Subrogating Insurer Has No More Rights than the Insured

After a hailstorm that impacted a shopping plaza in Colorado Springs where Defendant Dillon Companies, LLC (“King Soopers”) operates a store, the owner of that shopping area, H. Plaza, LLC (“Plaza”) had the roofs of its property examined and ultimately contracted to have the roof replaced. Plaza then sought coverage for the roof from its insurance provider, Plaintiff Zurich American Insurance Co. (“Zurich”). Zurich, acting as the Zurich American Insurance Co., as subrogee of H. Plaza, LLC v. Dillon Companies, LLC, dba King Soopers, Civil Action No. 20-cv-2183-RM-MEH, United States District Court, D. Colorado (March 30, 2022) sued the tenant to recover the amounts paid by Zurich to replace a roof based on King Soopers’ obligations under the lease with H. Plaza, LLC.

BACKGROUND

King Soopers is a tenant in the Plaza property where it has operated a store for almost 20 years. King Soopers and Plaza entered into a detailed, 20-year lease in 2002 that delineated both landlord’s and tenant’s responsibilities for maintenance and insurance coverage, among other things.

In June of 2018 a hailstorm hit Colorado Springs. King Soopers had the roof on its building inspected and concluded that there was no significant damage that would require its replacement. Plaza, however, unbeknownst to King Soopers, decided that the roof needed to be replaced. King Soopers first discovered that Plaza was replacing the roof in November of 2019, when employees noticed workers on the roof. At that time, King Soopers reached out to Plaza to get additional information and learned that the job was already 75% complete. King Soopers expressly inquired into its financial responsibility for the new roof and Plaza informed them that “Tenants will not be billed for this, it’s covered with insurance money from the hail damage claim.” King Soopers was never given notice that the lease required it to pay for the replacement of the roof.

Ultimately Zurich paid for the roof replacements for the Plaza property. The portion of that payment attributable to the King Soopers roof was $902,613.

Zurich sued King Soopers alleging a breach of contract.

SUBROGATION

By paying a debt that rightfully belongs to another, the subrogee has created a windfall for the debtor. Subrogation allows the subrogee to pursue that amount against the rightful debtor, thus eliminating any unjust transfer of responsibility for the debt. A subrogated insurer has no greater rights than the insured, for one cannot acquire by subrogation what another, whose rights he or she claims, did not have.

BREACH OF CONTRACT

As the plaintiff, Zurich must carry the burden of proving a prima facie case. The performance element in a breach of contract action means substantial’ performance.

Substantial performance occurs when, although the conditions of the contract have been deviated from in trifling particulars not materially detracting from the benefit the other party would derive from a literal performance, the defendant has received substantially the benefit he expected.

APPLICATION

Zurich must prove that:

a contract existed between King Soopers and Plaza,
King Soopers failed to perform its obligation under the contract,
Zurich and/or Plaza did perform or had a justification for failing to perform, and
Zurich suffered damages as a result.

The first and fourth elements are undisputed here-the parties agree that the lease constitutes a contract between King Soopers and Plaza, and they do not dispute that Zurich paid for the roof which, if there was a breach, constitutes damages. The parties vigorously dispute, however, whether Zurich can demonstrate that the second and third elements are met in this case. Both of those elements turn on the interpretation of the contract, a question of law that this Court is well positioned to address without the presentation of additional evidence.

When the Court interprets a contract, it strives to give effect to the intent of the parties. In this case, the parties strongly disagree about whether the lease required King Soopers to pay for the new roof-it is undisputed that King Soopers did not do so.

King Soopers asserts that it was entitled to notice of any breach under the “Default” provisions of the lease, and it argues that it never received any such notice.

The lease provided that the Landlord “will not exercise any right or remedy provided for in this Lease or allowed by law (including delivery of a Demand for Payment or Possession or Notice to Quit under the forcible entry and detainer laws) because of any default of Tenant, unless Landlord shall first have given written notice thereof to Tenant, and Tenant, within a period of twenty (20) days thereafter shall have failed to pay the sum or sums due, if the default consists of the failure to pay money, or, if the default consists of something other than the failure to pay money, Tenant shall have failed within thirty (30) days thereafter to begin the correction of the default or thereafter fails to actively and diligently and in good faith proceed with and continue the correction of the default until it shall be fully corrected.” (emphasis added)

While notice need not take any particular form, such provisions are intended to provide the allegedly breaching party with an opportunity to investigate the claim and potentially cure the breach.

ZURICH’S ARGUMENT IS CIRCULAR AND ABSURD

The Court was unpersuaded by Zurich’s argument that if this reading of the lease is correct then it, too, would have been entitled to notice of its breach-i.e., it did not receive notice of its failure to provide notice. This argument is clearly circular and absurd, but it is also unsuccessful for a simple reason.

King Soopers did not seek to exercise any remedy under the contract or at law to enforce Zurich/Plaza’s obligation to provide it with notice and time to cure. It did not allege that Plaza somehow defaulted on the lease by failing to notify it. Instead, it simply argues that the failure to provide it with notice precludes Zurich from exercising a remedy against King Soopers.

The Court concluded that Zurich has provided no facts that would permit a reasonable jury to conclude that it complied with the obligation under the lease to notify King Soopers of its default. Because Zurich has failed to do so, King Soopers is entitled to summary judgment in its favor.

Every insurance claim requires a thorough investigation by the insurer to provide the indemnity promised by the policy and to protect the rights of the insurer to pursue a subrogation claim. In this case, had Zurich’s claims personnel read the lease before replacing the roof it would have required the owner to give notice to King Soopers of its obligation. It did not do so and, in fact, the landlord gave notice to King Soopers that it would not bill King Soopers for the roof (a waiver of subrogation that was not discussed by the court). Zurich’s failure to protect its rights under the insurance contract, the pursuit of King Soopers in court, asserting a theory of notice that the court concluded was circular and absurd, was a waste of time and money.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

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