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The Court of Appeals for the Ninth Circuit affirmed dismissal under Rule 12(b)(6) of an insured's claim that it was not fully covered for a loss because the insurer had already litigated its subrogation claim to conclusion pursuant to the doctrine of res judicata and the rule against splitting causes of action.
Appellant Intri-Plex manufactures computer disk drive components called "baseplates." Appellee Crest, which manufactures hot air dryer consoles, sold Intri-Plex a dryer console for use in its baseplate manufacturing facility. This console was defective, and caused corrosion problems in certain Intri-Plex baseplates.
An Intri-Plex customer, KR Precision Public Company Ltd. ("KRP"), used the corroded baseplates in its "suspension assemblies." This resulted in the recall of finished baseplates manufactured, distributed, and shipped by Intri-Plex as well as compensation to KRP for the damaged suspension assemblies. Atlantic Mutual Insurance Co. (AMI), Intri-Plex's insurance company, settled KRP's claims prior to any litigation.
After settling KRP's claims, AMI commenced a subrogation action against Crest. AMI alleged that under the terms of its insurance policy, AMI paid for the identification, recall, and return of finished baseplates used by KRP. Intri-Plex negotiated and filed a stipulation for a protective order relating to use of its proprietary documents and test results in AMI litigation. After AMI reached a settlement with Crest, AMI's action was dismissed with prejudice.
A year later, Intri-Plex sued Crest in federal court, asserting the same factual allegations and causes of action against Crest as AMI asserted against Crest in its state court action. Significantly, Intri-Plex alleged it received partial indemnity from AMI for recall of baseplates used in the KRP products. Intri-Plex also alleged that it sustained some losses for which it was not insured, "including unsaleable inventory, deductibles and other losses, not covered by the [AMI] policy."
The Court explained that under California law, the trial court properly dismissed Intri-Plex's complaint because Intri-Plex impermissibly attempted to split a cause of action barred by res judicata. Res judicata precludes parties or their privies from relitigating a cause of action that has been finally determined by a court. There was no dispute that Intri-Plex and its subrogated insurer were privies, or that AMI's dismissal of its California superior court complaint with prejudice constituted a final judgment on the merits. The only disputed issue was whether Intri-Plex's action against Crest was the same cause of action seeking to vindicate the same "primary right" as AMI's action against Crest in state court.
Relying on Allstate Ins. Co. v. Mel Rapton, Inc., 77 Cal. App. 4th 901 (2000) and Ferraro v. S. Cal. Gas Co., 102 Cal. App. 3d 33, 42 (1980), the Court held that Intri-Plex's claims were barred. Intri-Plex argued that it was not seeking to vindicate the same primary right because AMI was acting as a partial subrogee of KRP when it settled the claims KRP intended to assert against Intri-Plex. According to the court, this argument not only demonstrated a misunderstanding of subrogation law, but also contradicted Intri-Plex's own complaint, which admitted that AMI was its insurance carrier and that Intri-Plex received partial indemnity from AMI. The court explained that when an insurer settles a claim brought against its insured, it becomes subrogated to the rights that its insured may have against third parties, not the rights of the insured's third party claimant. This is no less true when the "benefit" that the insured receives from its insurer is a payment directly to a third party to avoid the third party's claim.
The court cited Allstate for the proposition that insureds are often only partially compensated by their insurer for a loss. While the insurer may sue for subrogation, the insured also retains the right to sue the responsible party for any loss not fully compensated by insurance. However, the rule against splitting a cause of action is violated where both the insurer and the insured pursue separate actions. To avoid this result, the court explained, Intri-Plex should have intervened in the litigation between its insurer and Crest, and pursued its claims in that "single" action. The court noted that Crest was not required to join Intri-Plex in its action, because it was Intri-Plex's duty to intervene to protect its own rights.
Finally, again relying on Allstate and Ferraro, the court held that Crest did not waive the splitting defense. Before Intri-Plex filed its claim, there was no impermissible splitting because AMI simply had sued Crest for the partially subrogated amount of Intri-Plex's total claimed damages. Moreover, while Allstate holds that a tortfeasor with knowledge of an insurer's subrogation claim may not settle the entire cause of action by settling only with the insured (and thereby foreclose a subsequent action by the insurer), this rule exists to protect the insurer from fraud because it involves an insured's and tortfeasor's voluntary settlement and release of all claims with knowledge of an insurer's subrogation rights. An insured cannot rely on this rule because it has no subrogation rights to protect.
This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.
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