Liberty Mut. Fire Ins. Co. v. Auto Spring Supply Co.

• Decision Date: 30 April 1976
• Citation: 59 Cal.App.3d 860,131 Cal.Rptr. 211
• Court: California Court of Appeals Court of Appeals
• Parties: LIBERTY MUTUAL FIRE INSURANCE COMPANY, Plaintiff and Appellant, v. AUTO SPRING SUPPLY COMPANY et al., Defendants and Respondents. Civ. 46505.

Page 211

131 Cal.Rptr. 211

59 Cal.App.3d 860

LIBERTY MUTUAL FIRE INSURANCE COMPANY, Plaintiff and Appellant, v. AUTO SPRING SUPPLY COMPANY et al., Defendants and Respondents.

Civ. 46505.

Court of Appeal, Second District, Division 3, California.

April 30, 1976.

Morgan, Wenzel & McNicholas and Gerald E. Agnew, Jr., Los Angeles, for plaintiff and appellant.

Latham & Watkins, Michael J. Shockro and Lance B. Wickman, Los Angeles, for defendants and respondents.

COBEY, Associate Justice.

Plaintiff, Liberty Mutual Fire Insurance Company (hereafter Liberty) appeals from an adverse judgment in its subrogation action against defendant, Auto Spring Supply Company (hereafter Auto) and Henry Beacham. The appeal lies (Code Civ.Proc., § 904.1, subd. (a)), but we find no reversible error and will therefore affirm.

FACTS

On May 26, 1968, a fire damaged a building in Pico Rivera. Liberty then had outstanding a fire insurance policy covering the building in which Title Insurance and Trust Company (hereafter T.I.T.) was the named insured. ¹ Thereafter in 1968 Liberty paid to T.I.T. $47,488--the cost of repairing the fire damage to the building. At the time of the fire, Auto was operating a manufacturing plant in the building and the other defendant was employed there.

Very shortly after the fire Liberty informed T.I.T. that it was considering filing suit against Auto to recover the fire loss. On August 15, 1969, Liberty did just this by initiating the subrogation action before us. On August 6, 1974, two days before the trial of the action commenced, T.I.T. gratuitously, but purportedly pursuant to Liberty's policy ², executed a release and waiver of its entire right of recovery against Auto for the aforementioned fire loss.

At the time of the fire Auto was renting the building damaged by the fire under a sublease, executed in June of 1959. A portion of the rent payable by Auto under the sublease covered the premium on Liberty's policy which was carried by the sublessor of the building under its lease with the owner. According to the testimony of one of the original lessors, she and her colessor looked only to the insurance for recovery in the event of fire loss to any of the buildings insured under the lease. Moreover, under both the lease and the sublease the proceeds of such insurance were to be used wholly or partially to repair repairable fire damage. Furthermore, on the basis of the lessee's oral representation to Auto that provision of fire insurance by Auto was unnecessary in view of the lessee's policy issued by Liberty, Auto did not take out and maintain any fire insurance of its own on the subsequently fire-damaged building.

Based on the above evidence, the trial court found that the lessors of the subsequently fire-damaged building (originally the Mezoris), the sublessor and the sublessee (Auto), intended and understood that neither Auto nor its employees would have any liability for fire loss to the building and that the just-mentioned persons and entities would look solely to the proceeds of Liberty's policy to pay for any such loss. The trial court further found that the aforementioned release and waiver of August 6, 1974, complied in all respects with the requirements therefor of Liberty's policy. The trial court then concluded as a matter of law that Liberty had never had a right of subrogation against either defendant, but that, in any event, its claim of subrogation against Auto had been effectively released.

DISCUSSION ³

A subrogation as applied to an insurer is its right to be put in the position of its insured against third parties legally responsible to its insured for the loss which the insurer has both insured and paid. (Sacramento--Yolo Port Dist. v. Cargill of California, Inc., 4 Cal.App.3d 1004, 1010, 84 Cal.Rptr. 822.) In other words, Liberty's right to subrogation here is its right to be put in T.I.T.'s position against Auto with respect to the fire loss Liberty insured and paid. (Gordon v. J. C. Penney Co., 7 Cal.App.3d 280, 285, 86 Cal.Rptr. 604.)

We turn therefore to T.I.T.'s rights against Auto in regard to this fire loss. Under the lease of the damaged building the lessee was required to take out and maintain fire insurance thereon at its own expense during the term of the lease 'with loss payable to the (l)essor.' This the lessee did through Liberty's policy and, as previously related, in reliance thereupon Auto did not take out any fire insurance of its own on the building in question. Moreover, as also previously indicated, under both the lease and sublease the proceeds of Liberty's policy were to be used wholly or partially to repair repairable fire damage.

It is quite obvious from these provisions that the parties to the lease and the sublease all intended that the proceeds of Liberty's fire insurance policy, maintained by the lessee at Auto's expense, were to constitute the protection of all parties to the lease documents against fire loss to the extent of the policy limits. This was the commercial expectation of these parties. Stated otherwise, under the facts of this case, we regard the subtenant, Auto, as an implied in law co-insured of T.I.T., absent an express agreement between them to the contrary. They both had insurable interests in the fire-damaged building. (See Sutton v. Jondahl (Okl.App.1975) 532 P.2d 478, 482.)

If subrogation were permitted here, Auto, rather than the proceeds of Liberty's policy, would become the source of the funds used to repair the fire damage. This would be contrary to the just-expressed intent and expectation of T.I.T., Liberty's named insured. Under both the lease and the sublease T.I.T. did not look to Auto for payment of fire damage to the building, but instead looked only to the proceeds of Liberty's policy and not beyond. ⁴ The right to subrogation is governed by equitable principles (see Meyers v. Bank of America, etc. Assn., 11 Cal.2d 92, 96--97, 77 P.2d 1084) and it would be most inequitable to hold Auto responsible for a fire loss which it thought it had completely avoided through its indirect payment over some nine years of the premiums due on Liberty's policy and had also acted in reliance upon this belief by failing to take out corresponding fire insurance of its own. It would also be a windfall for Liberty to have collected these premiums over the years for its assumption of this risk and then when the risk actually occurred, by means of this litigation, to transfer the risk wholly to Auto--the entity which paid Liberty's premiums for years to avoid this very risk.

Whenever a building is leased or subleased for business purposes, it is customary to require in the various lease and sublease documents executed between the parties that some party to the lease or sublease provide protection from fire damage to the building and a source of funds for the alleviation of that damage by obtaining and maintaining adequate fire insurance on the building. Such a provision is for the implied benefit of all persons either owning or making primary use of the building. To construe otherwise, the scope of the protection so provided would be both unrealistic and unfair. ⁵ (See New Hampshire Insurance Co. v. Fox Midwest Theatres, Inc. (Kan.1969) 203 Kan. 720, 457 P.2d 133, 138, 140--141; see also Fred A. Chapin Lumber Co. v. Lumber Bargains, Inc., 189 Cal.App.2d 613, 616, 618, 11 Cal.Rptr. 634; Gordon v. J. C. Penney Co., supra, 7 Cal.App.3d at 283--284; 86 Cal.Rptr. 604; Rock Springs Realty, Inc. v. Waid (Mo.1965) 392 S.W.2d 270, 277--278; Foster Estates Inc. v. Wolek (1969) 105 N.J.Super. 339, 252 A.2d 219, 222; 6A Appleman, Insurance Law and Practice (1975 Supp.) § 4055.)

As was plainly indicated in the leading case of General Mills v. Goldman (8th Cir. 1950) 184 F.2d 359, 365--366, cert. denied 340 U.S. 947, 71 S.Ct. 532, 95 L.Ed. 683, even an implied provision for fire insurance in a lease represents the agreement of the parties thereto that nonintentional loss by fire shall be paid from and only from the proceeds of the policy. ⁶ It is true that no privity of contract or estate exists between T.I.T., the lessor, and Auto, the sublessee (see Johnson v. Couch, 189 Cal.App.2d 687, 691, 11 Cal.Rptr. 645), but these legal circumstances have no bearing upon the existence of T.I.T.'s continuing intent and expectation with respect to the ultimate source for payment of a fire loss. We see no reason why this construction of the named insured's intent and expectation should not extend to the sublease situation before us. We also do not...