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Los Angeles Daily Journal
Wednesday, October 20, 2004

Courts Bolster Duty to Pay
Claims of Insolvent Insurers

by Stephan A. Mills

Several recent decisions signal a willingness by the appellate courts to question, and reject, the California Insurance Guarantee Association's restrictive interpretations of statutes defining its obligation to pay "covered claims" for insolvent insurers. These decisions mark a trend toward construing those statutes more liberally and more in accord with their remedial purpose.

CD Investment v. CIGA, 84 Cal.App.4th 1410 (2000), rejected the association's assertion that it was entitled to deduct -- from the $500,000 statutory limit on what it must pay on a claim -- the insurance proceeds that a claimant receives on the same claim from other solvent insurers.

The court ruled that Insurance Code Section 1063.1(c)(9), which states that "[c]overed claims does not include...any claim to the extent that it is covered by any other insurance of a class covered by this article available to the claimant or insured," did not provide the association with such a right of setoff. If the court had accepted the association's interpretation, the insured would have received nothing, even though its loss remained substantially uncompensated by insurance, inasmuch as the insured had received more than $500,000 from other solvent insurers on the same claim.

Just as important, CD Investment also rejected the association's argument that, where there is a progressive loss triggering coverage over several policies, one $500,000 statutory limit applies to the entire claim.

The analytic framework employed by CD Investment is as significant as its interpretations of the statutes at issue in that case. The court rested its holdings on consideration of several policies.

First, an insured should not, by reason of its carrier's insolvency, be put in a worse position than it would have been had the insurer remained solvent; and an insolvency claim should not put an insured in a better position than it would have been had there been no insolvency (that is, an insolvency claim should not afford a claimant a "double recovery").

Second, the decisions of other states provide important guidance because the states' insurance guaranty statutes have a common lineage arising from a model act.

And third, the remedial purpose of the state's insurance guarantee statutes, as confirmed by their legislative history, is to protect the public from the effects of insurer insolvencies, and those laws should be construed liberally to serve that purpose.

Also, the court did not allow the public policy that the association must be considered the insurer of "last resort" to trump the foregoing principles.

Most recently, Cole v. California Insurance Guarantee Association, 2004 DJDAR 11726 (Cal.App.2nd Dist. Sept. 20, 2004), applied the foregoing principles in rejecting the association's claim that it was entitled to offset, against the association's obligation to pay Jocelyn Cole's claim on behalf of her insolvent uninsured motorist carrier, her federal and state disability/unemployment benefits. The court found that those benefits did not constitute "other insurance" proceeds that the association can set off under Section 1063.1(c)(9).

The court also found that disability/unemployment benefits did not trigger a right to setoff under Section 1063.2(e), which explicitly allows the association to set off an insured's recoveries for the same loss from any "governmental insurance or guaranty program which is also a covered claim."

After suffering bodily injuries in a multicar crash, Cole obtained federal Social Security Disability insurance funds and state Unemployment Compensation Insurance benefits. She also made a claim on her own uninsured motorist insurer (which subsequently became insolvent, thereby bringing the association into the picture).

As noted by the court, the uninsured motorist policy provided coverage for "bodily injury" damages but no unemployment compensation arising out of disability, while Social Security and state unemployment provided no bodily injury compensation if one is capable of gainful employment.

Hence, the court reasoned that, because the government disability insurance provided coverage different from that afforded by Cole's uninsured motorist coverage, her claim under the latter policy was not covered by any "other insurance of a class covered by this article." Section 1063.1(c)(9).

In addition, because "covered claims" does not include any obligations arising from disability insurance (Section 1063.1(c)(3)(i)), the court determined that such insurance is not "other insurance" of a "class covered by [the association statutes]."

The Cole court cited the rule, enunciated in CD Investment, that the association statutes are to be construed liberally to comport with their remedial purpose, and the court strove to "harmonize" the definitions and exclusions found in those statutes to that end. The court ultimately looked to the model act and the decisions of other states for verification and guidance and determined that the decisional authority of this state should comport with that of the other states.

The court also concluded that, by disallowing the setoff that the association requested, it was not handing Cole a "double recovery," because she would have been entitled to receive the disability payments as well as the uninsured motorist policy proceeds even if the insurer under that policy had remained solvent. Finally, the court rejected the association's argument that it would be deprived of its status as "payer of last resort" unless it was afforded the requested setoff.

In short, Cole adopted an analytic framework similar to the one employed in CD Investment.

CD Investment and Cole are not the only recent decisions rejecting the association's efforts to impose strict interpretations of the statutes defining its obligations. In American National Insurance v. Low, 84 Cal.App.4th 914 (2000), the association argued unsuccessfully that the claimant in that case, which was an insurance company, could not have a covered claim against the association because the association statutes are intended to protect only individuals.

Mindful of the remedial purpose of the association statutes, the court also rejected the association's attempt to focus the public-policy argument on the need to keep the number of covered claims limited to assure its financial stability, holding that [t]he argument that the association's financial stability is pre-eminent could be used to oppose any recovery under the statute and, taken to the extreme, would result in no claims being covered. See also Black Diamond Asphalt Inc. v. Superior Court, 109 Cal.App.4th 166 (2003), in which the court soundly rejected the association's contention that considerations of hardship and public policy dictated that venue for all actions against it should be established in Los Angeles County, where the association maintains its headquarters.

In Woodliff v. CIGA, 110 Cal.App.4th 1690 (2003), Arch Woodliff obtained a judgment against an insurer that had failed to defend him in certain federal court actions. The judgment was for the attorney fees and costs incurred by Woodliff in defending himself in those actions (those actions settled without Woodliff's having to pay any money).

After the insurer became insolvent, the association declined to pay the judgment on the ground that the attorney fees and costs awarded to Woodliff were "loss adjustment expenses" incurred before insolvency. According to Section 1063.2(h), the association is not required to pay pre-insolvency "loss adjustment expenses." The court refused to interpret the statute literally against Woodliff, finding that it would create absurd results and fail to serve the remedial objectives of the association statutes.

The court also considered out-of-state case law and carefully reviewed (and ultimately rejected the association's interpretation of) legislative history with respect to Section 1063.2(h). This is not to say, however, that the association has failed to score any significant appellate victories in the last few years.

In CIGA v. Workers' Compensation Appeals Board, 112 Cal.App.4th 358 (2003), the court held that the association was entitled to set off, against the workers' compensation benefits it was required to pay Scott Mangum, a worker injured in an employment-related car accident, the proceeds he obtained from his solvent underinsured motorist coverage.

The court ruled that Section 1063.2(c)(1), which explicitly gives the association the right to set off the proceeds of uninsured motorist coverage, also allowed the association to set off the proceeds of underinsured motorist policies. See also Denny's Inc. v. Workers' Compensation Appeals Board, 104 Cal.App.4th 1433 (2003) (an employer was self-insured for a small portion of the period in which an employee suffered cumulative injuries, but the employer had workers' compensation coverage for the rest of that period. The court ruled that the association did not have to pay any portion of the workers' compensation award because the employer was properly considered, as a certified self-insurer, as having provided "other [solvent] insurance." Section 1063.1(c)(9).

In Aloha Pacific Inc. v. CIGA, 79 Cal.App.4th 297 (2000), the court held that the association could re-litigate the question of coverage under an insolvent insurer's policy, even though a judgment had been entered against the insurer (before its insolvency) in federal court to the effect that the insurer had no basis for denying coverage for the subject claim.

Notwithstanding the decisions cited in the previous paragraph, the predominant trend in case law disfavors restrictive, literal interpretations by the association that would excuse it from answering for policy obligations of insolvent insurers.

Nevertheless, the courts hardly are giving away the store, and insureds desiring to force the association to answer for the obligations of defunct carriers must remain prepared to navigate a maze of statutes defining "covered claims" and the association to respond to them.

Stephan A. Mills, a member of Zemanek & Mills, practices in the insurance insolvency area. The firm represented the appellant in CD Investment.



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