November 2020 Update
The current update includes changes throughout this publication that reflect recent developments in case law, legislation, court rules, and jury instructions. Summarized below are some of the more important developments included in this update since publication of the 2019 update.
Certain procedures and deadlines in the text may be affected by the California Rules of Court Emergency Rules Related to COVID-19. At the time of this update’s publication, under Emergency Rule 9 all statutes of limitations exceeding 180 days for civil causes of action are tolled from April 6, 2020, to October 1, 2020. The latest version of the Emergency Rules can be viewed at https://www.courts.ca.gov/43820.htm.
Overview; judgment creditors. A successful tort plaintiff who cannot satisfy a judgment against a bankrupt insured can bring a direct action against the insurer, subject to the terms and limitations of the policy. See Ins C §11580. Although the courts have allowed the insurer certain defenses not available to the insured, the doctrine that the injured judgment creditor “stands in the shoes” of the insured remains intact when it relates to policy terms other than notice or cooperation clauses. In Lewis v Liberty Mut. Ins. Co. (9th Cir 2020) 953 F3d 1160 the Ninth Circuit held that a forum selection clause requiring an Australian insured to litigate with its insurer in Australia was binding on California unsatisfied-judgment creditors. See §1.42.
First party coverage; physical damage. Effective January 1, 2020 the Legislature amended Ins C §560 to provide that an insurer that provides automobile physical damage coverage cannot withhold payment of reasonable repair costs if the insured elects not to repair the vehicle. The only exceptions are in cases of suspected fraud or damage so serious that safety features of the vehicle are compromised. Under prior case law the insurer was not required to pay repair costs if the policy provided the insurer could elect to repair, instead of paying for physical damage, but the insured refused to authorize the repairs. See Hibbs v Allstate Ins. Co. (2012) 193 CA4th 809.
Insurer’s duty to defend. An insurer has a duty to defend when the damages sought against the insured are covered under a broad liability policy, even though there is the possibility of noncoverage under an exclusion clause. See Gray v Zurich Ins. Co. (1966) 65 C2d 263. In Southern Calif. Pizza Co., LLC v Certain Underwriters (2019) 40 CA5th 140, the court of appeal held that an employment practices insurer had a duty to defend because it failed to establish that all claims against the insured either fell outside the insuring agreement, or within the scope of the relevant exclusion. See §9.3.
In Target Corp. v Golden State Ins. Co., Ltd. (2019) 41 CA5th 13, the court of appeal held that an insurer had no duty to defend an additional insured retailer against a claim that did not arise out of the supplier-insured’s product. See §9.3.
Insurer’s control of the litigation. Code of Civil Procedure §116.710(c) gives the insurer of a defendant the right to appeal a small claims judgment in excess of $2500. Although CCP §116.710(d) precludes an appeal by a defaulting defendant, in Pacific Pioneer Ins. Co. v Superior Court (2020) 44 CA5th 890, the court held that §116.710(d) did not bar the insurer of a defaulting defendant from appealing a $10,000 default judgment. See §9.5.
Insurer’s duty of good faith; conflict of interest. In both Miller v Zurich Am. Ins. Co. (2019) 41 CA5th 247 and Trilogy Plumbing, Inc. v Navigators Specialty Ins. Co. (2020) 50 CA5th 920, the insureds asserted bad faith claims based, in part, on failure of the insurers to provide independent counsel. In each case the insured alleged that the insurer had directed its retained counsel to take actions contrary to the insured’s interests, and in each case the insurer moved to strike some or all of the allegations of the complaint under the anti-SLAPP statute (CCP §425.16). Both motions were denied, and both denials were affirmed, with the appellate courts holding that bad faith claims involving communications by the insurers with conflicted panel counsel were not subject to anti-SLAPP protection when the communications were “incidental” or “collateral” to the alleged improper claims handling and were not the basis of the claims. See §§1.45, 9.6.
Insurer’s duty of good faith; assignment of rights. In Potter v Alliance United Ins. Co. (2019) 37 CA5th 894, the court of appeal held that when an insurer sought to avoid an assignment of the insured’s rights by reaching a less than fair value settlement of the insured’s bad faith claim, the unsatisfied judgment creditor was entitled to attempt to set the settlement aside under the Uniform Voidable Transactions Act (CC §§3439–3439.12). See §10.19.
Insurer’s duty of good faith; “genuine dispute” defense. The reasonableness of an insurer’s claims handling may be held reasonable as a matter of law if there was a “genuine dispute” concerning coverage or the amount payable, as long as the insurer’s position was maintained in good faith and on reasonable grounds. Cases applying this principle include 501 E. 51st St., Long-Beach-10 LLC v Kookmin Best Ins. Co. (2020) 47 CA5th 924 (genuine dispute over efficient proximate cause of subsidence loss entitled insurer to summary judgment); and Fadeef v State Farm Gen. Ins. Co. (2020) 50 CA5th 94 (denial of claim for fire damage based on opinion of unqualified expert, as well as additional expert on which insurer failed to show reasonable reliance, required reversal of “genuine dispute” summary judgment in favor of insurer). See §10.30.
Insurer’s duty of good faith; punitive damages. For many years California appellate courts have differed on whether the heightened “clear and convincing evidence” standard applies on review of punitive damage awards that are challenged for insufficiency of evidence. In Conservatorship of O.B. (2020) 9 C5th 989, the Supreme Court settled the issue and held that the higher standard applies. On review the appellate court must determine “whether the record as a whole contains substantial evidence from which a reasonable factfinder could have found it highly probable that the fact was true.” See §10.34.