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.