Can an Intervening Insurance Company Sue for Breach of Contract?

If a party in litigation has a default judgment entered against it, can its insurance company still file a motion to intervene and use the same defenses that would have been available to the insured if not procedurally barred as a result of the default? In Western Heritage Ins. Co. v. Superior Court, 199 Cal.App.4th 1196 (2011), the Court determined the answer to be “yes.”

In that matter involving a developer who entered into construction contracts with subcontractors, the court noted, among other things, that (a) An intervening party is not bound by another party's procedural defaults; and (b) Cases permitting insurers to intervene do so in order to allow the insurers to litigate liability and damages issues their insureds are prevented from litigating.

A recent article about Western Heritage argues an intervening insurance company has a right, as part of such an intervention, to bring a breach of contract action against subcontractors for failure to obtain additional insured endorsements, if the breach of contract action can be considered a defense, and that this holds true even if the insurer is not a party to such contracts.

When determining if a breach of contract action by an insurer under these circumstances is permitted, the following inquiries should be made:

1. Will a windfall or alternative recovery occur if the insurer pursues the breach of contract claim? (If so, the claim should not be permitted.)

2. Is the breach of contract claim directly and contractually linked to the damages sought by plaintiffs? (If not, the claim should not be permitted.)

Subcontractors should be aware of potential limitations that apply to actions brought by insurers who intervene, and take steps to ensure that the process is appropriate to the underlying action.

For real estate and construction professionals, dealing with litigation and the threat of legal action has become expected and a significant cost of doing business. Tharpe & Howell brings decades of strategic experience, transaction solutions that minimize litigation risks, and access to the best experts and ADR professionals available to ensure that these costs don’t overwhelm your bottom line. We serve the distinct needs of a wide variety of clients in both commercial and residential real estate and construction matters, providing the legal services they need to compete and prosper in today’s dynamic market. Our practice is “ground-up,” handling our client’s transactional needs, as well as virtually every type of construction claim including: construction defects and delays; construction site injuries; earth-movement including floods, landslides, storm and earthquake claims; structural failures and building collapse; water-intrusion; contract disputes; environmental claims including mold and asbestos; insurance claims and insurance coverage disputes; and operations, labor and management claims. For more information, please contact us at (818) 473-5720 or email your request to cabusinesslawreport@tharpe-howell.com.

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