Fire Ins. Exchange v. Thunderbird Masonry, Inc.

• Court: Arizona Court of Appeals
• Writing for the Court: EHRLICH
• Citation: Fire Ins. Exchange v. Thunderbird Masonry, Inc., 868 P.2d 948, 177 Ariz. 365 (Ariz. App. 1993)
• Decision Date: 13 April 1993
• Docket Number: CA-CV,No. 1,1
• Parties: FIRE INSURANCE EXCHANGE, an inter-insurance exchange, Intervenor Plaintiff-Appellee, v. THUNDERBIRD MASONRY, INC., Defendant-Appellant. 91-0044.

Page 948

868 P.2d 948

177 Ariz. 365

FIRE INSURANCE EXCHANGE, an inter-insurance exchange, Intervenor Plaintiff-Appellee, v. THUNDERBIRD MASONRY, INC., Defendant-Appellant.

No. 1 CA-CV 91-0044.

Court of Appeals of Arizona Division 1, Department B.

April 13, 1993.

Reconsideration Denied July 1, 1993.

Review Denied March 16, 1994.

[177 Ariz. 366] Broening, Oberg & Woods by Brian Holohan, Phoenix, for intervenor plaintiff-appellee.

O'Connor, Cavanagh, Anderson, Westover, Killingsworth & Beshears, P.A. by Richard J. Woods and Lucas J. Narducci, Phoenix, for defendant-appellant.

OPINION

EHRLICH, Presiding Judge.

Thunderbird Masonry, Inc. ("Thunderbird"), appeals from the summary judgment entered for Fire Insurance Exchange ("Fire Insurance") in a tort action. The insurance company had intervened to recover its loss after paying a claim for fire damage. For the following reasons, the judgment is reversed.

FACTS AND PROCEDURAL HISTORY

Marvin Gardens Development Corporation/Northview Terrace Limited Partnership ("Northview") hired Marvin Gardens Development Construction Corporation ("Marvin Gardens") as the general contractor for its condominium development, Mulwood Springs. Their contract, an American Institute of Architects (AIA) "Standard Form of Agreement Between Owner and Contractor," required Northview to obtain and maintain insurance for the construction project, covering the interests of Northview, Marvin Gardens and all subcontractors. The contract provided in relevant part:

11.3 PROPERTY INSURANCE

11.3.1 Unless otherwise provided, the Owner shall purchase and maintain property insurance upon the entire Work at the site to the full insurable value thereof. This insurance shall include the interests of the Owner, the Contractor, Subcontractors and Sub-subcontractors in the Work and shall insure against the perils of fire and extended coverage and shall include "all risk" insurance for physical loss or damage including, without duplication of coverage, theft, vandalism and malicious mischief....

In the same contract, Northview and Marvin Gardens waived all of the rights that they possessed against each other and the subcontractors to the extent that any damage was covered by insurance.

11.3.6 The Owner and Contractor waive all rights against (1) each other and the Subcontractors, Sub-subcontractors, agents and employees each of the other, and (2) the Architect and separate contractors, if any, and their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other perils to the extent covered by insurance obtained pursuant to this Paragraph 11.3 or any other property insurance applicable to the Work, except such rights as they may have to the proceeds of such insurance held by the Owner as trustee....

Marvin Gardens hired Thunderbird as the masonry subcontractor. In their contract, also a standard AIA form, they too mutually waived their rights against each other to the extent covered by insurance. Their contract included:

9.2 The Contractor and Subcontractor waive all rights against each other and against the Owner, the Architect, separate contractors and all other subcontractors for damages caused by fire or other perils to the extent covered by property insurance provided under the General Conditions, except such rights as they may have to the proceeds of such insurance.

Northview obtained construction financing from First Commercial Savings & Loan Association ("First Commercial"). Pursuant to their loan agreement, Northview agreed to insure the project and name First Commercial as loss payee:

1.6 Insurance

BORROWER agrees to provide or cause to be provided, at BORROWER's expense, insurance against fire and such other casualties as may be required from time to time by LENDER in companies and amounts approved by LENDER, which insurance shall be payable to BORROWER, and during the construction, to the contractor also, as their respective interests may appear, with standard lenders' loss payable endorsements attached making the proceeds payable to LENDER as lender....

Northview insured the project with a policy obtained from Fire Insurance at an annual premium of $15,609. This builder's risk policy designated First Commercial as the loss payee, providing:

7. MORTGAGE CLAUSE ...: (Applies only to building items and is effective only when policy is made payable to a named mortgagee or trustee.)

Loss or damage, if any, under this policy, shall be payable to the mortgagee (or trustee), named on the first page of this policy, as interest may appear, under all present or future mortgages upon the property herein described in which the aforesaid may have an interest as mortgagee (or trustee) in order of precedence of said mortgages, and this insurance, as to the interest of the mortgagee (or trustee) only therein, shall not be invalidated by any act or neglect of the mortgagor or owner of the within described property, nor by any foreclosure or other proceedings or notice of sale relating to the property, nor by any change in the title or ownership of the property, nor by the occupation of the premises for purposes more hazardous than are permitted by this policy; provided, that in case the mortgagor or owner shall neglect to pay any premium due under this policy, the mortgagee (or trustee) shall, on demand pay the same.

The policy also specifically recognized the validity of the mutual waivers among Northview, Marvin Gardens and the subcontractors:

11. SUBROGATION: This insurance shall not be invalidated should the named Insured waive in writing prior to a loss any or all right of recovery against any party for loss occurring to the property described.

On May 8, 1987, a fire destroyed much of the project. ¹ As a result, Northview made a claim for damages and presented Fire Insurance with a formal proof of loss. While there is some dispute as to how Fire Insurance handled the claim, in essence, it first denied Northview's claim and then paid the policy's proceeds to First Commercial. ²

A subrogation action was initiated when State Farm Fire & Casualty Company and others sued Thunderbird and Marvin Gardens for damages arising from the fire. Fire Insurance intervened; it sought damages against Thunderbird for the payment to First Commercial, asserting that it was subrogated to First Commercial's rights.

Thunderbird moved for summary judgment, contending that Fire Insurance should be denied a right of subrogation against it because of the mutual waivers. Fire Insurance responded with a cross-motion for partial summary judgment on the issue of waiver. The trial court concluded that there was no waiver by either First Commercial or Fire Insurance and that the insurance policy did not cover Thunderbird. Accordingly, the court denied Thunderbird's motion and granted Fire Insurance partial summary judgment. The parties to the original complaint settled. Thunderbird and Fire Insurance then stipulated for purposes of appeal that Thunderbird was negligent and the court entered judgment for Fire Insurance in the amount of $375,000. Thunderbird timely appealed.

DISCUSSION

The primary issue is the effect of the mutual waivers executed among Northview, Marvin Gardens and Thunderbird upon Fire Insurance's ability to be subrogated to First Commercial's rights against Thunderbird. Fire Insurance asserts that it is subrogated to First Commercial and that First Commercial is unaffected by the waivers because it was not a party to the construction contracts.

I. SUBROGATION

Subrogation can be based either on specific language in the pertinent contract, known as conventional subrogation, or on the equitable doctrine of subrogation. Liberty Mutual Insurance Co. v. Thunderbird Bank, 113 Ariz. 375, 377, 379, 555 P.2d 333, 335, 337 (1976); Title Insurance Co. of Minnesota v. Costain Arizona, Inc., 164 Ariz. 203, 206, 791 P.2d 1086, 1089 (App.1990). Neither Fire Insurance nor the trial court indicated under which theory of subrogation the case was proceeding or decided. Therefore, we must examine both theories.

A. Conventional Subrogation

The policy issued by Fire Insurance specifically provides:

Whenever this Company shall pay the mortgagee [First Commercial] (or trustee) any sum for loss under this policy and shall claim that, as to the mortgagor or owner [Northview] no liability therefor existed, this Company shall, to the extent of such payment, be thereupon legally subrogated to all the rights of the party to whom such payment shall be made, under all securities held as collateral to the mortgage debt....

This is the only provision in the contract that would entitle Fire Insurance to succeed to First Commercial's rights. ³ However, it refers only to First Commercial's rights against Northview under the security documents and has nothing to do with a subcontractor. Therefore, Fire Insurance is not entitled to recover under conventional subrogation.

B. Equitable Subrogation

A party also may succeed to the rights of another under the equitable doctrine of subrogation.

Subrogation is the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. It is a creature of equity.... It rests upon the principle that substantial justice should be attained, regardless of form.... It involves three elements: (1) A valuable right; (2) a person who owns the right; and (3) a person who seeks to be substituted in that ownership. There must exist a claim or obligation against the debtor; an original right to that claim on the part of him in whose place substitution is sought, and some right belonging to him who seeks the substitution which will be protected thereby.

Mosher v. Conway, 45 Ariz. 463, 468-69, 46 P.2d 110, 112 (1935), cert. denied, 305 U.S. 599, 59 S.Ct. 77, 83...