Woodliff v. California Ins. Guarantee Ass'n

• Decision Date: 07 August 2003
• Docket Number: No. B160114.,B160114.
• Citation: 3 Cal.Rptr.3d 1,110 Cal.App.4th 1690
• Court: California Court of Appeals Court of Appeals
• Parties: Arch WOODLIFF, Plaintiff and Appellant, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent.

3 Cal.Rptr.3d 1

110 Cal.App.4th 1690

Arch WOODLIFF, Plaintiff and Appellant, v. CALIFORNIA INSURANCE GUARANTEE ASSOCIATION, Defendant and Respondent.

No. B160114.

Court of Appeal, Second District, Division 4.

August 7, 2003.

Certified for Partial Publication.^*

Review Denied November 12, 2003.

Law Office of Lorraine M. Walsh and Lorraine M. Walsh, Walnut Creek, for Plaintiff and Appellant.

Thomas & Elliott, Stephen L. Thomas, and Jay J. Elliott, Los Angeles; Benedon & Serlin and Gerald M. Serlin; Irell & Manella and Harry J. Schulz, Newport Beach; Paul, Hastings, Janofsky & Walker and Ronald M. Oster, Los Angeles; Howrey, Simon, Arnold & White and Kirk A. Pasich, Los Angeles; Munger, Tolles & Olson and Cary B. Lerman, Los Angeles; Law Offices of Glenn A. Brown, Jr. and Glenn A. Brown, Jr., Simi Valley; Prenovost, Normandin, Bergh & Dawe and Michael G. Dawe, Santa Ana; The Ford Law Firm and William H. Ford, III, Los Angeles, for Amici Curiae in support of Plaintiff and Appellant.

Black, Compean & Hall, Frederick G. Hall, Los Angeles, and Daniel Eli for Defendant and Respondent.

CHARLES S. VOGEL, P.J.

INTRODUCTION

This appeal raises a question of the first impression about the obligation of the California Insurance Guarantee Association (CIGA). The specific issue is whether CIGA is required to pay the claim of an insured of an insolvent insurer when the claim is based upon a judgment the insured obtained against the insurer prior to insolvency for breach of the contractual duty to defend. The judgment reflects the amount the insured paid for legal representation to defend himself after the insurer declined his tender.

CIGA contended, and the trial court agreed, that it had no obligation to pay based upon subdivision (h) of Insurance Code section 1063.2.¹ That provision provides: "`Covered claims' [for which CIGA is liable] shall not include any loss adjustment expenses, including adjustment fees and expenses, attorney fees and expenses, court costs, interest, and bond premiums, incurred prior to the appointment of a liquidator [for the insolvent insurer]." In a nutshell, CIGA's position and that of our dissenting colleague is that because the insured's judgment is to compensate him for attorney fees he incurred before the insurer became insolvent, the judgment and therefore the claim presented to CIGA is the functional equivalent of a claim for loss adjustment expenses for which CIGA is not liable.

We reject CIGA's analysis. The insured's judgment against the insurer is not a loss adjustment expense. In the insurance industry, the phrase "loss adjustment expenses" generally means the expense incurred by the insurer to investigate and settle a claim. Simply stated, an insured does not incur loss adjustment expenses because the insured does not initiate or control the loss adjustment process. The insured's reasonable expectation is that the insurer will engage in that process. That, in fact, is one of the reasons insurance is obtained. Consequently, when, as here, an insured is faced with a refusal to defend by its insurer and thereafter first retains counsel to defend and later obtains a judgment against the insurer to compensate for damages caused by breach of the contractual duty to defend— damages that can include compensation for monies spent on attorney fees—the insured's judgment against the insurer cannot reasonably be categorized as one for "loss adjustment expenses." Instead, it reflects compensation awarded to the insured by a court based upon the insurer's failure to provide a key benefit owed to him under the insurance policy: legal representation. Because we conclude the exclusion in section 1063.2, subdivision (h) does not apply, CIGA is obligated to pay the insured's claim since, as conceded by CIGA, the insured's judgment otherwise falls within the statutory definition of a "covered claim." We therefore reverse the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Arch Woodliff owned an apartment building. In 1994, he purchased a commercial property liability insurance policy from LMI Insurance Company (LMI).²

The policy was in effect in 1995 when two actions were brought against Woodliff for violation of the federal Fair Housing Act. The actions alleged discrimination "on the basis of familial status." The actions sought a declaration that Woodliff's actions were in violation of law, an award of compensatory and punitive damages to the discriminated families, and injunctive relief against further discrimination.

Woodliff tendered defense of the action to LMI. He relied upon the provision that LMI would insure him against all claims made based upon his operation and management of the apartment building. LMI declined to defend. Although the reasons for LMFs decision are not found in this record, CIGA conceded at oral argument on this appeal that LMI improperly denied a defense to Woodliff.

Woodliff retained counsel to defend against the federal actions. The actions were settled when Woodliff agreed to build a children's playground in the apartment complex. The settlement did not require Woodliff to pay any money to the plaintiffs. Woodliff incurred attorney fees in defending against these actions.

In 1997, Woodliff sued LMI, alleging three causes of action. The first was for breach of contract. Woodliff alleged the two federal actions raised claims within the policy's coverage so that LMI's refusal to defend was a breach of contract. The second was for breach of the covenant of good faith and fair dealing. He alleged LMI "refused without good cause to provide coverage and a defense to [him] despite the existence of facts indicating potential coverage." The third, for negligent infliction of emotional distress, alleged Woodliff suffered foreseeable emotional distress because of LMI's failure to defend. For the cause of action for breach of contract, Woodliff sought reimbursement for the attorney fees and costs he had expended to defend against the federal lawsuits. For the causes of action for breach of the covenant of good faith and fair dealing and negligent infliction of emotional distress, Woodliff sought damages "according to proof."

In 1999, a court trial was conducted on Woodliffs action against LMI. Woodliff prevailed in part. The court's judgment provides: "No breach of covenant of good faith and fair dealing. Hence, no `Brandt fees' and no damages. No proof of emotional distress damages. Inadequate proof and no evidence of any such damages over and above what would have been incurred had defendant [LMI] provided a defense under a reservation of rights. Plaintiff Archie Woodliff is entitled to judgment against [LMI] for breach of contract." (Italics added.) The court awarded Woodliff $47,386 plus interest, representing the attorney fees and costs Woodliff had incurred as a result of LMI's failure to defend him in the federal actions.³

In 2000, LMI declared insolvency prior to paying Woodliff's judgment.⁴ Woodliff tendered payment of his judgment against LMI to CIGA. CIGA denied any obligation to pay the judgment.

Woodliff sued CIGA for declaratory relief. The parties filed cross-motions for summary judgment based upon stipulated facts. Both motions raised the same legal issue: Did Woodliff's claim fall within the statutory exclusion found in section 1063.2, subdivision (h)?

Insofar as is relevant to this appeal, the trial court ruled in favor of CIGA as follows:

"The sole issue in dispute is the interpretation of Ins.Code 1063.2(h). As a statutory entity, CIGA's duties are expressly defined by the Insurance Code. The Insurance Code defines `covered claims' and specifically excludes certain obligations for which the insolvent insurer would otherwise be liable. Ins.Code 1063.2(h) excludes loss adjustment expenses, including attorneys' fees. In 1981, the statutory language was amended, deleting the words `adjustment expense arid attorneys' fees incurred by the insolvent insurer' and inserting the language `any loss adjustment expense, court costs, interest and bond premiums incurred.'

"Covered claims are not co-extensive with an insolvent insurer's obligations under its policies. [Citation.] For example, CIGA's duty to defend is more limited than an insurer's duty. [Citation.]

"[¶] ... [¶]

"[T]he fees are expressly excluded by the statutory exception set forth in Ins Code 1063.2(h). Plaintiff argues that because he and not LMI incurred the attorneys' fees, the claim does not fall within the exception set forth in the Ins.Code 1063.2(h). However, the above statutory amendment makes it clear that attorneys' fees are excluded regardless of who incurs them.

"[¶] . . . [¶]

"As Defendant has established that attorneys' fees are excluded from coverage pursuant to Ins.Code 1063.2(h), Defendant's Motion for Summary Judgment is granted."

This appeal by Woodliff follows.

DISCUSSION

A. Woodliff's Claim Is a "Covered Claim" Within the Meaning of Statutory Law

The Courts of Appeal have summarized the history of CIGA and its general principles as follows:

"CIGA was created in 1969 as a compulsory association of state-regulated insurance companies. ([Citation]; §§ 1063.14; 1063, subd. (a).) Its purpose is `to provide insurance against loss arising from the failure of an insolvent insurer to discharge its obligations under its insurance policies.' [Citation.] CIGA assesses its members when another member becomes insolvent, thereby establishing a fund from which insureds whose insurers become insolvent can obtain financial and legal assistance. [Citation.] Member insurers then recoup assessments paid to CIGA by means of a surcharge on premiums to their policy holders. (§ 1063.14, subd. (a).) In this way the insolvency of one insurer does not impact a small segment of insurance consumers, but is spread throughout the insurance consuming public, which in effect subsidizes CIGA's continued operation.

"While CIGA's general purpose is to pay the obligations of an insolvent insurer, it is...