Garamendi v. Golden Eagle Ins. Co.

• Decision Date: 25 November 2003
• Docket Number: No. A097435.,A097435.
• Citation: 7 Cal.Rptr.3d 86,113 Cal.App.4th 861
• Court: California Court of Appeals Court of Appeals
• Parties: John GARAMENDI, as Insurance Commissioner, etc., Plaintiff, v. GOLDEN EAGLE INSURANCE COMPANY, Defendant and Appellant; Scott Cade et al., Claimants and Appellants.

7 Cal.Rptr.3d 86

113 Cal.App.4th 861

John GARAMENDI, as Insurance Commissioner, etc., Plaintiff, v. GOLDEN EAGLE INSURANCE COMPANY, Defendant and Appellant Scott Cade et al., Claimants and Appellants.

No. A097435.

Court of Appeal, First District, Division 3.

November 25, 2003.

Rehearing Granted December 22, 2003.

Mahaffey & Associates, Douglas L. Mahaffey, Snell & Wilmer L.L.P., Richard A. Derevan, Josette Mollica, Irvine, for Plaintiff, Claimants and Appellants.

Timothy A. Gonzales, for Defendant and Appellant.

POLLAK, J.

A group of homeowners — plaintiffs in the underlying action and claimants in the proceedings from which this appeal was taken (claimants) — sued the developer of their subdivision for various alleged defects in their homes. The subcontractor whose liability is at issue in this appeal Rampart General, Inc. (Rampart), was insured under commercial general liability (CGL) policies issued by Golden Eagle Insurance Company (Golden Eagle). When Rampart and other subcontractors were brought into the litigation, Golden Eagle undertook the defense of Rampart. However, when Golden Eagle discovered on the eve of trial that Rampart's corporate status had been suspended for failure to pay franchise taxes, and that Rampart therefore could not participate in the litigation, Golden Eagle declined to intervene on its own behalf. Two other subcontractors remained in the litigation and, after a court trial, claimants obtained judgment against Rampart for $1,323,523.27, consisting of $283,322.33 property damages; $213,500.00 personal injury damages; $540,000.00 for Rampart's portion of the damages incurred by the developer, the right to recover which had been assigned to claimants as part of their settlement with the developer; and $286,700.94 as costs.

Claimants sought to enforce their judgment against Golden Eagle, which became insolvent shortly after the trial was concluded. The administrator in charge of the conservatorship of Golden Eagle denied their proof of claim in substantial part, on the ground that the underlying judgment was a default judgment inadmissible as evidence of Golden Eagle's liability. Claimants challenged that decision in the superior court, which concluded that the underlying judgment was not taken by default and therefore was enforceable against Golden Eagle. The San Francisco Superior Court (hereafter referred to as the "liquidation court" as distinguished from the trial court, which rendered the underlying judgment) also concluded that Golden Eagle had not waived its coverage defenses by failing to assert them previously. The liquidation court proceeded to determine that there was coverage under the policies for all of the amounts included in the trial court judgment except for the property damages, that the trial court had allocated too great a share of the developer's damages to Rampart, and that the trial court had improperly included loss of use of the property as an element of personal injury damages. After making the appropriate adjustments, the court ordered the administrator to pay claimants $722,000.99 plus interest at the legal rate from March 7, 2001.

Golden Eagle appeals, challenging the ruling that the underlying judgment was not obtained by default, arguing that portions of the underlying judgment are in all events void because they exceed the amount demanded in the complaint, and disputing the liquidation court's determination that a portion of the judgment was covered by the policies. Claimants cross-appeal, arguing that the liquidation court erred in concluding that Golden Eagle had not waived its coverage defenses and that a portion of the judgment was not covered by the policies. We agree with the liquidation court that the underlying judgment was not a default judgment and therefore should have been considered by the claims administrator as evidence of Golden Eagle's liability, except to the extent the judgment was void because it included relief for personal injury damages and attorney fees not requested in the operative pleading in the underlying action. We disagree with the liquidation court's conclusion that Golden Eagle retained the right to assert its coverage defenses, and we see no justification for having reduced the amount of the developer's damages allocated by the trial court to Rampart. Therefore, we modify the final order of the liquidation court insofar as it reduced by $283,200.00 the recoverable amount of the developer's damages, included personal injury damages of $213,500.00 and attorney fees of $147,285.50, and excluded property damages of $283,322.33. We also modify the date from which interest on the judgment began to accrue.

BACKGROUND

In 1989 and 1990, claimants purchased homes in a development in Orange County from the William Lyon Company (Lyon). Rampart was the subcontractor that installed fireplaces in the homes, and it was insured under CGL policies issued by Golden Eagle. In August 1991, claimants filed suit against Lyon alleging damages resulting from construction defects. The complaint was amended numerous times. After the third amended complaint was filed, Lyon filed a cross-complaint for indemnity against Rampart and other subcontractors. Prior to filing the fourth amended complaint, claimants settled with Lyon. They received from Lyon $125,000.00 and assignment of Lyon's claims against the subcontractors. The settlement stipulates that $37,712.50, or approximately 30 percent of the cash received in the settlement, represented the damage caused by the faulty fireplaces. The fourth amended complaint no longer named Lyon, but named Rampart and the other subcontractors as defendants.

The operative complaint at the time of trial appears to have been the fifth amended complaint,¹ which alleged Lyon's assigned causes of action for express and implied contractual indemnity, and claimants' own claims for negligence and breach of implied warranty. The amended complaint sought reimbursement for the amounts paid by Lyon to claimants, costs and fees incurred by Lyon in defense of the suit, and expenses incurred in repairing claimants' homes. The fourth amended complaint had requested special damages for medical bills and loss of earnings as well as a separate category described only as "general damages," but these categories were omitted from the fifth amended complaint.

In June 1996, the case was ready to proceed to trial against Rampart and two other nonsettling subcontractors. A few days prior to the start of trial, however, the attorney that Golden Eagle had hired to represent Rampart discovered that Rampart's corporate status had been suspended because it had failed to pay its franchise taxes, and therefore that it could not appear to defend the action. On the first day of trial, counsel for Rampart, counsel for claimants, and the court discussed the fact that Rampart had been suspended. The following Monday, the trial court indicated that it would grant a motion by Golden Eagle to intervene in the case to defend its interests, since Rampart could no longer appear. The trial court took a short recess to allow counsel to call Golden Eagle and ask if it wished to intervene, since its interests were at stake regardless of Rampart's ability to appear. The attorney reported, "I just made a telephone call to Golden Eagle. I talked to the persons of authority. And they are choosing not to intervene in this case." The trial court replied, "So then, you're excused. I don't think we have another choice. Do we?" Counsel for Rampart replied, "I don't think so, your Honor."

The matter proceeded to trial without participation by Rampart or Golden Eagle. Over the course of the ensuing five-day trial, the court heard testimony from the claimants, who described the problems with the fireplaces and adverse effects on their health. The court also heard from an architect who testified that the fireplaces were a fire hazard and needed to be replaced. The expert also testified as to the cost of removing and replacing fireplaces in homes in which construction had been completed. An attorney for Lyon testified about the contracts between Lyon and the subcontractors, including Rampart. A general contractor testified as an expert on damages.

The court questioned the architect, the general contractor, and the attorney for Lyon, as well as some of the claimants. Attorneys for the other remaining subcontractor defendants also questioned most of these witnesses, in part about damages caused by the defective fireplaces.

The trial court found that Rampart was liable for part of the damages, and on July 9, 1996, entered a judgment against it in the amount of $1,323,524.27. This amount consisted of $283,322.33 for resulting property damage, $213,500.00 for personal injury, $540,000.00 for "damages as assignees of Lyon," and $286,700.94 in costs. Almost six months later, on December 30, 1996, Golden Eagle moved to set aside the underlying judgment under Code of Civil Procedure section 473, and sought leave to intervene. The motion was denied, and that decision was not challenged on appeal.

Claimants then filed suit against Golden Eagle under Insurance Code section 11580 (hereafter, section 11580) seeking to recover the judgment. In January 1997, "the Insurance Commissioner seized Golden Eagle and instituted conservation proceedings. In August 1997, the San Francisco County Superior Court issued an order approving Golden Eagle's rehabilitation plan. Pursuant to the rehabilitation plan, the newly created Golden Eagle Insurance Corporation (GEIC) was responsible for `covered' claims arising under the insurer's policies, and the Golden Eagle Liquidating Trust (GELT) was established to administer `uncovered' claims (such as claims for extra-contractual damages or bad faith) pending against the company. The San Francisco County Superior Court retained jurisdiction to supervise the rehabilitation plan and adjudicate all third party claims asserted...