Baugh-Belarde Const. Co. v. College Utilities Corp.
| Decision Date | 01 April 1977 |
| Docket Number | BAUGH-BELARDE,No. 2532,2532 |
| Citation | 561 P.2d 1211 |
| Parties | CONSTRUCTION COMPANY, Appellant, v. COLLEGE UTILITIES CORPORATION, Appellee. |
| Court | Alaska Supreme Court |
Robert J. Dickson, Atkinson, Conway, Young, Bell & Gagnon, Anchorage, for appellant.
Millard F. Ingraham, Rice, Hoppner & Hedland, Fairbanks, for College Utilities.
Robert L. Eastaugh, Delaney, Wiles, Moore, Hayes & Reitman, Inc., Anchorage, for Fiberchem, Inc.
Before BOOCHEVER, Chief Justice, and RABINOWITZ, CONNOR, ERWIN and BURKE, Justices.
This is a case of first impression in Alaska, involving the subrogation rights of a builder's risk insurer against a negligent subcontractor of the named insured.
On December 29, 1970, Baugh-Belarde Construction Company entered into a contract to build faculty housing for the University of Alaska. Baugh-Belarde then engaged College Utilities Corporation to perform subcontract functions necessary to the construction of the modular housing project, commonly known as the Yak Estates. Underwriters at Lloyds of London, through Pitts and Associates Insurance Brokers, issued a builder's all risk insurance policy to Baugh-Belarde. This policy was later extended by endorsement to cover the Yak Estates construction job and the subcontractors on that site, to the extent of their interest in the project. 1
During the course of construction, a fire occurred, allegedly due to College Utilities' negligence, for which the repair costs were $230,894.46. The builder's all risk policy covered $218,562.07 of the repair costs, and that amount was paid to Baugh-Belarde by Lloyds.
College Utilities subsequently sought recovery against Baugh-Belarde for amounts it claimed were due under the contract. Baugh-Belarde counterclaimed for $230,894.46, the exact amount of loss caused by the fire, alleging that College Utilities had breached its contract and that College Utilities' negligence had caused the fire. Although these counterclaims were brought by Baugh-Belarde in name, it is admitted that they are brought on behalf of the insurer to the extent of the policy coverage.
College Utilities moved for partial summary judgment, seeking dismissal of the counterclaims to the extent of the $218,562.07 paid by Lloyds, arguing that it was a co-insured under the builder's risk policy and, as such, could not be sued by its own insurer in a subrogated action. The trial court, Van Hoomissen, J., granted College Utilities' motion, and it is from this decision that Baugh-Belarde appeals.
In Graham v. Rockman, 504 P.2d 1351 (Alaska 1972), we held that in subrogated actions, an insurer may not recover its losses from a negligent third party if that party is an additional insured under the applicable policy. Although we remanded that case to the trial court for further findings as to the negligent party's status under the policy, we stated unequivocally that 'an insurer cannot recover by means of subrogation against its own insured.' 2 College Utilities' status as an additional insured under the builder's risk policy is undisputed in the case before us now; 3 however the policy language, limiting the subcontrators' coverage to their own property, prevents an automatic application of the Rockman rule to this situation. The issue raised by Baugh-Belarde in this appeal is whether College Utilities' immunity from liability in a subrogation action is limited to the amount of loss to its own property in the construction project.
The language of the builder's risk policy in this case provided that subcontractors were insured 'only as regards (their) property,' and were included 'as their interests may appear.' This type of limiting language, however, has not stopped other courts from viewing subcontractors as insureds in order to prevent them from being liable in subrogation claims for property not their own. In New Amsterdam Casualty Co. v. Homans-Kohler, Inc., 305 F.Supp. 1017 (D.R.I.1969), subcontractors allegedly caused a fire on a construction site through their negligence, and the insurance company, as subrogee to the owner's claim, attempted to recover amounts paid out for the fire loss. As in the present case, the subcontractors were specifically covered under the builder's risk policy 'as their interests may appear.' However, the New Amsterdam court was not willing to rely on that phrase to distinguish between the insured status of the owner and that of the subcontractors. The court viewed the policy as providing single coverage for all of its insured and barred the subrogation suit by the insurer against the subcontractors.
By accepting the premiums for (the subcontractors') inclusion as co-insureds under said policy, the plaintiff insurance company assumed the risk of any loss occasioned by their negligence. (emphasis added). 4
The result was also adopted by the courts in Transamerica Insurance Co. v. Gage Plumbing & Heating Co., 433 F.2d 1051 (10th Cir. 1970) and United States Fire Insurance Co. v. Beach, 275 So.2d 473 (La.App.1973). 5 Although some other courts have reached the contrary conclusion that the insurance benefits under a builder's risk policy are extended to a subcontractor only for damage done to his property and that the subcontractor's immunity from liability is accordingly limited, 6 we agree with the single coverage approach of the New Amsterdam court. The builder's risk policy obtained by Baugh-Belarde protected each insured party against his own negligence, whether the property lost belonged to him or to some other insured party. Thus, the fact that College Utilities had a limited property interest in the Yak Estates project does not prevent it from being immune to suit by its insurer.
We base our decision on several policy considerations. First, a severe conflict of interest would exist if an insurer were permitted to recover from one of its own insureds. As an insured, College Utilities was under an implied duty to cooperate fully with its insurer in its inspection of any loss covered under the policy. As part of this duty of cooperation, College Utilities was obligated to answer the questions of insurance agents concerning the facts surrounding any loss and to permit inspection of its property and equipment on the site. If the insurer were permitted to suprogate to Baugh-Belarde's claims against College Utilities, it could use College Utilities' Cooperation in the investigation of the loss to build a liability case against the insured subcontractor. Such a conflict of interest would result in a breach of the fiduciary relationship between the insurer and its insured. This danger of conflict of interest was recognized by the court in Home Insurance Co. v. Pinski Brothers, Inc., 160 Mont. 219, 225-226, 500 P.2d 945, 949 (1972) in its enumeration of reasons why insurers should not be permitted to sue their own insureds:
To permit the insurer to sue its own insured for a liability covered by the insurance policy would violate these basic equity principles, as well as violate sound public policy. Such action, if permitted, would (1) allow the insurer to expend premiums collected from its insured to secure a judgment against the same insured on a risk insured against; (2) give judicial sanction to the breach of the insurance policy by the insurer; (3) permit the insurer to secure information from its insured under the guise of policy provisions available for later use in the insurer's subrogation action against its own insured; (4) allow the insurer to take advantage of its conduct and conflict of interest with its insured; and (5) constitute judicial approval of a breach of the insurer's relationship with its own insured. (emphasis added)
A second policy reason for not permitting a builder's risk insurer to subrogate against its insured, regardless of the extent of the insured's property in the construction project, is reduction of litigation. If an insurer on a major construction job were able to recover from one or more of its insureds, most losses on construction jobs would result in costly litigation. This result is clearly not in the public interest, especially since the cost of such litigation would ultimately be passed on to the general public in the form of increased insurance premiums and higher construction costs.
Our third policy consideration concerns...
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