In Travelers Property Casualty Co. of Amer. v. Engel Insulation, Inc. (No. C085753, filed 11/30/18), a California appeals court held that an insurer may not file its own action to assert claims solely as a subrogee of a suspended corporation, where the corporation could not otherwise assert the claims on its own behalf.

In Engel, a homeowners association filed a construction defect action against the developer, Westlake. Travelers defended Westlake as an additional insured on the policy of a subcontractor. After the case settled, Travelers brought a subrogation action against another subcontractor for contribution to the defense costs. However, Westlake had its corporate status suspended for failure to pay taxes, and the subcontractor moved for judgment on the pleadings, which was granted.

The subcontractor argued that under Truck Insurance Exchange v. Superior Court (1997) 60 Cal.App.4th 342 (Truck), an insurer is prohibited from asserting and prosecuting the affirmative claims of a suspended corporate insured as subrogee, and the appeals court agreed.

The appeals court noted that under Revenue and Taxation Code Section 23301 “[t]he suspension of the corporate powers, rights, and privileges means a suspended corporation cannot sue or defend a lawsuit while its taxes remain unpaid. [] Once a suspended corporation pays its taxes and obtains a certificate of revivor, however, the corporation may be allowed to carry on the litigation.” (Citing Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2006) 136 Cal.App.4th 212, 217-218.)

However, Travelers argued it could proceed by virtue of Revenue and Taxation Code section 19719, which makes it a misdemeanor for anyone to exercise the rights or powers of a suspended corporation. Travelers relied on an exception in the statute for “any insurer, or … counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation in a civil action based upon a claim for personal injury, property damage, or economic losses against the suspended corporation, and, in conjunction with this defense, prosecutes subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.”

The problem for Travelers was that it had not intervened in the underlying action. After the exception was added to the statute in 1998, the court in Reliance Insurance Co. v. Superior Court (2000) 84 Cal.App.4th 383 relied on the exception to hold that “where the insurer may be subject to a direct action under Insurance Code section 11580 by a judgment creditor who has or will obtain a default judgment in a third party action against the insured, intervention is appropriate.” But Travelers was attempting to pursue a separate subrogation action, after the fact. The Engel court quoted Kaufman & Broad, supra, as stating that: “[S]ection 19719 does not generally authorize the insurer to exercise the rights and powers of its corporate insured. This obviously includes the right to sue or defend a lawsuit or even to appear in the lawsuit. . . . Instead, the only manner in which the insurer may exercise those powers is by intervening in the lawsuit under Code of Civil Procedure section 387 and asserting any defenses on behalf of its insured.”

The Engel court went on: “Travelers cites no authority permitting an insurer to bring its own action based on the subrogated rights of a suspended corporation under section 19719, subdivision (b), separate from what has been authorized.” (Citing Truck, Kaufman & Broad, and Reliance, supra.) The Engel court cited Truck, supra, for the proposition that a motion to intervene under Revenue and Taxation Code section 19719 is not based on subrogation to the rights of the insured, but to protect the insurer’s own interests as against a direct judgment creditor action by the plaintiff under Insurance Code section 11580. By contrast, a pure subrogation action is wholly derivative and the subrogee stands in the shoes of the subrogor.

Having ruled that a separate subrogation action was prohibited, the Engel court declined to state whether such claims could nonetheless be raised in intervention: “Moreover, we do not address whether an insurer who has intervened to protect its own rights could, in that context, essentially prosecute the subrogated rights of its suspended insured.” The Engel court was driven in part by the fact that Revenue and Taxation Code section 19719 is actually directed to making the exercise of a suspended corporation’s powers criminal, so the court declined to see the exception as a general grant of authority for insurers beyond what had previously been authorized in the decisions Truck, Kaufman & Broad, and Reliance, supra.

The Engel court concluded by finding that there was no abuse of discretion by the trial court denying Travelers leave to amend, since it made no showing of a theory or facts that would change the result beyond pure speculation.