California Court of Appeal Rules Parent Company Lacks Standing to Bring Declaratory Relief Action Against Subsidiary’s Insurer

By and on May 11, 2016
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In an opinion filed March 30, 2016, the California Court of Appeal for the First Appellate District held that the trial court properly sustained a demurrer, without leave to amend, as to a parent corporation’s declaratory relief complaint against its subsidiary’s insurer. D. Cummins Corporation v. United States Fidelity and Guaranty Company (2016) 2016 Cal.App.LEXIS 342. The court found that the parent company failed to show that an actual controversy between it and its subsidiary’s insurer existed.

The insured was D. Cummins Corporation (“Subsidiary”), a corporation engaged in the business of installing asbestos containing products. The Subsidiary and its parent, Cummins Holding LLC (“Parent”), brought a state court declaratory relief action against the Subsidiary’s insurer, United States Fidelity and Guaranty Company (“Insurer”). The Subsidiary and Parent sought a declaration relating to insurance coverage for underlying asbestos bodily injury claims.

The Insurer removed the action to federal court on the ground that the Parent, whose inclusion in the lawsuit defeated diversity jurisdiction, was fraudulently joined. The federal court remanded the case and the Insurer demurred to the Parent’s declaratory relief claim on the ground it lacked standing. The trial court sustained the demurrer and the Parent appealed.

The court of appeal cited to California’s declaratory relief statute, Code of Civil Procedure (“CCP”) section 1060, which provides that “[a]ny person interested under a written instrument … may, in cases of actual controversy … bring an original action … for a declaration … including a determination of any question of construction or validity arising under the instrument or contract.” Further, CCP section 1061 provides that the court may refuse to issue a declaratory judgment where the court’s “declaration or determination is not necessary and proper.”

The Parent argued that it had standing because it had a “practical interest in the proper interpretation of [its Subsidiary’s] insurance policies given its relationship to, and its central role in the pursuit of those insurance assets.” The appellate court rejected this argument because the Parent had not shown how this alleged indirect interest translated into “a legally cognizable theory of declaratory relief.”

The Parent next argued that its participation in the litigation was necessary since Subsidiary had no assets of its own. The appellate court rejected this argument because the Subsidiary’s lawsuit was continuing in the trial court notwithstanding the fact Parent’s claims were dismissed. Finally, the Parent cited to a number of decisions for the proposition that in some cases, parties have been permitted to bring declaratory relief actions even though they were not directly affected by the challenged contract, regulation or statute. The appellate court rejected this argument as well, finding that Parent had not alleged any theory showing it had more than an indirect interest in the policies at issue.

The appellate court held that because Parent had no contractual privity with the Insurer and was not otherwise interested in the policy, the trial court acted within its discretion in holding a declaration of Parent’s rights was “not necessary or proper at the time under all the circumstances.”

The practical significance of this case is twofold. First, it highlights that, while California’s declaratory relief statutes are broad, they are not limitless. Second, the constraints on California’s declaratory relief statutes articulated in the decision will make it more difficult for plaintiffs to include parties with no practical interest in declaratory relief actions for the purpose of defeating diversity jurisdiction.

Filed under Declaratory Judgment Actions

General Liability Insurer Entitled to Subrogate Against its Insured’s Indemnitor

By and on July 20, 2015
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In Valley Crest Landscape Development, Inc. v. Mission Pools of Escondido, Inc., the California Court of Appeal for the Fourth Appellate District held that an insurer was entitled to equitably subrogate a breach of express indemnity claim against its insured’s indemnitor.

Valley Crest was a general contractor for exterior improvements at the St. Regis resort and subcontracted with Mission Pools to install a swimming pool. The subcontract provided that Mission Pools would defend and indemnify Valley Crest. Jeffrey Epp suffered a severe spinal cord injury diving into the pool and he subsequently sued Valley Crest and Mission Pools. The Epps alleged that Mission Pools was liable because the vertical tile depth markers were illegible and the use of “French gray” plaster in the pool made it difficult to determine depth.

Valley Crest’s general liability insurer, National Union, defended and indemnified Valley Crest, but Mission Pools did not. Valley Crest cross complained against Mission Pools for breach of the subcontract’s indemnity provision. National Union subsequently intervened as a cross-complainant asserting an equitable subrogation claim against Mission Pools.

The trial court found that Missions Pools was liable to National Union for all amounts it incurred on Valley Crest’s behalf. The court of appeal affirmed, rejecting Mission Pools’ argument that National Union was not entitled to be equitably subrogated to Valley Crest’s claims because National Union’s equitable position was, on balance, inferior to that of Mission Pools. In considering this argument, the court recognized that in order to succeed on an equitable subrogation claim, the plaintiff must establish that justice requires the loss be borne by the party with the inferior equitable position.

The court considered a number of equitable factors. It ultimately found that the factor which tipped the scale in favor of National Union was compliance with contractual obligations. It determined that because National Union had honored its contractual obligations to Valley Crest by agreeing to provide a defense, while Mission Pools had not, National Union was entitled to equitably subrogate.

Filed under Appellate, General Liability

Contamination Products Insurance Does Not Cover Recall of Ingredients Supplied to Insured Manufacturer

By and on March 25, 2015
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In Windsor Food Quality Company, Ltd v. The Underwriters of Lloyds of London, et al. (2015) 2015 Cal.App. LEXIS 195, the California Court of Appeal for the Fourth Appellate District held that a contamination products policy does not cover contaminated ingredients obtained from a supplier and incorporated into the insured manufacturer’s product.

The insured, Windsor Food Quality Company, Ltd. (“Windsor”) manufactured Jose Ole frozen food products using ground beef supplied by Westland/Hallmark Meat Company (“Westland”).  The United States Department of Agriculture announced a voluntary recall of all products containing Westland’s ground beef because Westland had used “downer cattle” (non-ambulatory disabled cattle, the use of which is prohibited in human food) that may have been contaminated.  Windsor recalled its products which had incorporated Westland ground beef and incurred an approximate $3 million loss.

Windsor tendered the loss to its contamination products insurer, The Underwriters of Lloyds of London (“Lloyds”).  Lloyds denied the tender on the grounds that its policy did not cover recalled products.  Windsor then sued Lloyds for breach of contract and breach of the implied covenant of good faith and fair dealing.  The trial court granted Lloyd’s motion for summary judgment and Windsor appealed.

The policy’s insuring agreement covered “Malicious Product Tampering” to an “Insured Product.”  “Insured Products” was defined as “all products including their ingredients and components once incorporated therein of the Insured that are in production or have been manufactured, packaged or distributed by or to the order of the Insured… .”  Windsor argued that the frozen food products containing the contaminated beef qualified as an “Insured Product” because the beef was incorporated into Windsor’s final product.  The court disagreed, finding no ambiguity and that the plain meaning of the policy required Windsor to prove “there was contamination or tampering with its product during or after manufacture, not before Windsor began the process.”

The decision highlights the distinction between contamination products insurance and recall insurance.  The former provides coverage for loss arising out of products contaminated during the insured’s manufacturing process and the latter provides coverage for loss resulting from recalled products regardless of when the alleged contamination to the products occurred.

Filed under Contaminated Products Insurance, Product Recall Insurance, Property Damage

Conduct That Violates Unfair Insurance Practices Act May Be Actionable Under Unfair Competition Law Despite Moradi-Shalal Restriction

By and on September 13, 2013

On Aug. 1, the California Supreme Court held that an insured may state a cause of action against an insurer under the Unfair Competition Law (UCL) for conduct that violates the Unfair Insurance Practices Act (UIPA) despite the bar against private actions under the UIPA itself.  The Supreme Court’s holding in Zhang v. Superior Court, Opinion No. S178542, resolved a split on the issue among the state’s intermediate appellate courts.

Yanting Zhang sued her insurer, California Capital Insurance Co., over coverage for and the handling of a fire loss claim.  Zhang alleged causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and violation of the UCL.  In the UCL claim, Zhang alleged California Capital had “engaged in unfair, deceptive, untrue, and/or misleading advertising” by promising to pay claims with no intention of paying the true value of the covered claims.  Zhang also alleged several bad-faith practices by California Capital including unreasonable delays causing deterioration of the insured property; withholding of policy benefits; refusal to consider cost estimates; misinforming her as to the right to an appraisal; and falsely telling Zhang’s mortgage holder that Zhang did not intend to repair the property, resulting in foreclosure proceedings.

The trial court sustained California Capital’s demurrer on the UCL cause of action finding it was an impermissible attempt to plead around the bar against private actions under the UIPA pursuant to Moradi-Shalal v. Fireman’s Fund Ins. Cos. (1988) 46 Cal. 3d 287.  The court of appeal had reversed finding the complaint sufficiently pled facts to support a UCL cause of action.  California Capital sought review from the Supreme Court, which affirmed.

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Filed under California Insurance Regulations