Insurance Companies Held Liable As Real Parties In Interest After Unsuccessfully Prosecuting Action Under Assigned Contract With Attorneys’ Fees Provision

In Hearn Pacific Corporation v. Second Generation Roofing, Inc. 2016 Cal. App. LEXIS 354 (May 2, 2016), the California Court of Appeal, First Appellate District, reversed an order denying a subcontractor’s motion to add two insurance companies as judgment debtors in an action after the insurers unsuccessfully prosecuted a contractual indemnity claim based upon an assignment of rights under a contract which included an attorneys’ fees provision.

The Court of Appeal determined that the trial court had abused its discretion in refusing to add North American Specialty Insurance Company (“North American”) and RSUI Group, Inc. (“RSUI”) as judgment debtors in a lawsuit under California Code of Civil Procedure section 368.5. The appellate court held that the insurers’ ability to prosecute the action in the insured transferee’s name under the statute did not insulate them from exposure as real parties in interest. The appellate court similarly found that North American and RSUI should be added as judgment debtors even though they only received a partial assignment of rights from their insured.

The Court of Appeal also rejected the trial court’s finding that Insurance Code section 11580 prevented the subcontractor from suing North American and RSUI. Although Insurance Code section 11580 provided certain litigants with a means to sue third-party insurers for policy benefits, the appellate court found that there was no language in the statute which indicated that it provided an exclusive remedy against insurers who had prosecuted assigned rights under a contract. In so ruling, the Court of Appeal partially rejected the Ninth Circuit’s decision in Fireman’s Fund Ins. Co. v. City of Lodi, California (9th Cir. 2002) 302 F.3d 928 which broadly interpreted the statute.