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In Michael Berg et al., v. Pulte Home Corp. (“Berg”), the Third District Court of Appeal analyzed the question of whether an entitlement to equitable subrogation, as opposed to the underlying action itself, determines the right to a jury trial. Berg v. Pulte Home Corp., 67 Cal. App. 5th 277, 282 (2021). Pulte Home Corp. (“Pulte”), a general contractor, was sued by homeowners for allegedly violating building standards, breach of contract, and breach of express warranty. St. Paul Mercury Insurance Company (“St. Paul”) defended Pulte as an additional insured under a general liability policy.

Pulte had an agreement with its subcontractors whereby they each agreed to “indemnify and defend Pulte against all liability and claims, judgments, suits or demands for damages to persons or property arising out of, resulting from, or relating to that subcontractor’s performance of the work under the Agreement and any Contractor Project Agreement”. It was undisputed in Berg that there were alleged damages that resulted from or related to each of the subcontractors’ work for Pulte.

St. Paul thereafter sought reimbursement for the defense of St. Paul from three of these subcontractors through equitable subrogation. This claim rested on the assertion that the subcontractors were in breach of their contract with Pulte. The trial court found that St. Paul had proven all elements of its equitable subrogation claim. Damages were awarded and determined by a jury trial in a second phase.

St. Paul appealed, arguing that there is no right to a jury trial in an equitable subrogation claim because it is a claim in equity. This argument relied on a conclusion reached by the Fourth District Court of Appeal in Pulte Home Corp. v. CBR Electric, Inc., 50 Cal. App. 5th 216 (2020), namely that no jury trial right exists in such an equitable subrogation action. However, the Berg court reasoned that, “an insurer’s entitlement to equitable subrogation does not transform its insured’s legal claims against third parties into equitable ones.”  Therefore, it disagreed with the conclusion reached in CBR Electric.

The Berg Court reasoned that equitable subrogation consists of two phases: entitlement and enforcement. The first phase (entitlement) asks whether the insurer is entitled to equitable subrogation, and the Berg court concluded such an inquiry is appropriately performed by a trial court sitting as a court of equity. In the second phase (enforcement), where the question is whether the insurer prevails against the third parties, the Court reasoned that the right to a jury trial was dependent on the nature of the claim(s). In sum, if the underlying claim is legal, then a jury trial is appropriate. Likewise, if the underlying claim is of an equitable nature, then a court of equity would be the trier of fact. Notably, the Berg Court found support for this two-phase approach in the Supreme Court of California’s decision in Offer v. Superior Court. While that case did not address this exact question, it “distinguish[ed] between the equitable nature of subrogation…and the independent equitable or legal nature of the action to which the insurer asks to be subrogated on the other.” (Citing Offer v. Superior Court, 194 Cal. 114, 123 (1924)).

As noted previously, St. Paul’s claim was based on a breach of contract – a legal claim. Thus, based on the foregoing reasoning, the Court affirmed the decision of the trial court to grant a jury trial.

Insurance Law is published by the State Bar Litigation Section in its California Litigation Review (2020 Edition), co-authored by RRB attorney Stephen L. Raucher, along with Michael Sohigian, who have provided insurance updates together for the eighth consecutive year.

On Thursday, February 4, 2021, Stephen L. Raucher presented a continuing legal education program entitled “Annual Update on Developments in Insurance.” The program examined the most important new cases from 2020 regarding insurance coverage and bad faith, focusing particularly on liability and property policies.

Insurance Law is published by the State Bar Litigation Section in its California Litigation Review (2019 Edition), co-authored by RRB attorney Stephen L. Raucher, along with Michael Sohigian, who have provided insurance updates together for the seventh consecutive year.

Stephen Raucher’s article Are Cumis Counsel Disputes With Insurers Subject to Anti-SLAPP? is published in the Los Angeles Daily Journal on October 31, 2019.

Insurance Law is published by the State Bar Litigation Section in its California Litigation Review (2018 Edition), co-authored by RRB attorney Stephen L. Raucher, along with Michael Sohigian, who have provided insurance updates together for the sixth consecutive year.

The recent appellate case Strawn v. Morris, Polich & Purdy LLP, 30 Cal. App. 5^th 1087 (2019), examined an insurance company attorney’s potential liability in the context of the litigation privilege and elder abuse claims, resulting in a mixed ruling.

Dennis and Diane Strawn’s home and vehicle were destroyed by a fire in 2009.  The Strawns immediately notified State Farm about the incident and filed a claim.  Dennis Strawn was prosecuted for arson relating to the fire, but the case was dismissed on February 19, 2013.  In August of 2015, State Farm denied the Strawn’s claim on the grounds that Dennis had intentionally set the fire and that Diane Strawn had concealed evidence of that wrongful conduct.

In August of 2016, the Strawns filed a complaint against State Farm and its attorneys.  The claims against State Farm’s attorney Douglas K. Wood (“Wood”), and his law firm Morris, Polich & Purdy, LLP (“MPP”) for invasion of privacy and elder abuse were dismissed on demurrer by the trial court.

Invasion of Privacy Claim

The invasion of privacy claim against Wood centered on alleged misconduct involving financial records.  Throughout the claims process, State Farm requested financial records from the Strawns, including tax returns.  The Strawns refused to waive any privilege regarding these tax returns.  Instead, the Strawns authorized their accountant to give Wood records used to prepare their tax returns, but not the actual returns.  However, the accountant’s office accidentally included tax returns with the documents they produced.  The Strawns alleged that Wood then provided these tax returns to State Farm despite being expressly informed that they were privileged.

Wood and MPP claimed that their actions were protected by the litigation privilege.  The litigation privilege is not limited to statements made during a proceeding, but may extend to steps taken prior thereto, or afterwards.  Strawn, 30 Cal. App. 5^th at 1094 (citing Rusheen v. Cohen, 37 Cal. 4^th 1048, 1057 (2006)).  The trial court dismissed the invasion of privacy claim based on this privilege.

However, on appeal, the Court found that there was a factual question as to whether Wood’s communication of the tax returns was related to litigation contemplated in good faith and under serious consideration.  The Court noted that a mere threat of litigation will not suffice for a claim of the litigation privilege, but, rather, good faith contemplation of an imminent resort to the judicial system is required.  Since no litigation was instituted until nearly a year after the claim was denied, there was a question as to whether the “imminence” element of the privilege was satisfied.  Otherwise, virtually every insurance claim investigation could be covered by the litigation privilege.  Accordingly, the Court reversed the order sustaining the demurrer to the cause of action for invasion of privacy against Wood and MPP.

Elder Abuse Claim

The basis of the elder abuse claim against Wood and MPP was that they helped State Farm wrongfully deny the Strawn’s insurance claim by supplying State Farm with privileged tax returns.  This claim by the Strawns was an attempt to circumvent a rule stating that an insurer’s agents cannot be found liable for a bad faith denial of coverage.  Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 576 (1973).

The Court upheld the dismissal of this claim because Gruenberg and the legislative history of the Elder Abuse Act show no intent to impose liability on an attorney acting on behalf of an insurer for the insurer’s bad faith denial of coverage.  An attorney is not a party to the insurance agreement, and therefore is not subject to an implied duty of good faith and fair dealing regarding an insurance claim.

On Monday, April 15, 2019, Stephen L. Raucher was one of the panelists presenting a continuing legal education program entitled “Fifth Annual Update on Developments in Insurance.” The program examined the most important new cases from 2018 regarding insurance coverage and bad faith, focusing particularly on liability and property policies.