Travelers Property Casualty Co v. Liberty Surplus Insurance Corp

• Court: Court of Appeals for the Ninth Circuit
• Decided: March 12, 2020
• Docket: 18-15956
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS MAR 12 2020 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

TRAVELERS PROPERTY CASUALTY No. 18-15956 COMPANY OF AMERICA, a Connecticut corporation, D.C. No. 2:16-cv-02752-WBS-EFB Plaintiff-Appellee,

v. MEMORANDUM*

LIBERTY SURPLUS INSURANCE CORPORATION, a Massachusetts corporation,

Defendant-Appellant.

Appeal from the United States District Court for the Eastern District of California William B. Shubb, District Judge, Presiding

Argued and Submitted December 6, 2019 San Francisco, California

Before: SILER,** BYBEE, and R. NELSON, Circuit Judges.

Liberty Surplus Insurance Company appeals the district court’s grant of

summary judgment to Travelers Property Casualty Insurance Company of America

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Eugene E. Siler, United States Circuit Judge for the U.S. Court of Appeals for the Sixth Circuit, sitting by designation. on the issue of equitable contribution. We affirm.

Travelers and Liberty issued consecutive general liability policies to

subcontractor Dura Art, Inc. Dura was named as a cross-defendant in a construction

defect suit. But, when the cross-complaint was filed, Dura was unable to participate

in the litigation because Dura’s corporate status had been suspended under Cal. Rev.

& Tax. Code § 23301 and Cal. Corp. Code § 2205. See Palm Valley Homeowners

Ass’n, Inc. v. Design MTC, 102 Cal. Rptr. 2d 350, 354-55 (Cal. Ct. App. 2000). This

presented a problem for Dura’s insurers because in California an insurer may be

liable to a judgment creditor who obtains a default judgment against a suspended

corporate insured. See Cal. Ins. Code § 11580(b)(2).

The parties addressed this legal quandary in different ways. Travelers

intervened in the underlying suit in its own name pursuant to Cal. Civ. Proc. Code

§ 387 and reached a settlement. Liberty chose not to intervene. Subsequently,

Travelers initiated this lawsuit seeking a declaration that Liberty had a duty to defend

and indemnify Dura and requesting equitable apportionment of fees and costs. The

district court agreed and granted summary judgment in favor of Travelers.

We review the district court’s grant of summary judgment de novo. Protect

Our Cmtys. Found. v. LaCounte, 939 F.3d 1029, 1034 (9th Cir. 2019). In a diversity

action like this one, the substantive law of the forum state applies, and we review

the district court’s interpretation of California law de novo. See Conestoga Servs.

2 18-15956 Corp. v. Exec. Risk Indem., Inc., 312 F.3d 976, 980-81 (9th Cir. 2002).

We must consider two related questions. First, does California law permit an

insurance company to intervene to defend a suspended corporate insured? And, if

so, did Liberty have a legal obligation to defend and indemnify Dura in the

underlying suit?

First, California law permits an insurer to intervene in a lawsuit in its own

name to defend a suspended corporate insured. California law imposes criminal

liability on “[a]ny person who attempts or purports to exercise the powers, rights,

and privileges of a corporation that has been suspended pursuant to Section 23301.”

Cal. Rev. & Tax. Code § 19719(a). But the statute contains an important exception:

This section shall not apply to any insurer, or to counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation in a civil action based upon a claim for personal injury, property damage, or economic losses against the suspended corporation, and, in conjunction with this defense, prosecutes subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.

Id. § 19719(b) (emphasis added). Indeed, the statute expressly says that “[n]othing

in this section shall create or limit any obligation upon an insurer to defend a

suspended corporation.” Id. § 19719(c) (emphasis added). Thus, the plain text of

the statute exempts insurers who provide a defense for a suspended corporation.

Plus, the California Court of Appeal has stated that “[s]ubdivision (b) of

section 19719 allows an insurance company to provide a defense for a suspended

3 18-15956 corporation in certain actions and, in connection with this defense, prosecute

subrogation, contribution or indemnity rights in the name of the suspended

corporation.” Kaufman & Broad Cmtys., Inc. v. Performance Plastering, Inc., 39

Cal. Rptr. 3d 33, 38 (Cal. Ct. App. 2006) (emphasis added). Liberty points to

language in Kaufman & Broad that suggests an insurer may not defend the interests

of a suspended insured. See id. at 38-39. Even so, when reading the decision

comprehensively, Kaufman & Broad seems to interpret section 19719(b) to allow an

insurance company to intervene as an interested party in litigation to defend a

suspended corporate insured so long as the insurer intervenes in the lawsuit in its

own name. See id. at 36-38; see also El Escorial Owners’ Ass’n v. DLC Plastering,

Inc., 65 Cal. Rptr. 3d 524, 534-35 (Cal. Ct. App. 2007) (noting that section 19719(b)

created “an exception for insurers” and citing Kaufman & Broad for the proposition

that an insurance company “may defend [a suspended insured] in its own name, but

not in the name of the suspended corporation”).

Moreover, Dura’s simultaneous suspension under Cal. Corp. Code § 2205 did

not prevent Travelers from intervening to defend Dura. Of course, like Cal. Rev. &

Tax. Code § 23301, § 2205 provides for suspension of “corporate powers, rights,

and privileges,” which include the ability to participate in litigation activities. Cal.

Corp. Code § 2205(c). And, unlike Cal. Rev. & Tax. Code § 19719(b), § 2205

contains no express exception allowing insurers to intervene on behalf of a

4 18-15956 suspended insured.

Even so, § 2205 contains no provision that imposes criminal liability on a

person or entity that attempts to intervene in a lawsuit on behalf of a suspended

corporation. In fact, the statute is silent on whether an insurer may intervene in

litigation to defend a suspended corporate insured. Additionally, we are aware of no

case that expressly prohibits an insurance company from intervening in a lawsuit to

protect an insured suspended under Cal. Corp. Code § 2205. True, in one case the

California Court of Appeal upheld the imposition of sanctions on a law firm that

participated in discovery and filed motions on behalf of a client that it knew to be

suspended under § 2205. See Palm Valley Homeowners Ass’n, 102 Cal. Rptr. 2d at

352-56. But Palm Valley did not address the issue of an insurance company’s

intervention in a lawsuit in its own name to defend a suspended

corporation. Elsewhere, the California courts have noted that an insurer’s obligation

to defend its insured continues even if the insured is suspended. See El Escorial, 65

Cal. Rptr. 3d at 535 (noting that Cal. Rev. & Tax. Code § 19719 was amended to

“protect[] insurers that are obligated to defend suspended corporations”);

Garamendi v. Golden Eagle Ins. Co., 10 Cal. Rptr. 3d 724, 740 (Cal. Ct. App. 2004)

(noting that, when an insured is suspended, “[t]he insurer not only ha[s] a right to

participate in and to control the litigation, it ha[s] a duty to do so”). In light of this

authority, we conclude that Cal. Corp. Code § 2205 does not bar an insurer from

5 18-15956 intervening in a lawsuit in its own name to defend a suspended corporation.

Moreover, Liberty’s contention that Travelers may have been able to

intervene to defend its own interests but that it could not intervene in the lawsuit to

defend Dura’s interests presents a distinction without a difference. An insurance

company’s legal interest—assuming there are no defenses to coverage—is

inextricably tied to the potential liability of its insured for a covered loss within the

policy limits. As such, when Travelers intervened in the construction defect suit to

defend its own interests, it was also defending or seeking to limit Dura’s liability in

the underlying construction defect suit.

Second, having determined that California law permits an insurer to intervene

in its own name to defend a suspended corporate insured, we must address whether

Liberty owes equitable contribution to Travelers. In California, a right to equitable

contribution arises when two or more insurance companies owe a duty to defend or

indemnify the same insured. See, e.g., Fireman’s Fund Ins. Co. v. Md. Cas. Co., 77

Cal. Rptr. 2d 296, 303-04 (Cal. Ct. App. 1998).

Liberty contends that even if it was permitted to intervene it does not owe a

duty to defend or indemnify. Thus, Liberty argues, because it was not required to

intervene in the underlying suit, it owed no duty to the insured. However, Liberty’s

duties are defined by the provisions in its insurance policy. And here, Liberty’s

insurance policy stated, “We will pay those sums that the insured becomes legally

6 18-15956 obligated to pay as damages of ‘bodily injury’ or ‘property damage’ to which this

insurance applies. We will have the right and duty to defend the insured against any

‘suit’ seeking those damages.” (emphasis added).

Moreover, in California, “any provision that takes away or limits coverage

reasonably expected by an insured must be conspicuous, plain and clear.” Haynes

v. Farmers Ins. Exch., 89 P.3d 381, 385 (Cal. 2004) (internal quotation marks

omitted). Here, there is no language in the policy that limits or extinguishes

Liberty’s coverage obligation in the event of Dura’s suspension.

In sum, Liberty owed a duty to defend and indemnify Dura based on the

provisions in its insurance policy. The policy expressly imposed a duty upon Liberty

to defend and indemnify Dura for property damage to which the policy applied.

Liberty refused to defend Dura in the underlying suit even though neither California

law nor the insurance policy excused Liberty’s obligation to defend Dura. As a

result, Liberty had a duty to defend and indemnify Dura in the underlying

construction defect suit and owes equitable contribution to Travelers.

Third, Travelers’s decision to settle poses no bar to its recovery of equitable

contribution. California law permits a settling coinsurer to recover equitable

contribution from a nonparticipating coinsurer if the participating coinsurer

demonstrates a potential for coverage. See Safeco Ins. Co. of Am. v. Superior Court,

44 Cal. Rptr. 3d 841, 844 (Cal. Ct. App. 2006). To demonstrate a potential for

7 18-15956 coverage, a participating coinsurer need only make a prima facie showing of

potential liability triggering a duty to defend. Id. Here, a potential for coverage has

been shown since the provisions in Liberty’s insurance policy impose an express

duty to defend and indemnify Dura.

Finally, Liberty concedes that the no voluntary payments clause in the policy

will only preclude a suit to recover on a settlement if Liberty did not previously

breach the duty to defend. See Appellant’s Pr. Brief at 31-32. Based on the

foregoing, Liberty was permitted by California law to intervene in the underlying

suit and failed to intervene even though Liberty had a duty to defend and indemnify

based on the plain language of the insurance policy. As a result, the no voluntary

payments clause has no effect on Travelers’s ability to recover equitable

contribution.

In conclusion, Liberty owed a duty to defend and indemnify Dura based on

the provisions in its insurance policy. Dura’s suspended corporate status did not

modify or excuse Liberty’s duty to defend. Thus, Liberty owes equitable

contribution for Travelers’s defense of Dura in the underlying construction defect

suit.

AFFIRMED.

8 18-15956