

[W]here by the application of equitable principles, a surety has been found not to be entitled to subrogation, an assignment will not confer upon him the right to be so substituted in an action at law upon the assignment. His rights must be measured by the application of equitable principles in the first instance, his recovery being dependable upon a right in equity, and not by virtue of an asserted legal right under an assignment.