Insurer Does Not Have Standing to Recover its Insured’s Deductible Pursuant to California Code of Regulations, Title 10, Section 2695.7

Submitted by Brian J. Colombana

In Pacific Gas & Electric Co. v. Sup. Ct. (American General and Liability Ins. Co.) 2006 DJDAR 14172 (3^rd Dist. Oct. 24, 2006), the Court of Appeal held that an insurer is not authorized to recover its insureds deductible pursuant to California Code of Regulations, Title 10, Section 2695.7 (section 2695.7).

American brought a subrogation action against Pacific Gas & Electric for property damage suffered by its insured as a result of PG&E’s negligence.  American sought reimbursement for sums already paid, future payments, and for its insured’s deductible, although the insured was not named in the action.  PG&E moved to strike the demand for the deductible as American did not have standing.  The trial court denied the motion. 

On appeal, American argued that section 2695.7 conferred standing upon it because American was required to seek recovery of the deductible as part of its subrogation demand, in order to comply with fair settlement practices.  The Court disagreed and rationalized its ruling by looking to the legislative intent and regulatory context in which section 2695.7 appears.  In analyzing, the Court found that “section 2695.7 is part of a larger regulatory scheme designed to curtail unfair business practices and the “preamble” to article 1 in section 2695.1 “leaves no doubt that the regulations to which it refers concern the settlement of claims, not the pursuit of litigation.” 

American focused heavily on the use of the term “subrogation demand” in section 2695.7.  However, the “plain meaning of this phrase in context is that an insurer seeking settlement from a tortfeasor must seek recovery of its insured’s deductible.  “Subrogation demand” is not the same as standing to sue and does not authorize substitution of one party for the lawful party in a lawsuit.  Therefore, to recover an insured’s deductible, the insured must be joined as a party to the action; the insurer does not have standing to recover the deductible.

Accordingly, the Court of Appeal reversed and issued a peremptory writ of mandate.

© 2006 Crandall, Wade & Lowe

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