Appellate Law Update: June/July 2021

The following published decisions may be of interest to attorneys practicing insurance law:

California Court of Appeal

Uninsured motorist coverage claims are subject to arbitration even where bad faith claims are also alleged.  McIsaac v. Foremost Ins. Co. Grand Rapids, MI. (2021) 64 Cal.App.5th 418

Plaintiff obtained uninsured/underinsured motorist (UM) coverage from the defendant.  As required by Insurance Code section 11580.2, the policy provided for arbitration of UM claims concerning coverage or the amount of benefits due.  Plaintiff was injured in an accident with an underinsured driver but the parties were not able to resolve his claim.  Plaintiff then brought a lawsuit alleging breach of contract, bad faith, and other claims.  The defendant petitioned to stay the bad faith action and compel arbitration of the claims related to coverage.  The trial court denied the petition because the lawsuit did not involve only a dispute over coverage or the amount, but also bad faith claims, which are not subject to arbitration under section 11580.2.

The Court of Appeal (First Dist., Div. One) reversed.  While bad faith claims are not subject to arbitration under section 11580.2, the insurer here did not seek to arbitrate the bad faith claims.  Rather, it sought merely to stay them pending resolution of the arbitrable claims.  The allegations of bad faith were not a valid basis to deny arbitration of the coverage-related claims.  Thus, the appellate court reversed with directions to the trial court to grant the petition, and then consider whether to stay the bad faith claims pending the arbitration.

Construction bond surety was required to pay an attorney fee award against the principal even though the amount exceeded the bond amount.  Karton v. Ari Design & Construction (2021) 61 Cal.App.5th 734

The plaintiff hired the defendant contractor to do work on his home.  When the plaintiff became suspicious of the contractor’s licensing status, he demanded the contractor stop work and refund all amounts not yet spent on labor and materials.  The parties failed to agree on the amount of the refund, so the plaintiff sued the contractor as well as the contractor’s surety.  Because the contractor was indeed unlicensed, pursuant to Business and Professions Code section 7031, subdivision (b), the trial court ordered the contractor to disgorge the full amount the plaintiff had paid (about $92,000), even for work that had already been done.  The plaintiff–a lawyer who largely represented himself in the proceedings–then sought nearly $300,000 in attorney fees under Code of Civil Procedure 1029.8.  The trial court reduced the amount to $90,000.  The trial court reasoned that the plaintiff had over-litigated the case and acted in an uncivil manner in its filings, and that a $300,000 fee request on a $90,000 judgment was unreasonable.  The trial court declined to rule that contractor’s surety was liable to pay the fee award.

The Court of Appeal (Second Dist., Div. Eight) affirmed the reduced fee award, and further ordered that the surety was responsible for paying it because the fees were awarded as an item of costs.  Although the bond amount was only $12,500, the surety did not interplead the funds and instead litigated the case.  “Under Civil Code section 2808, a surety’s liability is commensurate with that of the principal within the express terms of the bond and of pertinent statutes. If the principal would have been liable for attorney fees based on conduct secured by the bond, the surety also is liable for the attorney fees as a cost item.”  Because here the principal (contractor) was liable for attorney fees as a cost item, the surety was responsible for those costs even though they exceeded the bond amount.  The surety’s argument that its liability was limited to the bond amount was particularly belied by the fact it had already agreed to pay some of the costs above the bond amount.

Third party creditors of prior owners of insolvent insurance company could not pursue fraudulent transfer claims against owners that the conservator had released.  In re CastlePoint National Insurance (2021) 65 Cal.App.5th 668

CastlePoint National Insurance was formed to merge a handful of distressed insurers from six different states and then facilitate their liquidation and the transfer of their liabilities to their respective state insurance guaranty associations.  The California Insurance Commissioner was appointed as CastlePoint’s conservator and then liquidator.  The liquidation plan enjoined creditors from pursuing claims against the distressed insurers as well as certain investment entities who had acquired the insurers just prior to the conservatorship proceedings.  The commissioner also executed a release agreement with the investment entities in exchange for a $200 million payment to be used to pay claims.  A group of plaintiffs with financial interests in the investment entities filed suit against the investment entities in New York, asserting various business torts related to the failed investment in the insolvent insurance companies.  A New York court stayed the action to permit the California court to determine which, if any, of the plaintiff’s claims could proceed.  The California court concluded that all but one of the New York plaintiffs’ claims were enjoined or released.

The Court of Appeal (First Dist., Div. Five) affirmed in part and reversed in part.  The New York plaintiffs’ claims could not proceed to the extent they would interfere with the Commissioner either by depleting Castlepoint’s assets or by disrupting the orderly distribution of those assets, but otherwise could proceed.  Given that the New York plaintiffs agreed not to pursue CastlePoint for any recovery, their claims against the investment entities for breach of contract, tortious interference with contract, and breach of fiduciary duty were not enjoined or released, since those claims sought recovery only from the investment entities themselves based on contracts between the plaintiffs and the entities–contracts to which the insurers and the Commissioner were not parties.  However, the New York plaintiffs’ fraudulent transfer claims alleging that the investment entities stripped the insurers of assets and engaged in unfair competition requiring disgorgement were barred, as the Commission has exclusive authority over fraudulent transfer claims and other claims seeking to recoup the insolvent insurers’ assets, and the Commissioner had released those claims in exchange for an infusion of cash.

This e-Bulletin was prepared by Emily V. Cuatto, Certified Appellate Specialist and Partner of Horvitz & Levy LLP. Ms. Cuatto is a member of the Insurance Law Standing Committee of the Business Law Section of the California Lawyers Association.