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December 2011

Jones v. Golden Eagle Insurance Corporation ? When Mutual Insured is in Bankruptcy, Equitable Contribution Claim Against Co-carrier in Rehabilitation Barred by Underlying Plaintiffs' Failure to Participate in Liquidation Process.

When an Underlying Plaintiff Fails to Participate In or Has Its Claim Denied Through the Claim Handling Process Put in Place as Part of an Insurance Company's Rehabilitation Plan, Claims for Equitable Contribution are Precluded Based on the Fact that there is No Longer Any Potential for Indemnity.

(Nov. 28, 2011) ___ Cal.App.4th ___; 09 C.D.O.S. 14839

On November 28, 2011, Division One of California's First Appellate District rendered its opinion in Jones v. Golden Eagle Insurance Company and provided a cautionary tail for co-insurers seeking equitable contribution from a co-carrier that is in conservatorship.

Golden Eagle Insurance Company ("GEIC") was an insurer of Calsol, Inc. ("Calsol"), who had been sued by a series of plaintiffs for exposure to a hazard chemical used in connection with mechanical repairs.  At the time of the suits, Calsol was in bankruptcy, but the Bankruptcy Court granted leave to the plaintiffs to pursue their claims against Calsol under the condition that any judgment could only be enforced against Calsol's insurers.  Among the carriers providing insurance to Calsol, GEIC had the largest exposure based on the number of policies issued, but was in rehabilitation at the time of the underlying suits.

As part of the conservatorship of GEIC, a claim handling process had been put into place wherein claimants were required to submit a "Sworn Statement Proof of Loss" ("SSPL").  After being advised of the claim handling process and failing to submit the SSPL within the time limit provided, the plaintiffs' claims were denied within GEIC's liquidation.  Several co-carriers for Calsol filed claims of their own with the conservatorship for the cost of defense and settlement of the plaintiffs' lawsuits.  These claims were also denied and this appeal followed.

Citing Scottsdale Ins. Co. v. MV Transportation (2005) 36 Cal.4th 643, 654 and Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 295, the Court of Appeals affirmed the long standing rule that "[a]n insurer must defend its insured against claims that create a potential for indemnity under the policy."  However, under the facts of this case, the court held that the plaintiffs' lawsuits presented no "potential for indemnity" under the GEIC policies because the plaintiffs had "forfeited their claims against [GEIC] by failing to participate in the conservatorship proceedings."  Consequently, the court held that GEIC had no duty to indemnify or defend Calsol.

Because the primary requirement of the doctrine of equitable contribution (i.e. a co-obligation of defense and/or indemnity) ceased to exist as to GEIC when the plaintiffs' claims were denied in the liquidation process, the court held that the co-carriers' claims for equitable contribution also failed.

In addressing the co-carriers' argument that such a result was inequitable, the court opined that the plaintiffs' failure to file claims against GEIC not only relieved GEIC of any potential legal obligation, it also constituted a determination that there were no claims covered by the GEIC policies. As such, plaintiffs had also forfeited their right to recover in their lawsuits to the extent their claims were covered by the GEIC polices.  Because the Bankruptcy Court's order only allowed the plaintiffs to seek liability against Calsol to the extent it was covered by insurance, the practical effect of plaintiffs' failure to file a claim was that it was as if the GEIC policies never existed.  Accordingly, the court found that no additional defense or indemnity obligation had been placed on the co-carriers.

Please click here for a copy of the opinion.

This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority.

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David L. Jones
Timothy P. Lindell