American Natl. Ins. v. Low

• Decision Date: 08 November 2000
• Citation: 101 Cal.Rptr.2d 288,84 Cal.App.4th 914
• Court: California Court of Appeals Court of Appeals
• Parties: (Cal.App. 2 Dist. 2000) AMERICAN NATIONAL INSURANCE COMPANY, Plaintiff and Appellant, v. HARRY W. LOW, as Insurance Commissioner, etc., Defendant and Respondent. B137765 Filed

101 Cal.Rptr.2d 288 (Cal.App. 2 Dist. 2000)

AMERICAN NATIONAL INSURANCE COMPANY, Plaintiff and Appellant, v. HARRY W. LOW, as Insurance Commissioner, etc., Defendant and Respondent.

B137765

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA, SECOND APPELLATE DISTRICT,

DIVISION FOUR

Filed 11/8/00

APPEAL from an order of the Superior Court of Los Angeles County, Kurt J. Lewin, Judge. Reversed and remanded.

(Super. Ct. No. C572724)

Thelen Reid & Priest, James J. Moak and Mark D. Campbell for Plaintiff and Appellant.

Rubinstein & Perry, Karl L. Rubinstein, Robert H. Nunnally, Jr., Kathleen M. McCain and David Wayne Johnson, Jr., for Defendant and Respondent.

Lord, Bissell & Brook, C. Guerry Collins and Stephen J. Tomasulo for California Insurance Guarantee Association, as Amicus Curiae on behalf of Defendant and Respondent.

CERTIFIED FOR PUBLICATION

CURRY, J.

This case involves the proper interpretation of the statutory provisions which prioritize claims among creditors of insolvent insurance companies, and govern the obligations of the California Insurance Guarantee Association (CIGA) to policyholders of insolvent member insurers. Under the Insurance Code, CIGA is obligated to pay an insolvent member insurer's "covered claims" which are defined, on the one hand, to include all obligations of the insurer arising from an insurance policy and, on the other, to exclude all obligations to insurers. (Ins. Code, 1063.1, subd. (c).)¹ Section 1033 which contains the priority scheme for payment of claims by an insolvent insurer's estate similarly excludes from priority obligations owed to insurers. The issue raised in this appeal is whether appellant American National Insurance Company, which is itself in the business of providing insurance to the public, can obtain priority for its claims as a policyholder when the insurer to which it looked for liability coverage became insolvent. Appellant maintains that as an insured seeking payment under the terms of a policy, its claims are entitled to policyholder priority. Respondent Insurance Commissioner and amicus CIGA ask us to uphold a ruling by the trial court that relegated appellant to general creditor status. After review of the relevant statutes and their history, we conclude that the Legislature intended all policyholders' claims to fall within the category of "covered claims" even where the policyholders also happen to be in the business of providing insurance, and reverse.

FACTUAL AND PROCEDURAL BACKGROUND

Appellant filed an order to show cause why its claim against Mission Insurance Company (Mission), a liquidated insurer, should not have been allowed by the liquidator, respondent Insurance Commissioner. The following facts pertinent to appellant's claim were laid out in appellant's moving papers and are not disputed.

Appellant obtained an automobile liability insurance policy in the amount of $250,000 from Great American Insurance Company, which was issued effective January 1, 1980. Effective May 15 of that same year, Great American issued appellant a catastrophic liability insurance policy in the amount of $5 million. Mission issued an excess umbrella insurance policy in the amount of $10 million to appellant also effective May 15, 1980. Under the policy, Mission had the duty to indemnify appellant after the underlying insurer, Great American, had paid or been held liable to pay the full amount of its liability.

On May 15, 1980, Scott Duff, one of appellant's agents, struck Anthony Markese, a three-year-old boy, in an automobile/pedestrian accident, resulting in the boy becoming a quadriplegic. An action was brought on behalf of the child in Illinois, which resulted in a 1986 judgment against Duff and appellant in the amount of $6,591,344.

Great American tendered its policy limits (a total of $5.25 million under the automobile policy and the catastrophic liability policy) to Mission as the excess liability carrier. Mission had been declared insolvent and placed in conservatorship in California in 1985,² and was unable to accept the tender. Appellant thereafter settled with Markese at a cost of approximately $1 million over the amount received from the Great American policies. In addition, appellant filed a lawsuit against Great American in Texas alleging a failure to settle within policy limits, and received a settlement of $423,741 in June 1987.

In September 1987, appellant filed a proof of claim with the ancillary receiver for Mission in Texas. In October 1988, its claim was rejected as a covered claim as that term is defined under the provision of articles 21.28 and 21.28-C of the Texas Insurance Code,³ but approved as a Class 2 claim as defined by article 21.28, section 8 of the Texas Insurance Code⁴ in the amount of $585,608.54. No funds were available to pay the claim. Thereafter, appellant filed a petition against the State of Texas in the Texas courts alleging that rejection of its claim as a covered claim was improper. The Texas Property and Casualty Insurance Guarantee Association (Texas Guarantee Association), the nonprofit, unincorporated legal entity created pursuant to the Texas Insurance Code to pay covered claims, filed a plea in intervention. In May 1996, judgment was entered in favor of appellant against the Texas Guarantee Association in the amount of $100,000.

In the meantime, appellant was notified by respondent of the proposed liquidation of Mission and filed a proof of claim in the amount of $1 million with respondent, the Mission liquidator and trustee of the Mission Insurance Company trust, in May 1987. In August 1998, it received notice by letter that respondent had rejected its claim. In respondent's letter, under "reason(s) for rejection," a box entitled "Claim paid in full by Guaranty Association" was checked. Beside it the word "settled" was handwritten in. Appellant filed its order to show cause contending its claim had not been satisfied by either the Texas Guarantee Association or by settlement. Respondent stated in its opposition that the rejection would be modified to a partial approval in the amount of $458,608.54,⁵ but that appellant's claim would be assigned general creditor status rather than policyholder priority.

The trial court denied the order to show cause, giving the following rationale in its order: "When, as here, an insurance company purchases a simple liability insurance policy exactly the same as thousands of other policyholders, a logically sound argument can be made that they should not be differentiated in any manner. The legislature has, however, unequivocally differentiated the claims of an insurance company from those of all other policyholders, (Insurance Code sections 1033 & 1063.1) and relegated those claims to the lower priority (6). Although it can be argued that this constitutes a distinction without a difference, the classification is not irrational or arbitrary under the reasoning supporting the more explicit though substantially identical provision of the Model Act. It can also be argued that when an insurance company lays off its own direct risk by the purchase of a policy, as between two insurance companies, this is substantively a policy of reinsurance. Finally, policyholder status for [appellant] in these circumstances would set a dangerous precedent; an unwarranted camel's nose in the insolvency tent." An appeal was taken from this order.

DISCUSSION

I

The statutory provisions which we are called on to interpret are the versions of sections 1033 and 1063.1 in effect when appellant submitted its proof of claim. Section 1033 is contained in article 14 (div. 1, pt. 2, ch. 1) of the code which governs insolvency and delinquency of insurance companies. Section 1063.1 appears in article 14.2 of the same chapter, which created CIGA and dictates its powers and duties. The purpose behind the creation of CIGA was to establish a fund from which insureds could obtain financial and legal assistance in the event their insurer became insolvent. (Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775, 784; see 1063 et seq.) All insurers transacting insurance business in California are involuntary members of CIGA unless exempted by the statute. (Ibid.) Members make premium payments to CIGA when a fellow insurer becomes insolvent. This enables CIGA to pay the obligation of the insolvent carrier. ( 1063.5; Burrow v. Pike (1987) 190 Cal.App.3d 384, 398.) Member insurers recoup their CIGA payments from their own policyholders through a surcharge on premiums. ( 1063.14, subd. (a); R. J. Reynolds Co. v. California Ins. Guarantee Assn. (1991) 235 Cal.App.3d 595, 600.) Appellant, as a provider of life insurance, is not a member of CIGA; Mission, as a liability insurer, was a member. (See 1063, subd. (a).)

"CIGA's duties are not co-extensive with the duties owed by the insolvent insurer under its policy. [Citations.]" (R. J. Reynolds Co. v. California Ins. Guarantee Assn., supra, 235 Cal.App.3d at p. 601.) CIGA's primary function is to "pay and discharge covered claims and in connection therewith pay for or furnish loss adjustment services and defenses of claimants when required by policy provisions." ( 1063.2, subd. (a), italics added.) CIGA is authorized by statute to "pay only . . . those [claims] determined by the Legislature to be in keeping with the goal of providing protection for the insured public. [Citation.]" (R. J. Reynolds Co. v. California Ins. Guarantee Assn., supra, at p. 600.)

"'Since "covered claims" are not coextensive with an insolvent insurer's obligations under its policies, CIGA cannot and does not "'stand in the shoes' of the insolvent insurer for all purposes." [Citation.] Indeed, CIGA is "expressly forbidden" to do so except where the claim at issue is a "covered claim." [Citation.] It necessarily follows that CIGA's first duty is to determine whether a claim placed before it is a "covered claim."' [Citation.]" (Industrial Indemnity Co. v. Workers' Comp. Appeals...