W. Heritage Ins. Co. v. Frances Todd, Inc.

in good repair. Paragraph 8(A) required the Lessee to "keep in force a public liability insurance policy covering the leased Premises, including parking areas, if any, included in this Lease, insuring Lessee and naming Lessor as an additional insured. ... Said insurance policy shall have minimum limits of coverage of $ 1,000,000 in the aggregate." (Italics added.) The Lease did not specify which party (Lessor or Lessee) would carry fire insurance.

Paragraph 9(B) of the Lease, entitled "Lessor's Right to Recover Damage(s)," provided, "Such efforts as Lessor may make to mitigate damages caused by Lessee's breach of this Lease shall not constitute a waiver of Lessor's right to recover damages against Lessee hereunder. Nor shall anything herein contained affect Lessor's right to indemnification against Lessee for any liability arising prior to the termination of this Lease for personal injuries or property damage resulting from the acts or omissions of Lessee, and Lessee hereby agrees to indemnify and hold Lessor harmless from any such injuries or property damages ... except for damages occasioned by Lessor's intentional or grossly negligent acts."

Paragraph 11 of the Lease provided in relevant part, "Lessee agrees to surrender the Premises at the termination of the tenancy herein created, in substantially the same condition as they were on the Commencement Date, reasonable wear and tear, casualty, and any alterations, improvements, and/or additions which are the property of Lessor under Paragraph 7 excepted." Paragraph 19 allowed either party to terminate the lease when damage due to

implied insureds given the language of the lease between de Carion and defendants, and that in any event, defendants had no contractual relationship with the Association, who was the only named insured for the fire loss.

On June 1, 2017, the trial court granted summary judgment. In a detailed order, it concluded that the question was whether the Lease contemplated that the Western Heritage policy would be for defendants' benefit. It found the Lease provisions in this case to be "strikingly similar" to those in Parsons Manufacturing Corp. v. Superior Court (1984) 156 Cal.App.3d 1151 , 203 Cal.Rptr. 419 ( Parsons ). "As in Parsons , fairly interpreting all of the pertinent lease provisions in context with one another, the lease can only be interpreted to place on the lessor (de Carion dba Surfwood Properties) the burden of insuring from fire losses to the leased premises (as distinguished from the lessee's personal property) against lessor and lessee negligence." Subrogation was thus inappropriate.

B. Equitable Subrogation-General Principles

" 'Subrogation is defined as the substitution of another person in place of the creditor or claimant to whose rights he or she succeeds in

insurer may not seek subrogation against an insured's lessee in such cases for a fire he or she negligently causes, even when the elements necessary for subrogation have otherwise been met.

Thus, in Fred A. Chapin Lumber Co. v. Lumber Bargains, Inc. (1961) 189 Cal.App.2d 613 , 618-619, 622, 11 Cal.Rptr. 634 , the lessor's policy was held in an appeal following an order granting judgment on the pleadings to be for the mutual benefit of the lessor and lessee where the lease expressly required the lessor to maintain fire insurance. This rule was followed in Gordon v. J.C. Penney Co. (1970) 7 Cal.App.3d 280 , 282, 284, 86 Cal.Rptr. 604 , which affirmed a judgment in favor of the lessee following a court trial. "A fire insurance policy which does not cover fires caused or contributed to by the insured would be an oddity indeed. As we stated in Sacramento-Yolo Port Dist. v. Cargill of California, Inc. (1970) 4 Cal.App.3d 1004 , 1012, 84 Cal.Rptr. 822 [ ]: 'Otherwise, few insured fire claims would be paid without controversy and most would require litigation.' For that reason we do not deem that a policy 'for the benefit' of a lessee excludes coverage for fires caused by his negligence. We would not construe that to have been the intent of the parties here without a provision in the lease expressly so providing." ( Gordon at pp. 284-285, 86 Cal.Rptr. 604 .)

In Liberty Mutual Fire Ins. Co. v. Auto Spring Supply Co. (1976) 59 Cal.App.3d 860 , 131 Cal.Rptr. 211 , the lessee's insurer was denied subrogation against the sub-lessee where the sub-lessee's rent covered the premium on the lessee's fire policy and proceeds of the policy were to be used to repair fire damages. The court held it was "... quite obvious from these provisions that the parties to the lease and the sublease all intended that the proceeds of [the insurance company's] fire insurance policy, maintained by the lessee at [the sub-lessee's] expense, were to constitute the protection of all parties to the lease documents against fire loss[.] This was the commercial expectation of these parties. Stated otherwise, under the facts of this case, we regard the subtenant ... as an implied in law co-insured of [the lessee], absent an express agreement between them to the contrary." ( Id . at p. 865, 131 Cal.Rptr. 211 .)

In Parsons , supra , 156 Cal.App.3d at 1151 , 203 Cal.Rptr. 419 , the court reversed a partial summary judgment for the insurer and the corresponding denial of summary judgment for the lessee. In that case, the lease's "yield-up" clause stating the conditions for the return of the premises provided "for [the lessee's] return of

not collect against its own insured had the insured negligently caused the fire. In effect, the tenant stands in the shoes of the insured landlord for the limited purpose of defeating a subrogation claim. [Citations.] Third, the ordinary and usual meaning of 'loss by fire' includes fires of negligent origin. A reasonable businessman or woman contracting as a lessee would understand that the term exempts him or her from liability for all fires covered by the usual fire insurance policy. [Citations.]"

The court further explained, "We do not mean our opinion to state that a lessor may never shift to the lessee the burden of insuring against the lessee's negligence. We state only that, at least where the [lease] agreement adverts to the possibility of fire and there is no clear language or other admissible evidence showing an agreement to the contrary, a lease agreement should be read to place on the lessor the burden of insuring the premises (as distinguished from the lessee's personal property) against lessor and lessee negligence." ( Parsons , supra 156 Cal.App.3d at p. 1162, 203 Cal.Rptr. 419 .) The insurer did not present evidence in opposition "to rebut the inference from the language of the lease that lessor would procure insurance for the benefit of both lessor and lessee. Therefore, the court erred in denying [the tenant's] motion for summary judgment." ( Id . at p. 1164, 203 Cal.Rptr. 419 .)

Finally, in Hammond , supra , 83 Cal.App.4th at pages 320 to 321, 99 Cal.Rptr.2d 596 , the court considered a summary judgment in favor of the lessee on a subrogation action and reversed, finding the action to be viable. The court found Parsons distinguishable "given the significant differences between the rental agreements under consideration." Significantly, the yield-up clause in Hammond exempted only " 'normal wear and tear' " from the requirement that the lessee return the premises to the landlord in the same condition, and the lease expressly held the lessee liable for damages caused by their

Because the insurance company could not seek subrogation against its own named insured (the lessor), it cannot seek subrogation against the lessee. In this case, we conclude the Western Heritage policy was maintained for defendants' benefit and that summary judgment was properly granted in their favor.

First, the Lease in this case required defendants to obtain only liability insurance, not fire insurance. The implication was that fire insurance would be carried by the lessor, de Carion. William R. de Carion was an additional named insured on the insurance policy purchased by the Association, as the CC & Rs governing the property required.

Second, owners such as de Carion were prohibited by the CC & Rs from purchasing an individual fire policy, as were "occupants" and "tenants" of the premises to whom the CC & Rs applied. (See Policy, [¶] [¶] 3.1, 13.4.) Defendants could not, therefore, purchase their own first-party fire insurance for the structure (a structure in which they held no ownership interest).

Third, the yield-up clause in this case provided that defendants, as lessees, agreed to "surrender the Premises at the termination of the tenancy herein

In support of its argument that summary judgment in favor of defendants was improper, Western Heritage notes that under paragraph 9(B) of the Lease, de Carion was entitled to recover damages caused by defendants' acts or omissions. This is not precisely correct. That paragraph provides that defendants will indemnify de Carion and hold him harmless for property damage or personal injury resulting from the acts and omissions of defendants; the underlying liability in question is to third parties. (See Myers Building Industries, Ltd. v. Interface Technology, Inc. (1993) 13 Cal.App.4th 949 , 969, 17 Cal.Rptr.2d 242 [indemnification and hold harmless clauses

damage must be repaired by Landlord; but, at yield-up, the

allowed to proceed with a subrogation action because it has superior equities to the allegedly negligent defendants. It relies on State Farm , supra , 143 Cal.App.4th at page 1098, 49 Cal.Rptr.3d 785 , in which the court reaffirmed this defensive doctrine: "Under the doctrine of superior equities, although an insurer might have a subrogation interest in the insured's claim against the party that caused the loss, it cannot enforce its subrogation rights unless it has equities superior to those of the wrongdoer." ( Id . at p. 1108, 49 Cal.Rptr.3d 785 .) In that case, the court reversed an order granting summary judgment in favor of a third party in a subrogation action who allegedly allowed a fire to negligently spread. ( Id. at p. 1119, 49 Cal.Rptr.3d 785 ). As the trial court in this case noted, the equities are different when the third party is not the party to any agreement with the insured, but is simply a neighbor. Here, the allegedly negligent party is also a party to a lease that on its face contemplates that fire insurance will be procured by the lessor. This changes the equities considerably.

It is not necessary to consider the extrinsic evidence offered by Western Heritage that the rent was set using fair market value per foot and did not earmark a set amount toward the insurance payment. Extrinsic evidence may be admitted to explain the meaning of an ambiguous contract, but cannot be admitted to show the parties' intention independent of an unambiguous written instrument. (See In re Marriage of Iberti (1997) 55 Cal.App.4th 1434 , 1440, 64 Cal.Rptr.2d 766 ; Hayter Trucking, Inc. v. Shell Western E&P, Inc. (1993) 18 Cal.App.4th 1 , 15, 22 Cal.Rptr.2d 229 .) We do not find the contract between de Carion and defendants to be ambiguous on the issue of which of the two parties would obtain fire insurance. Moreover, the evidence was immaterial to the question of whether the parties intended the existing Western Heritage insurance policy to be for the benefit of defendants. While a provision in a lease that insurance will be paid for by the lessee may suggest that the insurance is for the benefit of the lessee (see Chapin , supra , 189 Cal.App.2d at p. 618-622, 11 Cal.Rptr. 634 ), the converse is not necessarily true. A lessee pays for insurance through his or her rent and there is no requirement that a specific amount of the rent be allocated for insurance for an intent to benefit the lessee to be shown.

property insurance coverage for all Improvements within the Project, insuring against loss or damage by fire or other casualty. ... The policy shall name as insured the Association, the Owners and all Mortgagees of record, as their respective interests may appear." Article 13.3 provides in part, "Any insurance maintained by the Association shall contain [a] 'waiver of subrogation' as to the Association, its officers, Owners and the occupants of the Units and Mortgagees. ..." Article 13.4 prohibits an individual owner from obtaining fire insurance while allowing an owner to obtain individual liability insurance. Article 3.1 requires that all "occupants and tenants" comply with the CC & Rs.

The condominium located at 1800 Second Street, part of the East Shore Commercial Condominiums, was owned by William R. de Carion dba Surfwood Properties (de Carion) and was leased to defendants, who owned and operated a furniture manufacturing business. The parties' relationship was governed by a written lease dated February 1, 2013 (the Lease). Paragraph 5 of the Lease provided, "Lessee shall not commit waste, nor carry on any activity which would destroy or impair the quiet enjoyment of other lessees in the building of which the Premises form a part." Paragraph 6 required the Lessee to keep the Premises

relation to the debt or claim.' [Citation.] It provides a ' " 'method of compelling the ultimate payment by one who in justice and good conscience ought to make it-of putting the charge where it justly belongs.' " ' " ( State Farm , supra , 143 Cal.App.4th at p. 1105, 49 Cal.Rptr.3d 785 .)

" 'In the case of insurance, subrogation takes the form of an insurer's right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid.' [Citation.] 'The right of subrogation is purely derivative. An insurer entitled to subrogation is in the same position as an assignee of the insured's claim, and succeeds only to the rights of the insured. The subrogated insurer is said to " 'stand in the shoes' " of its insured, because it has no greater rights than the insured and is subject to the same defenses assertable against the insured. Thus, an insurer cannot acquire by subrogation anything to which the insured has no rights, and may claim no rights which the insured does not have.' [Citation.]" ( Fire Insurance Exchange v. Hammond (2000) 83 Cal.App.4th 313 , 317, 99 Cal.Rptr.2d 596 ( Hammond ).)

"The essential elements of an insurer's cause of action for equitable subrogation are as follows: (a) the insured suffered a loss for which the defendant is liable, either as the wrongdoer whose act or omission caused the loss or because the defendant is legally responsible to the insured for the loss caused by the wrongdoer; (b) the claimed loss was one for which the insurer was not primarily liable; (c) the insurer has compensated the insured in whole or in part for the same loss for which the defendant is primarily liable; (d) the insurer has paid the claim of its insured to protect its own interest and not as a volunteer; (e) the insured has an existing, assignable cause of action against the defendant which the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer; (f) the insurer has suffered damages caused by the act or omission upon which the liability of the defendant depends; (g) justice requires that the loss be entirely shifted from the insurer to the defendant, whose equitable position is inferior to that of the insurer; and (h) the insurer's damages are in a liquidated sum, generally the amount paid to the insured." ( Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279 , 1292, 77 Cal.Rptr.2d 296 .)

"While the insurer by subrogation steps into the shoes of the insured, that substitute position is qualified by a number of equitable principles. For example, an insurer cannot bring a subrogation action against its own insured. .... [¶] The most restrictive principle is the doctrine of superior equities, which prevents an insurer from recovering against a party whose equities are equal or superior to those of the insurer. ( State Farm , supra , 143 Cal.App.4th at pp. 1106-1107, 49 Cal.Rptr.3d 785 .)

C. Subrogation Action for Fire Loss Caused by Negligence of Lessee

"In California, courts have held a lessee is not responsible for negligently caused fire damages where the lessor and lessee intended the lessor's fire policy to be for their mutual benefit." ( Hammond , supra , 83 Cal.App.4th at p. 317, 99 Cal.Rptr.2d 596 .) The import of this rule is that an

the premises in the same condition as received, '... damage by fire, act of God or by the elements excepted[.]' " ( Id . at p. 1155, 203 Cal.Rptr. 419 .) The agreement also required the lessor to rebuild after fire loss under certain circumstances. ( Id . at p. 1162, 203 Cal.Rptr. 419 .) This suggested the lessor would procure insurance on the premises, and the lessee would reasonably expect that insurance to be for its benefit as well as the lessor's. ( Id . at pp. 1162-1163, 203 Cal.Rptr. 419 .)

The court in Parsons adopted the reasoning of Rizzuto v. Morris (1979) 22 Wash.App. 951 , 955-956, 592 P.2d 688 : "First, it would be an undue hardship to require a tenant to insure against his own negligence when he is paying, through his rent, for the fire insurance which covers the premises in favor of the lessor. [Citation.] Second, insurance companies expect to pay their insureds for negligently caused fire, and they adjust their rates accordingly. In this context, an insurer should not be allowed to treat a tenant, who is in privity with the insured landlord, as a negligent third party when it could

Western Heritage also relies on Civil Code section 6858, subdivision (b), which provides that a common interest association has standing to proceed without joining its members in an action for damage to the common area. That the Association might have legal standing to proceed in such an action without de Carion or other members does not answer whether de Carion is an insured under the Western Heritage policy or whether Western Heritage has established all elements necessary for an equitable subrogation action against defendants.

Western Heritage argues that under the doctrine of superior equities, it should be

III. DISPOSITION

The summary judgment is affirmed. Ordinary costs on appeal are awarded to defendants/respondents.

We concur.

SIMONS, ACTING P.J.

BURNS, J.