Patent Scaffolding Co. v. William Simpson Const. Co.

• Decision Date: 29 November 1967
• Citation: 256 Cal.App.2d 506,64 Cal.Rptr. 187
• Court: California Court of Appeals Court of Appeals
• Parties: The PATENT SCAFFOLDING CO., a corporation, Plaintiff and Respondent, v. The WILLIAM SIMPSON CONSTRUCTION COMPANY, a corporation, Defendant and Appellant. Civ. 30131.

Page 187

64 Cal.Rptr. 187

256 Cal.App.2d 506

The PATENT SCAFFOLDING CO., a corporation, Plaintiff and Respondent, v. The WILLIAM SIMPSON CONSTRUCTION COMPANY, a corporation, Defendant and Appellant.

Civ. 30131.

Court of Appeal, Second District, Division 5, California.

Nov. 29, 1967.

Rehearing Denied Dec. 26, 1967.

Hearing Denied Jan. 25, 1968.

Hill, Farrer & Burrill, William McD. Miller, A. J. Cathcart, and William M. Bitting, Los Angeles, for defendant and appellant.

Joseph Stell, Los Angeles, for plaintiff and respondent.

HUFSTEDLER, Associate Justice.

The William Simpson Construction Company ('Simpson') appeals from a judgment in favor of The Patent Scaffolding Co. ('Patent') awarding to Patent judgment for $16,481.09, with interest and costs.

Procedural and Factual Summary

Three insurance companies, United States Fidelity and Guaranty Company, Niagara Fire Insurance Company, and National Fire Insurance Company ('insurers'), brought the action in the name of their insured, Patent, against Simpson and California Institute of Technology ('Caltech') to recover damages for claimed breach of a contract between Patent and Simpson and of a contract between Simpson and Caltech of which Patent claimed to be a third party beneficiary.

Simpson, a general contractor, executed a contract with Caltech to construct a building for Caltech. Simpson entered into a subcontract with Patent whereby Patent was to furnish scaffolding and other equipment for use during construction of the building, to erect the scaffolding and equipment at the job site, and to remove such materials when the job was completed. The written contract, dated November 20, 1959, between Patent and Simpson contained the following paragraph:

'15. FIRE INSURANCE--Subcontractor's work and materials at the site of the project are to be protected from fire loss and damage by insurance procured by the contractor or the owner, without cost to the subcontractor.'

During the course of construction a fire of unknown origin destroyed certain items of Patent's equipment and materials at the job site. Prior to the commencement of the action Patent demanded $16,480.09 from Simpson and Caltech to compensate it for its fire loss. Neither Simpson nor Caltech paid Patent for its loss. Simpson did not procure insurance protecting Patent's equipment and materials from fire loss and it did not request or cause Caltech to procure fire insurance upon Patent's materials and equipment.

Prior to Patent's executing the subcontract with Simpson, Patent had procured from the insurers fire insurance on the materials and equipment damaged and destroyed by the fire. The insurers' policies together provided coverage of over $1,000,000 to Patent against loss of its property.

Patent made claims on each of the insurers and the insurers paid Patent the following amounts of money: United States Fidelity and Guaranty and Niagara Fire Insurance Companies paid Patent $5,768.38 each, and National Fire Insurance Company paid $4,944.33, the total of which equaled $16,481.09.

The trial court concluded (1) the insurers were subrogated to Patent's claim upon its contract with Simpson; (2) the insurers were entitled to recover the total sums paid to Patent; (3) the contract between Simpson and Patent was 'not a contract merely to obtain fire insurance, but a contract of indemnification against fire loss'; (4) the insurers were not entitled to recover against Caltech, because Patent was not a third party beneficiary of the contract between Simpson and Caltech. Judgment was accordingly entered in favor of the nominal plaintiff, Patent, against Simpson, and in favor of Caltech against Patent. No appeal has been taken from that portion of the judgment in favor of Caltech.

The appeal presents the novel question: Are the insurers who compensated Patent for Patent's fire loss equitably subrogated to Patent's cause of action against Simpson for breach of Simpson's contractual duty either to indemnify Patent for fire loss or to procure fire insurance for Patent's benefit?

Equitable Subrogation Elements

The elements of an insurer's cause of action based upon equitable subrogation are these: (1) The insured has suffered a loss for which the party to be charged is liable, either because the latter is a wrongdoer whose act or omission caused the loss or because he is legally responsible to the insured for the loss caused by the wrongdoer; (2) the insurer, in whole or in part, has compensated the insured for the same loss for which the party to be charged is liable; (3) the insured has an existing, assignable cause of action against the party to be charged, which action the insured could have asserted for his own benefit had he not been compensated for his loss by the insurer; (4) the insurer has suffered damages caused by the act or omission upon which the liability of the party to be charged depends; (5) justice requires that the loss should be entirely shifted from the insurer to the party to be charged, whose equitable position is inferior to that of the insurer; and (6) the insurer's damages are in a stated sum, usually the amount it has paid to its insured, assuming the payment was not voluntary and was reasonable. (Meyers v. Bank of America Nat. T. & S. Assn. (1938) 11 Cal.2d 92, 77 P.2d 1084; Offer v. Superior Court (1924) 194 Cal. 114, 228 P. 11; Liberty Mut. Ins. Co. v. Kleinman (1954) 149 Cal.App.2d 404, 308 P.2d 347; American Alliance Ins. Co. v. Capital Nat. Bank (1946) 75 Cal.App.2d 787, 171 P.2d 449; Harrington v. Central States Fire Ins. Co. (1934) 169 Okl. 255, 36 P.2d 738, 96 A.L.R. 859; In re Future Mfg. Co-op., Inc. (N.D.Cal.1958) 165 F.Supp. 111. See also Justice Traynor's dissenting opinion, Anheuser-Busch, Inc. v. Starley (1946) 28 Cal.2d 347, 355--356, 170 P.2d 448, 166 A.L.R. 198.)

No express assignment of the insured's cause of action is required; equitable subrogation is accomplished by operation of law. However, as in cases of assignment, the equitable subrogee is substituted only in respect of a subrogor's causes of action which are not purely personal and, generally, any defenses or counterclaims which could have been asserted against the subrogor-insured can also be asserted against the subrogee-insurer. (Anheuser-Busch, Inc. v. Starley (1946) 28 Cal.2d 347, 351, 170 P.2d 448, 166 A.L.R. 198; Royal Indemnity Co. v. Security Truck Lines (1963) 212 Cal.App.2d 61, 65--66, 27 Cal.Rptr. 858; see also Meyers v. Bank of America Nat. T. & S. Assn., supra, 11 Cal.2d at 94, 77 P.2d 1084.)

Subrogor's Cause of Action

If Patent had had no insurance to compensate it for its loss, Patent could have recovered damages from Simpson for all detriment proximately caused by Simpson's breach of its contractual duty to indemnify or to procure insurance. (Civ.Code, § 3300; see Dutton Dredge Co. v. United States F. & Guar. Co. (1934) 136 Cal.App. 574, 581, 29 P.2d 316; see also Transportation Guar. Co., Ltd. v. Jellins (1946) 29 Cal.2d 242, 252--253, 174 P.2d 625.)

After Patent was fully compensated for its fire loss, however, could Patent itself have successfully sued Simpson for breach of contract? Patent could recover twice for the same loss only if the 'collateral source' rule applies. 'When an injured party receives compensation for his losses from a collateral source 'wholly independent of the tortfeasor,' such payment generally does not preclude or reduce the damages to which it is entitled from the wrongdoer. (See Anheuser-Busch, Inc. v. Starley (1946) 28 Cal.2d 347, 349--350, 170 P.2d 448, 166 A.L.R. 198; see also Lewis v. County of Contra Costa (1955) 130 Cal.App.2d 176, 178, 278 P.2d 756.)' City of Salinas v. Souza & McCue Constr. Co., Inc. (1967) 66 Cal.2d --- ^a, 57 Cal.Rptr. 337, 424 P.2d 921.) Thus, if Patent sued a person whose negligent or willful act caused the fire which destroyed its property, Patent's compensation from its insurers would neither diminish nor defeat the damages which it could recover from the tortfeasor. (E.g., City of Salinas v. Souza & McCue Constr. Co., Inc., supra, 66 Cal.2d --- ^b, 57 Cal.Rptr. 337, 424 P.2d 921; Maxwell, The Collateral Source Rule in the American Law of Damages (1962) 46 Minn.L.Rev. 669; Fleming, The Collateral Source Rule and Loss Allocation in Tort Law (1966) 54 Cal.L.Rev. 1478.)

The collateral source rule, however, has not been generally applied in cases founded upon breach of contract, unless the 'breach has a tortious or wilful flavor.' (City of Salinas v. Souza & McCue Constr. Co., Inc., supra, 66 Cal.2d at --- ^c, 57 Cal.Rptr. at 342, 424 P.2d at 926; United Protective Workers, etc. v. Ford Motor Co. (7 Cir. 1955) 223 F.2d 49, 54.) The collateral source rule is punitive; contractual damages are compensatory. The collateral source rule, if applied to an action based on breach of contract, would violate the contractual damage rule that no one shall profit more from the breach of an obligation than from its full performance. An application of the collateral source rule is particularly indefensible in a situation in which the injured party potentially could make a treble recovery: one from his insurer, one from a defendant who has undertaken contractual liability for the loss, and one from the wrongdoer. (See Justice Traynor's dissenting opinion in Anheuser-Busch, Inc. v. Starley, supra, 28 Cal.2d at 355--356, 170 P.2d 448.) We conclude that the collateral source rule would be inapplicable in an action brought by Patent for its own benefit after Patent had been paid by the insurers.

Patent suffered no uncompensated detriment caused by Simpson's breach of contract. It was fully paid for its fire loss. It could not recover the cost of the premiums it had paid to the insurers because it did not incur that expense as a consequence of its contract with Simpson or as a result of Simpson's breach of contract. A breach of contract without damage is not actionable. (E.g., Hawkins v. Oakland Title Ins. & Guar. Co. (1958) 165...