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Insurer that Refused to Defend Barred from Intervening After Additional Insured Stipulates to $29 Million Judgment
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September 14, 2009
By Benjamin D. Heath
Howrey LLP
An insurance company that rejected the insured’s tender of defense was not permitted to intervene in a case after the insured stipulated to judgment in favor of the plaintiff and agreed that the plaintiff could pursue the insurer for coverage and bad faith in the insured’s name.
The case arose from the death of two young mothers whose car was rammed by a runaway big rig truck. The accident occurred in the area of California Department of Transportation (CalTrans) project north of San Luis Obispo. Modern Continental Construction Co. was under contract to CalTrans to perform work on the project.
The suit alleged that the collision was caused by the lack of an adequate median barrier. Plaintiffs were the children and husbands of the young mothers. CalTrans was an additional named insured on Modern Continental’s liability policy, which was issued by Zurich American Insurance Co. When CalTrans was sued, it tendered its defense to Zurich. Zurich refused the tender. Zurich did provide a defense to Modern Continental.
After several years of litigation and several mediations, the plaintiffs settled with the trucking company, Modern Continental and CalTrans.
In the confidential settlement, CalTrans agreed to entry of a stipulated judgment of $29 million against it, and plaintiffs agreed to a covenant not to execute against CalTrans. CalTrans agreed that plaintiffs’ could represent it in any subsequent action for breach of contract and bad faith against Zurich and that any recovery would be paid to plaintiffs.
After settlement was reached and after the trial court was informed of the settlement but before the stipulated judgment could be entered (because court approval was needed for the compromise of the minor children’s claims), Zurich moved to intervene, belatedly offering CalTrans a defense under a reservation of rights.
Under California Code of Procedure §387, the trial court had the discretion to permit a nonparty to intervene in litigation pending between others if its application is timely and when: 1) the nonparty has a direct and immediate interest in the action; 2) the intervention will not enlarge the issues in the litigation; and 3) the reasons for intervention outweigh any opposition by the parties.
The trial court denied the motion as untimely because it was made after the case had settled and because Zurich failed to show good cause for its delay in seeking to intervene. The Court of Appeal affirmed. Noya v. A.W. Coulter Trucking, 143 Cal.App.4th 838, 49 Cal.Rptr.3d 584 (2006).
On appeal, Zurich argued that the trial court should have allowed it to intervene because it would be adversely affected by the settlement and assignment of rights. It claimed it did not seek to intervene earlier to avoid needlessly injecting coverage issues into the lawsuit.
The Court of Appeal was not convinced. While it acknowledging that Zurich had a direct and immediate interest in the case because it might have to pay the judgment against CalTrans and that no specific statutory time limit is placed on motions to intervene, the court found that Zurich was in no position to complain. It noted that Zurich had denied CalTrans both coverage and a defense and then had waited years to act.
In such circumstances, the court wrote, “the insured is entitled to make a reasonable, noncollusive settlement without the insurer’s consent” and may seek to recover the cost of settling and for bad faith. Having been given a chance to be heard and to defend, the carrier cannot void a deal the insured has made to eliminate personal liability, the appeals court wrote.
The court also concluded that Zurich’s reasons for seeking to intervene did not outweigh the interests of CalTrans and the plaintiffs in resolving the claims. Rather, “Zurich’s agreement to defend CalTrans under a reservation of rights was too little, too late, to justify its intervention as a matter of right.”
The court distinguished this case from others in which insurers were allowed to intervene when they acted promptly to avoid default judgments being taken against insureds.
The court did note that in the subsequent coverage and bad faith action, Zurich would be entitled to dispute the presumption that the settlement reflected CalTrans’ actual liability.
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For more information about the issues covered in this report, please contact Benjamin D. Heath in our San Francisco office at 415-848-3390 or at heathb@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
©2009 Howrey LLP
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