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March 2010

City of Laguna Beach. v. California Insurance Guarantee Association ? Self-Insurance Constituted "Other Insurance" that Precluded Reimbursement from CIGA

City's Self-Insurance Constituted "Other Insurance" Which Precluded Reimbursement from CIGA for Benefits Paid to Employee

(2010) _____Cal. App. 4th ____, 10 C.D.O.S. 2645

The California Court of Appeal, Second Appellate District, affirmed a trial court decision granting summary judgment in favor of the California Insurance Guarantee Association ("CIGA") in connection with a claim for reimbursement by the City of Laguna Beach (the "City") under Insurance Code section 1063.1, subdivision (c)(13).  The Court of Appeal held that CIGA is not required to reimburse a permissibly self-insured employer for benefits paid to an employee for a cumulative injury that takes place over time if the employer's liability is based, in part, on injury during a period of time when the employer was self- insured. 

Continental Casualty Company ("Continental") issued a worker's compensation insurance policy to the City, which provided coverage from May 1, 1998 to May 1, 1999, in excess of City's $275,000 self-insured retention.  This policy covered cumulative injury that first manifested during the policy period.  Reliance National Indemnity Company ("Reliance") also issued a worker's compensation insurance policy to the City, providing coverage from May 1, 1999 to July 18, 2001, in excess of the City's $275,000 self-insured retention.  The Reliance policy covered cumulative injury if the date of exposure to the conditions causing the disease occurred during the policy period. 

A City employee filed a worker's compensation claim for cumulative injury that took place from 1986 to June 18, 1999. The City incurred workers' compensation liability in excess of its self-insured retention and sought reimbursement from Continental and, because Reliance was insolvent, from CIGA.  Both Continental and CIGA determined they did not have to pay the City's claim. 

The City sued Continental and CIGA for declaratory relief, seeking a ruling that both owed the City reimbursement.  CIGA filed a motion for summary judgment arguing that the City's self-insured status and the Continental policy constituted "other insurance" under Insurance Code section 1063.1, subdivision (c)(9) and, therefore, that CIGA had no obligation to pay any portion of the benefits that were due under the Reliance policy.   The trial court granted CIGA's motion, and the City timely appealed.

The Court of Appeal determined that the pivotal question on this appeal was whether the City's claim is a "covered claim" under section 1063.1, subdivision (c)(13) or, alternatively, a "barred claim" under subdivision (c)(9).  The Court noted that CIGA must pay "covered claims" which are the obligations of an insolvent insurer.  Under section 1063.1, subdivision (c)(13), "covered claims" include obligations arising under an insurance policy written to indemnify a permissibly self-insured employer for its liability to pay worker's compensation benefits in excess of a specific or aggregate retention.  However, under section 1063.1, subdivision (c)(9), "covered claims" do not include any claim that is covered by any other insurance. 

In its opinion, the Court of Appeal discussed Denny's Inc. v. Workers' Comp. Appeals Bd. (2003) 104 Cal.App.4th 1433 ("Denny's") which held that an entity's self-insurance during a period of the cumulative injury constitutes "other insurance" which precludes reimbursement by CIGA.  The City argued that section 1063.1, subdivision (c)(13) abrogated the ruling in Denny's.  The Court of Appeal rejected the City's argument, holding that the law of statutory interpretation required the Court to harmonize the statute with Denny's

The Court of Appeal first found that section 1063.1 does not directly conflict with Denny's because the statute involves excess insurance and Denny's involved primary insurance.  The Court of Appeal next found that there was no indirect conflict between section 1063.1, subdivision (c)(13) and the policy and reasoning of Denny's.  The Court of Appeal held that Denny's broadly found that CIGA is not required to provide a safety net for an employer that chooses to gamble on self-insurance without private insurance for any portion of a cumulative injury period.  Accordingly, section 1063.1, subdivision (c)(13) could be harmonized with Denny's, because an employer that had excess insurance for the entire cumulative injury period, could seek reimbursement from CIGA if the excess insurer became insolvent.

The Court of Appeal further held that when an employer decides to gamble on self-insurance and foregoes excess insurance for any part of the period of cumulative injury, then the policy and reasoning of Denny's eliminates any claim for reimbursement from CIGA, if the excess insurer ends up insolvent.  Pursuant to Denny's,  if the City was self-insured without primary or excess insurance for any portion of the period of its employee's cumulative injury, CIGA was not obligated to reimburse City because the self-insurance constituted "other insurance."

The Court of Appeal rejected the City's attempt to rely upon the legislative history of section 1063.1, subdivision (c)(13), as evidence of legislative intent to overturn Denny's. The Court of Appeal found the Legislature did not appreciate that Denny's involved a primary insurer and not an excess insurer, and that the final language of the provision does not purport to repeal Denny's

Finding the legislative history was not helpful, the Court of Appeal noted that it must harmonize the statute with common law, applying practicality and common sense.  Therefore, the Court of Appeal held there was no reason to saddle CIGA with a liability that exonerates an employer's decision to lower its costs and gamble on not being insured for a portion of the cumulative injury period.  Finally, the Court of Appeal found that whether the Continental policy provided coverage was moot because there existed "other insurance" in the form of either the City's self-insurance or Continental's excess insurance.  Both precluded the City from seeking reimbursement from CIGA.

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This opinion is not final.  Though it has been certified for publication, it may be modified on rehearing, or granted review by the Supreme Court of the State of California.  Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

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Aaron P. Rudin
Christopher R. Wagner