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INSURANCE NOTES

Defending Insurer May Intervene in Suit Between Insured and Claimant to Protect Its Own Interests

04.08.2010

In Gray v. Begley, __ Cal.Rptr.3d __, 2010 WL 1010744 (3/22/10), Gray was seriously injured when the SUV he was riding in was struck by a vehicle driven by Begley. There was a question of whether Begley was acting in the course and scope of his employment with Granite. Granite was insured by CNA (primary) and Westchester (excess). CNA and Westchester settled on behalf of Granite only and agreed to pay over $8 million for Granite’s release.

Gray then went to trial against Begley. CNA had initially denied coverage to Begley but agreed to defend him under a reservation of rights. The trial resulted in a $4.5 million judgment against Begley. Begley sought to offset the $8 million settlement in a motion to vacate the judgment. Gray and Begley entered into a private agreement for Begley to assign to Gray his rights against CNA and to withdraw his motion to vacate.

After Begley withdrew his motion to vacate, CNA moved to intervene in the action in order to bring its own motion to vacate and seek the offset. The trial court allowed the intervention, but refused to vacate the judgment on the ground that there was insufficient evidence. The trial court noted that Begley had a right to discovery before a hearing on a motion for an offset, but that CNA had failed to timely appeal after Begley’s withdrawal of the motion and the trial court no longer had jurisdiction over the case.

On appeal, Gray and Begley argued that CNA did not have a sufficient interest in the action in order to intervene in the first place because CNA was defending Begley under a reservation of rights and its interest was contingent on a later determination of coverage. The Court of Appeal considered the options of an insurer under the law. When an insurer admits coverage, it has a direct and immediate interest in the outcome of the action and thus is entitled to intervene. When an insurer denies coverage and refuses to defend, it has lost its right to control the litigation and thus has no interest to warrant intervention. As a result, when an insurer refuses to defend, it may be bound by a reasonable, non-collusive settlement reached between the insured and the claimant.

The Court noted that existing authority was unclear as to an insurer’s right to intervene when it defends under a reservation of rights, as CNA had done. Extrapolating from cases involving settlements reached without the defending insurer’s participation, the Court stated that CNA did not lose the right to challenge the settlement because, as long it was providing a defense, even while reserving rights, CNA had a right to control the litigation and had sufficient interest to intervene when the insured attempted to settle, to CNA’s potential detriment. Accordingly, CNA was held to have the right to pursue its motion for offset of the settlement with Granite.

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