Commercial Union Ins. Co. v. Postin

• Decision Date: 02 May 1980
• Docket Number: No. 5189,5189
• Citation: 610 P.2d 984
• Parties: COMMERCIAL UNION INSURANCE COMPANY, a Massachusetts Corporation, Appellant (Plaintiff below), v. Robert POSTIN; Volk and Harrison; Ketchum, Konkel, Ryan and Fleming, now known as Ketchum, Konkel, Barrett, Nickel and Austin, Inc.; and Milo Ketchum, Appellees (Defendants below).
• Court: Wyoming Supreme Court

Page 984

610 P.2d 984

COMMERCIAL UNION INSURANCE COMPANY, a Massachusetts Corporation, Appellant (Plaintiff below) v. No. 5189.

Robert POSTIN; Volk and Harrison; Ketchum, Konkel, Ryan and Fleming, now known as Ketchum, Konkel, Barrett, Nickel and Austin, Inc.; and Milo Ketchum, Appellees (Defendants below).

Supreme Court of Wyoming.

May 2, 1980.

Bard Ferrall and King Tristani, Cheyenne, for appellant.

Ellen Crowley, Cheyenne, and William H. Knapp, of Knapp & Lee, Denver, Colo., for Postin, appellee.

James W. Owens, of Murane & Bostwick, Casper, for Volk and Harrison, appellees.

A. Joseph Williams, of Guy, Williams & White, Cheyenne, for Ketchum, Konkel, Barrett, Nickel and Austin, Inc., and Milo Ketchum, appellees.

Before RAPER, C. J., McCLINTOCK, THOMAS and ROSE, JJ., and GUTHRIE, J., Retired. ^*

ROSE, Justice.

This appeal calls up the issue of whether or not an insurance company will, under a qualified subrogation policy provision, have a cause of action against alleged tortfeasors for damages the company paid upon a claim resulting from an inherent or latent defect when such cause of damage is specifically excluded from coverage. ¹

The case was decided against the insurance company on a motion for summary judgment in the trial court.

We will affirm.

We will hold that the insurance company, under the doctrine of legal or equitable subrogation did not make payment under compulsion, had no interest of its own to protect, and was, therefore, a mere volunteer. The company, therefore, could not recover against alleged third-party tortfeasors under this theory of subrogation. We will also hold that, since there was no contract by which the insured assigned effective subrogation rights to the insurance company under the facts of this case, the company cannot, therefore, recover against alleged tortfeasors in reliance upon the doctrine of conventional or contractual subrogation.

Having resolved the appeal in the area of subrogation, it will not be necessary to consider the statute-of-limitations issue raised in the briefs.

FACTS

The Cheyenne, Wyoming, Air Terminal Building, which was built by the City of Cheyenne, Wyoming (herein referred to as "Cheyenne" or "the City"), was substantially completed in 1960, and on July 2, 1975, a portion of the roof collapsed. At that time the building was insured by appellant-plaintiff, Commercial Union Insurance Company, under a policy which excluded coverage for inherent or latent defect. Even so, acting on an insurance adjuster's report which recognized the cause of collapse in all probability to be from latent or inherent defect, i. e., "design of this building," the company settled with the insured City and then brought suit against defendants-appellees, architects and engineers. The amended complaint charges that latent defect was the cause of the collapse and resultant damages.

For purposes of this opinion, we assume that immediately after collapse, appellant's adjuster believed the probable cause to be inherent or latent defect. The opinion assumes that the cause was, in fact, latent or inherent defect and, furthermore, the trial judge had the right to make that assumption. This assumption is permissible since it is upon this cause that the appellant has rested its case both here and in the trial court and, no other theory of liability having been advanced, the parties and the concerned courts are bound to this concept of recovery.

The two relevant subrogation paragraphs of the policy will be referred to as "Subrogation Paragraph 1 or 2," and they are these:

1. "This company may require from the insured an assignment of all rights of recovery against any party for loss to the extent that payment therefor is made by this Company."

2. "In the event of any payment under this policy the Company shall be subrogated to all the insured's rights of recovery therefor against any person or organization and the insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The insured shall do nothing after loss to prejudice such rights." (Emphasis supplied.)

There is no assignment under Paragraph 1 aforesaid and no assignment of subrogation rights in the record in any respect except that which is contained in the above-quoted Paragraph 2.

ISSUE

The issue is whether or not subrogation Paragraph 2 supports the insurance company's right to subrogation, given the facts of this case.

THE NATURE OF SUBROGATION

Subrogation has been defined as "the substitution of another person in the place of a creditor, so that the person in whose favor it (subrogation) is exercised succeeds to the rights of the creditor in relation to the debt." Criss v. Folger Drilling Company, 195 Kan. 552, 407 P.2d 497, 500 (1965). (Bracketed matter supplied.) This would mean here that the insurance company seeks to step into the shoes of the City in relation to any "debt" the appellees-tortfeasors owe the City because of their alleged negligence.

Two Types of Subrogation

There are two kinds of subrogation legal or equitable and conventional. Legal or equitable subrogation arises by operation of law, and conventional subrogation arises by contract. ²

Legal Subrogation

The right to legal subrogation occurs upon the payment of the debt by the subrogee for the subrogor. Couch on Insurance 2d § 61:2, pp. 238-239. An insurer has the right to recover for damages that it is obligated to pay to an insured under its policy. Couch, supra, § 61:4, p. 239.

The United States Court of Appeals, Fourth Circuit, has said:

" 'Where the tortious conduct of a third person is the cause of a loss covered by an insurance policy, the insurer, upon payment of the loss, becomes subrogated pro tanto by operation of law to whatever rights the insured may have against the wrongdoer.' " United States v. South Carolina State Highway Dept., 4 Cir., 171 F.2d 893, 898 (1948), citing Rivers v. Liberty National Bank, 135 S.C. 107, 133 S.E. 210. (Emphasis supplied.)

With respect to whether the insurance company has paid "under its policy," (Subrogation Paragraph 2 language) it is a defense in legal or equitable subrogation to show that the company paid as a mere volunteer.

VOLUNTEERS

(Compulsion and Protectable Interest)

Payment for Harm not Covered

Couch, supra, § 61:52, pp. 269-270, puts the volunteer rule this way:

"While the right of subrogation is not dependent upon legal assignment, or upon contract, agreement, stipulation, or privity between the parties to be affected by it, the person who pays the debt must not be a mere volunteer, for the payment must have been made under compulsion, or for the protection of interest of the person making it in discharge of an existing liability which must be fully satisfied. ³ Hence, an insurer which pays a loss for which it is not liable thereby becomes a mere volunteer, and is not entitled to subrogation, in the absence of an agreement therefor." (Emphasis supplied and footnote ours.)

The author goes on to say:

"The principle that the insurer is not subrogated when it makes a voluntary payment has been applied even though the 'voluntary' status of the payment could not be determined until the jury's verdict established that the insurer had not been obligated to make such payment. . . ." Couch, supra, § 61:54, p. 270.

The insurance company will be regarded as a volunteer when it purports to pay under its policy but where in fact the payment is made for harm that was not covered.

Couch, supra, § 61:54, p. 271, says:

"Where the harm for which the insurer has indemnified the insured is not covered by the policy, the making of such payment to the insured is deemed 'voluntary,' and no right of subrogation arises. . . ." (Emphasis supplied.)

In this regard, see Hartford Fire Insurance Company v. Payne, 28 Ga.App. 655, 112 S.E. 736 (1922), where the insurer paid a loss under an insurance leakage policy for which it was not liable. It was not entitled to be subrogated to the claim of the insured against occupants of the building in which the sprinkler system burst. The court held that when the insurer is not liable for the loss because the insured property had been removed from the premises, it cannot pay the loss and, upon receiving an assignment from the insured, recover against the party whose negligence caused the loss.

In Nationwide Mutual Ins. Co. v. Weeks-Allen Motor Co., 18 N.C.App. 689, 198 S.E.2d 88 (1973), where the insured was involved in a collision allegedly caused by a defective master brake cylinder, insurer, who settled the claim without an adjudication of liability, did so voluntarily and did not succeed to the rights of its insured against the manufacturer, distributor and seller of the distributor.

In affirming summary judgment for the defendants, the court said:

"Plaintiff (insurance company) admitted that its policy of insurance required it to pay on behalf of its insured all sums which its insured should become legally obligated to pay as damages. Plaintiff further admits that it settled with all the claimants without an adjudication of liability because it was able to settle all claims within the limits of its policy. Plaintiff by paying the funds in settlement of claims for damages did so voluntarily. Even though suits had been filed, plaintiff's liability under its policy had not arisen. Therefore, because plaintiff was a volunteer in paying the claims, it did not succeed to the rights of its insured. . . ." (Emphasis in original text) 198 S.E.2d at 92.

In Greenville Shipbuilding Corp. v. Hartford Acc. & Ind. Co., N.D.Miss., 334 F.Supp. 1228, 1237-1238 (1971), aff'd, 5 Cir., 460 F.2d 1063 (1972), the federal court, applying Mississippi law, was confronted with the situation that the "wrong" or "volunteer" insurance company had settled a claim. The "volunteer" company sued to collect from the insurance company under whose policy the claim should have been paid. The court said:

". . . The rule is...