In a case of first impression in California, Musick, Peeler & Garrett has successfully argued that a third-party claimant has no right to intervene in an insurer’s declaratory relief lawsuit against its policyholder. The April 23, 2008 decision in Royal Indemnity Company v. United Enterprises, Inc., et al.,
___ Cal.Rptr.3d ___, 2008 WL 1808521, is the first published decision by a California court on the issue.
The action arose out of underlying litigation brought by Flat Rock Land Company and Otay Land Company against United Enterprises, seeking recovery of environmental response costs in connection with land located in San Diego. United tendered the matter to Royal Indemnity Company under liability insurance issued to United in the late 1960’s. Royal agreed to defend United, subject to a reservation of rights, and then filed an action for a judicial declaration that it has no duty to defend or indemnify United in connection with the underlying litigation.
Royal did not name Flat Rock in the coverage action. Flat Rock filed a motion to intervene arguing it is the ultimate beneficiary of any proceeds that may be owed under the Royal policy. Flat Rock asserted it should be allowed to participate in the adjudication of coverage. Flat Rock further argued that existing California law did not address a claimant’s right to intervene in an insurer’s declaratory relief lawsuit against the alleged tortfeasor/ insured. Both Royal and United opposed Flat Rock’s motion. The trial court denied the motion to intervene, and Flat Rock appealed.
The Court of Appeal affirmed the judgment. The Court first noted that under California’s intervention statute, Code of Civil Procedure § 387, a party must have a “direct and immediate interest in the action.” “A person has a direct interest justifying intervention in litigation where the judgment in the action of itself adds to or detracts from his legal rights without reference to rights and duties not involved in the litigation.” City and County of San Francisco v. State,
128 Cal.App.4th 1030, 1037 (2005).
Flat Rock acknowledged that California’s rule barring a “direct action” against another’s insurer generally bars a claimant from suing another’s insurer to obtain policy benefits. Exceptions to the so-called “no direct action” rule, as where a claimant has obtained a judgment against the insured or an assignment of rights from the insured, did not apply. Nevertheless, Flat Rock argued that the rule does not apply to a claimant seeking to obtain merely declaratory relief.
Flat Rock cited two California cases as supporting its interpretation of California law, Thompson v. Mercury Cas. Co.,
84 Cal.App.4th 90 (2000), and Haynes v. Farmers Ins. Exch.,
32 Cal.4th 1198 (2004). However, the Court found Thompson
distinguishable. Factually, each case involved a claimant injured in an auto accident while riding as a passenger and vehicles being driven by permissive users at the time of the accident. The claimant in both cases sought a declaration of the permissive user coverage provisions under the owner’s insurance policies. Procedurally, the insurers in both cases did not object to litigating directly with the claimants, and the cases did not involve attempted intervention by the claimant.
The Court further rejected a respected legal practice guide’s statement based on Thompson
that “[a]n injured third party may sue the insured’s liability insurer for declaratory relief to determine coverage issues affecting the claim.” The Court found the practice guide’s conclusion “overstated and overbroad.”
Finally, the Court was guided by federal court decisions made under an analogous federal intervention rule. The federal courts have uniformly refused to allow a claimant in Flat Rock’s position to intervene in a declaratory relief suit between an insurer and policyholder on the ground that the claimant has a “purely speculative” interest in the coverage action, which is insufficient to justify intervention.
Therefore, the Court of Appeal concluded that the trial court had properly denied Flat Rock’s motion to intervene. The Court’s decision clarifies favorably for insurers that California’s “no direct action” rule extends to intervention claims, whether the claim is for declaratory relief or other relief.
This Opinion is not yet final. We will report if any further appeals are pursued by Flat Rock. A copy of the Opinion is available on our website, www.musickpeeler.com