Ninth Circuit Issues Ruling on Insurers’ Rights and Obligations Regarding Suspended Corporate Insureds
On March 12, 2020, the Ninth Circuit issued a memorandum disposition in Travelers Property Cas. Co. of America v. Liberty Surplus Ins. Co. addressing two important insurance questions in California: (1) whether an insurer of a suspended corporation can intervene in an underlying action in its own name to defend the insured’s interests; and (2) whether the insurer can then seek equitable contribution from the insured’s other insurers. Though the memorandum disposition is unpublished, it has important implications for insurers operating in California.
The dispute between Liberty Surplus and Travelers arose over an action involving their mutual insured, Dura Art, Inc. The insurers had both issued consecutive general liability policies to Dura. Dura was named as a cross-defendant in a construction defect suit after its corporate status was suspended. Under California law, a suspended corporation cannot defend itself in a lawsuit. What is more, an insurer can be held liable for default judgments entered against a suspended corporate insured. Travelers, therefore, intervened in the underlying construction defect action and eventually settled the action. Liberty did not intervene.
After settlement, Travelers sought equitable apportionment of fees and costs between itself and Liberty. The district court granted summary judgment in favor of Travelers.
The Ninth Circuit affirmed the district court’s decision. After analyzing various statutory provisions, the Ninth Circuit determined that California law permits an insurer to intervene in a lawsuit in its own name to defend its own interests and those of the suspended corporate insured. The Court also found that Liberty had a duty to defend based on the plain language of the policy and that nothing within the policy relieved Liberty of this duty when its corporate insured was suspended. The Court concluded that Liberty, therefore, owed contribution to Travelers and rejected Liberty’s arguments regarding application of the no voluntary payments and settlement without consent provisions because Liberty had breached its duty to defend.
While the Court did not go so far as to require an insurer with a duty to defend to intervene in an underlying action involving a suspended corporate insured, the Court’s opinion may effectively make this the safest course of action for an insurer in California. The Court was clear that an insurer who has a duty to defend is not relieved of that duty when a corporate insured is suspended, absent a specific exclusion in the policy or endorsement addressing the situation. Further, given that a suspended corporation cannot defend itself in an action, an insurer who does not intervene can face significant consequences, including liability for a default judgment against the corporate insured or for contribution to another insurer that choses to intervene and even settle an underlying action.