On December 16, 2013, a fire broke out when a tenant disposed of a cigarette on the balcony of an apartment in the complex. Rather than self-extinguishing, the cigarette allegedly started a fire that ignited the decking, engulfed the second level of the tenant's apartment, and spread to other portions of the building.

Willow Creek tendered its claim for the resulting losses and damages from the fire to its insurance carrier, Philadelphia Indemnity Insurance Company. Pursuant to the insurance policy, Philadelphia reimbursed Willow Creek $669,052.19.

Thereafter, Philadelphia filed suit against Danco and Schmidbauer, seeking to recover $649,052.19 for repairs from the spread of the fire.

Schmidbauer argued in a motion to dismiss that Philadelphia was not entitled to seek subrogation. In particular, it contended that Philadelphia had failed to plead sufficient facts demonstrating that Schmidbauer was “primarily liable for the loss,” and that justice required “the entirety of the loss to be shifted to Schmidbauer and Danco.”

The Philadelphia Policy

The Philadelphia policy insured Willow Creek against:

among other risks, any loss or damage to the property under certain circumstances.

The court denied Schmidbauer's motion to dismiss.

In its decision, the court explained that there were eight elements to the right of subrogation:

[1] the insured suffered a loss for which the defendant was liable, either as the wrongdoer whose act or omission caused the loss or because the defendant was legally responsible to the insured for the loss caused by the wrongdoer;

[2] the claimed loss was one for which the insurer was not primarily liable;

[3] the insurer had compensated the insured in whole or in part for the same loss for which the defendant was primarily liable;

[4] the insurer had paid the claim of its insured to protect its own interest and not as a volunteer;

[5] the insured had an existing, assignable cause of action against the defendant that the insured could have asserted for its own benefit had it not been compensated for its loss by the insurer;

[6] the insurer had suffered damages caused by the act or omission upon which the liability of the defendant depended;

[7] justice required that the loss be entirely shifted from the insurer to the defendant, whose equitable position was inferior to that of the insurer; and

[8] the insurer's damages were in a liquidated sum, generally the amount paid to the insured.

The court noted that Schmidbauer contended that the insurer's complaint was “devoid of facts to support elements three and seven,” but the court disagreed. It decided that, when “read as a whole,” the insurer's complaint contained “sufficient facts to plausibly support subrogation liability.”

The court reasoned that Schmidbauer did not have to “be the direct cause of the fire to be liable to Philadelphia under a theory of subrogation.” Rather, the court said, by bringing its lawsuit against Danco and Schmidbauer, Philadelphia was attempting to seek recovery from them to the extent their roles as third parties in distributing and installing the “highly combustible” decking materials contributed to or permitted the spread of the fire.

The court observed that, as alleged, the procured decking was “defective,” “unsafe for its intended use,” and Schmidbauer “knew, or should have known, that DECKING [sic] would be used without inspection.” The court conceded that a Willow Creek tenant likely was the “direct cause of the fire,” but said that the issue was whether Danco and Schmidbauer “were in a better position to avoid the loss than [Philadelphia] or its insureds.”

Therefore, the court concluded, if the allegations of the defective nature of the decking were accepted as true, “Philadelphia was not in a better position to avoid the loss than Schmidbauer.” As long as Philadelphia had a “plausible claim for relief,” preventing it from pursuing its claim simply because neither Danco nor Schmidbauer had started the fire “would be inequitable.”

The case is Philadelphia Indemnity Ins. Co. v. Danco Builders, No. 15-cv-03945-WHO (N.D. Cal. March 22, 2016).