Opinion ID: 2634716
Heading Depth: 2
Heading Rank: 2

Heading: Cotter's Equitable Subrogation Argument

Text: Cotter also contends that because all excess insurers have refused to defend, principles of equity require the excess insurers to share the defense costs. Specifically, Cotter argues that the theory of equitable subrogation requires the insurers to provide a pro-rata share of the defense costs. We find Cotter's reliance on the doctrine of equitable subrogation misplaced. To support its contention that the doctrine of equitable subrogation requires American Empire and First State to provide defense costs, Cotter relies on a series of cases in which courts have applied the doctrine to require that insurers share defense costs. See, e.g., Millers' Mut. Ins. Ass'n v. Iowa Nat'l Mut. Ins. Co., 618 F.Supp. 301 (D.Colo. 1985); Cont'l Cas. Co. v. Zurich Ins. Co., 57 Cal.2d 27, 17 Cal.Rptr. 12, 366 P.2d 455 (1961). Cotter argues that [u]nder general principles of equitable subrogation . . . all obligated carriers who have refused to defend should be required to share in costs of the insured's defense. Millers' Mut., 618 F.Supp. at 305 (quoting Cont'l Cas., 17 Cal. Rptr. 12, 366 P.2d at 461). Therefore, Cotter contends, because all of its insurers have refused to defend, the doctrine of equitable subrogation requires First State and American Empire to share in Cotters defense costs. Cotter, however, misstates the doctrine of equitable subrogation. The doctrine does not allow Cotter to recover from American Empire and First State for two reasons. First, the doctrine does not provide a remedy to a party seeking to recover its own expenses. Second, the doctrine only allows for recovery against obligated parties. Subrogation is defined as the substitution of another person in the place of a creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. Behlen Mfg. Co. v. First Nat'l Bank of Englewood, 28 Colo.App. 300, 472 P.2d 703, 707 (1970) (quoting D.W. Jaquays & Co. v. First Sec. Bank, 101 Ariz. 301, 419 P.2d 85, 88 (1966)). Although subrogation can occur by contract, equitable subrogation is an equitable principle that allows a party secondarily liable who has paid the debt of the party who is primarily liable [to] institute a recovery action in order to be made whole. Mid-Century Ins. Co. v. Travelers Indem. Co., 982 P.2d 310, 315 (Colo.1999) (citing 16 George J. Couch, Cyclopedia of Insurance Law § 61:20 (Mark S. Rhodes ed., 2d ed.1983)). In the insurance context, courts generally apply the doctrine of equitable subrogation to allow an insurer, who has made payment to its insured for a loss caused by a third party, to seek recovery from the third party for such payment. See, e.g., United Sec. Ins. Co. v. Sciarrota, 885 P.2d 273, 277 (Colo.App.1994). This prevents the insured from being unjustly enriched by recovering from the insurer as well as the third party, and prevents the third party from escaping its liability for the loss. Id. First, by definition, Cotter may not rely on the doctrine of equitable subrogation because it has not discharged the debt of another and is not attempting to recover from a third party. Equitable subrogation only allows a party who has paid the debt of another to recover from a liable third party. Behlen Mfg. Co., 472 P.2d at 707; see also 73 Am. Jur.2d Subrogation § 1 (2001); cf. Millers' Mut., 618 F.Supp. at 305-07 (applying doctrine of equitable subrogation to grant excess insurer right of contribution for defense costs from other excess insurer in anticipatory declaratory judgment action). For this reason, insurers that have paid an insured's claim often rely on the doctrine to recover from other obligated parties. See, e.g., Blue Cross v. Bukulmez, 736 P.2d 834 (Colo.1987) (applying doctrine of equitable subrogation to find that insurer had right to recover benefits paid to insured from obligated third party); see also United Sec., 885 P.2d at 273. Cotter, as the insured, has not discharged the debt of another and does not seek payment from a liable third party. Therefore, Cotter cannot rely on the doctrine of equitable subrogation to recover defense costs. Rather, Cotter merely seeks repayment of its own defense costs from First State and American Empire. Although Cotter terms this recovery as equitable subrogation, Cotter appears to simply seek reimbursement of defense costs. Though similar in effect, equitable subrogation and reimbursement allow recovery for parties in two very different positions. A. Copeland Enters., Inc. v. Slidell Mem'l Hosp., 657 So.2d 1292, 1298-99 (La.1995); see also 16 Couch on Insurance § 222:22 (Lee R. Russ & Thomas F. Segalla eds., 3d ed.1997) (noting distinction between subrogation and reimbursement). Subrogation allows a party who discharges another's debt to stand in the shoes of the subrogor. A. Copeland Enters., 657 So.2d at 1298-99. In contrast, reimbursement allows a party to recover amounts expended from another with whom it has a direct right of repayment. Id.; 16 Couch on Insurance § 222:22 (Lee R. Russ & Thomas F. Segalla eds., 3d ed.1997). Here, Cotter appears to seek reimbursement because it attempts to recover its own defense costs directly from First State and American Empire, with whom Cotter has a direct contractual relationship. Cotter does not seek recovery for its payment of another's debt from a liable third party. Therefore, the doctrine of equitable subrogation does not permit Cotter to recover from the insurers. Second, even if Cotter could rely on the doctrine of equitable subrogation, it could not recover defense costs from First State and American Empire because the insurance policies impose no duty to defend. The doctrine of equitable subrogation only permits recovery from other parties liable to the subrogor. See Mid-Century Ins. Co. v. Travelers Indem. Co., 982 P.2d 310, 315 (Colo.1999); Millers' Mut. Ins. Ass'n of Ill. v. Iowa Nat'l Mut. Ins. Co., 618 F.Supp. 301, 305-06 (D.Colo.1985). By definition, when a subrogee discharges the debt of the subrogor and steps into its shoes, the subrogee does not acquire greater rights than the latter. Wright v. Estate of Valley, 827 P.2d 579, 582 (Colo.App.1992). Therefore, for example, in the insurance context, an insurer can only recover from a third party an amount that the insured could have recovered from the third party. Here, however, a subrogee could not recover defense costs from First State and American Empire because their policies do not obligate them to defend Cotter. The American Empire and First State policies expressly disclaim any duty to defend. Therefore, even if Cotter was in a position to rely on equitable subrogation, it could not recover from American Empire and First State because they owe no duty to defend. Thus, we find Cotter's reliance on the doctrine of equitable subrogation misplaced.