The California Court of Appeal for the Second Appellate District granted a petition for writ of mandate in connection with a trial court ruling limiting an insurer’s intervention rights. As a result of the insured’s procedural default the trial court precluded the insurer from litigating liability issues in the underlying action. The Court of Appeal directed the trial court to vacate this ruling and to issue a new order allowing the insurer to litigate both liability and damages issues.
The underlying action arose out of an automobile accident allegedly caused by Julia Reyes. Reyes’ passenger, George Brooks Parks, died in the accident. Brooks’ estate and two adult children sued Reyes alleging vehicular and general negligence. Plaintiffs also sued Grateful Home Care, Inc. (“GHC”). They alleged Reyes was acting in the course and scope of her employment with GHC at the time of the accident. Plaintiffs pursued claims against GHC for vicarious liability.
Western Heritage Insurance Company (“Western Heritage”) issued a general liability policy to GHC. It agreed to defend both GHC and Reyes, subject to a reservation of rights.
After Reyes filed an Answer, she failed to respond to Plaintiffs’ discovery requests or appear for deposition. At Plaintiffs’ request, Reyes’ Answer was stricken and default was entered against her. Thereafter, Western Heritage filed a motion to intervene to protect its own interests in the outcome of the litigation in light of Insurance Code, section 11580, subdivision (b)(2), the “direct action” statute. The “direct action” statute requires that a policy insuring against loss or damages resulting from liability for an injury suffered by another person shall contain, or be construed as containing, a provision that whenever judgment is secured against the insured in an action based on bodily injury, death or property damage, then an action may be brought by the judgment creditor against the insurer on the policy, subject to its terms and limitations, to recover on the judgment.
At the time Western Heritage filed its motion to intervene, Plaintiff’s motions in limine were pending. One such motion sought to preclude Defendants from disputing Reyes’ liability because of the default. The trial court granted this motion. Western Heritage’s motion to intervene was also granted. At a subsequent hearing to identify issues for trial, the trial court ruled Western Heritage could only contest the amount of damages at trial because it was stepping into Reyes’ shoes and she had defaulted. Western Heritage filed a motion in limine to challenge the trial court’s ruling, but the trial court, relying on Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2006) 136 Cal.App.4th 212 (Kaufman), reaffirmed its prior ruling. Western Heritage filed a timely writ of mandate.
The Court of Appeal first upheld the trial court’s granting of Western Heritage’s motion to intervene. It noted exposure to direct liability has repeatedly been held sufficient to create a basis for an insurer’s intervention in a third party action against its insured. The Court therefore found Western Heritage had a sufficient interest to intervene since there was a risk Western Heritage could be found liable for any judgment entered against Reyes under Insurance Code section 11580, subdivision (b)(2).
The Court of Appeal next discussed the scope of intervention and noted an intervenor is not limited by every procedural decision made by a party to which it is aligned. Once a party is permitted to intervene, it is permitted to pursue its own interests and is not bound by another party’s procedural defaults.
The Court recognized no case had expressly considered whether an intervening insurer was entitled to litigate issues that its insured was barred from litigating. Nevertheless, the Court held Western Heritage was permitted to do so here. The Court found this holding necessarily followed from existing case law, stating the “entire purpose of the intervention is to permit the insurer to pursue its own interest, which necessarily includes the litigation of defenses its insured is procedurally barred from pursuing.”
The Court rejected the trial court’s reliance on Kaufman, a case involving subrogation claims. It found subrogation laws were inapplicable and, further, that the language the trial court had relied upon from Kaufman, stating subrogated insurers stand in the shoes of their insureds, was dicta and taken out of context.
Nor was Western Heritage required to vacate Reyes’ default because an intervening insurer is not bound by a default taken against its insured. To the extent the language in Nasongkhla v. Gonzalez (1994) 29 Cal.App.4th Supp. 1 implied otherwise, the Court disagreed with this decision and declined to follow it.
Finally the Court rejected Plaintiffs’ contention that Western Heritage’s reservation of rights letter created an irreconcilable conflict. An insurer’s intervention right could be defeated only by a refusal to defend, not by a mere reservation of rights to later dispute coverage. The Court also held there was no irreconcilable conflict here because coverage issues were not part of the wrongful death suit, which was limited to Reyes’ and GHC’s liability for Park’s death.
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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