In Western Heritage Ins. Co. v. Frances Todd, Inc., 33 Cal.App.5th 976 (March 4, 2019), the California First District Court of Appeal affirmed the trial court's entry of summary judgment in favor of Frances Todd, Inc. dba The Wooden Duck, Eric Todd Gellerman and Amy Francis Ferber (collectively "defendants") in connection with a subrogation lawsuit filed by Western Heritage Insurance Company ("Western Heritage") arising out of a fire loss involving commercial condominiums located in Berkeley, California. The Declaration of Codes, Covenants & Restrictions ("CC&Rs") applicable to the property required the East Shore Commercial Condominiums Owners' Association ("Association") to "obtain and maintain a master or blanket policy of all risk policy insurance coverage for all improvements under the project, insuring against loss or damage by fire or other casualty. The CC&Rs required the all risk policy to name as the insured, the Association, the owners and all mortgagees of record as their respective interests may appear. The CC&Rs prohibited an individual owner from obtaining fire insurance while allowing an owner to obtain individual liability insurance.

The condominiums were owned by William R. de Carrion dba Surfwood Properties ("de Carrion") and were leased to defendants, who owned and operated a furniture manufacturing business. The written lease governed the parties' relationship with respect to operations on the property. The lease provided that the "The lessee shall not commit waste, nor carry on any activity which would destroy or impair quiet enjoyment of other lessees in the building in which the premises form a part." The lease required the lessee to keep in force a public liability insurance policy covering the leased premises, including the parking areas, if any, included in the lease. The lease also excepted lessees from accounting for reasonable wear and tear, casualty and any alterations, improvements and/or additions which are the property of Lessor, de Carrion leased a condominium to the defendants.

Western Heritage issued an insurance policy covering the condominiums effective May 28, 2013 to May 28, 2014. Each of the owners of the condominiums, including de Carrion, was a named insured on the policy. However, the lessees were not specifically named on the policy. Subsequently, on April 12, 2014, a fire erupted in the condominium owned by de Carrion which damaged that of another nearby property. Western Heritage paid the losses caused by the fire. Thereafter, Western Heritage filed a Complaint in subrogation against defendants alleging two causes of action for negligence and breach of lease. Subsequently, it amended the Complaint to allege a single cause of action for negligence against the defendants, based on their alleged cause of the fire. In response, the defendants filed a Motion for Summary Judgment arguing that Western Heritage could not file a subrogation action against them as they were implied insureds under the Western Heritage policy for fire casualty losses. The trial court agreed and entered summary judgment in favor of the defendants.

In affirming the trial court's entry of summary judgment in favor of the defendants, the Court of Appeal commented on general subrogation principles as follows:

B. Equitable Subrogation—General Principles

"Subrogation is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in relation to the debt or claim.' [Citation.] It provides a method of compelling the ultimate payment by one who in justice and good conscience ought to make it—of putting the charge where it justly belongs." (State Farm, supra, 143 Cal.App.4th at p. 1105, italics added.)

"In the case of insurance, subrogation takes the form of an insurer's right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid.' [Citation.] 'The right of subrogation is purely derivative. An insurer entitled to subrogation is in the same position as an assignee of the insured's claim, and succeeds only to the rights of the insured. The subrogated insurer is said to "'stand in the shoes" of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured. Thus, an insurer cannot acquire by subrogation anything to which the insured has no rights, and may claim no rights which the insured does not have.' [Citation.]" (Fire Ins. Exchange v. Hammond (2000) 83 Cal.App.4th 313, 317 (99 Cal. Rptr. 2d 5961(Hammond).)

"The essential elements of an insurer's cause of action for equitable subrogation are as follows: (a) the insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer; (b) the claimed loss was one for which the insurer was not primarily liable; (c) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (d) the insurer has paid the claim of its insured to protect its own interest and not as a volunteer; (e) the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer; (f) the insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends; (g) justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (h) the insurer's damages are in a liquidated sum, generally the amount paid to the insured." (Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279. 1292 (77 Cal. Rptr. 2d 2961.)

"While the insurer by subrogation steps into the shoes of the insured, that substitute position is qualified by a number of equitable principles. For example, an insurer cannot bring a subrogation action against its own insured. ... [¶] The most restrictive principle is the doctrine of superior equities, which prevents an insurer from recovering against a party whose equities are equal or superior to those of the insurer." (State Farm. supra, 143 Cal.App.4th at pp. 1106-1107.)

C. Subrogation Action for Fire Loss Caused by Negligence of Lessee

"In California, courts have held a lessee is not responsible for negligently caused fire damages where the lessor and lessee intended the lessor's fire policy to be for their mutual benefit." (Hammond, supra, 83 Cal.App.3d at p. 317.) The import of this rule is that an insurer may not seek subrogation against an insured's lessee in such cases for a fire he or she negligently causes, even when the elements necessary for subrogation have otherwise been met."

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Based on the above principles, the Court of Appeal held that a lessee is not responsible for negligently caused fire damages where the lessor and lessee intended the lessor's fire policy to be to their mutual benefit. The Court of Appeal noted that such rule applied irrespective of whether the lessee was specifically named as an insured under the lessor's fire policy. Here, the Court of Appeal held that the lease between de Carrion and the defendants was intended to afford coverage to the defendants as lessees for fire loss. As such, Western Heritage, standing in the shoes of de Carrion, could not file an action against the defendants for the damages caused by the fire.

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