Jim Dobbas to the Rescue

By: William J. Baron

The Ninth Circuit has held that the California rule permitting insurers to intervene to defend suspended corporate insureds also applies under federal procedural rules.  (See California Dept. of Toxic Substances Control v. Jim Dobbas, Inc. (9th Cir. 2022) 54 F.4th 1078, 1082.)

In Jim Dobbas, the Department of Toxic Substances Control (DTSC) sought a default judgment against a bankrupt limited liability company (Collins), which formerly owned contaminated land in Elmira, California.  The DTSC had obtained an order in Bankruptcy Court permitting it to sue Collins, but only to seek recovery from Collins’ insurers.

Upon receiving notice of the suit and the request for a default judgment, Collins’ insurers filed a motion to intervene as of right under Federal Rule of Civil Procedure 24(a)(2) to defend the claims against Collins, and also moved to set aside the default that had been entered.  (Id. at 1083-1084.)  The District Court denied the insurers’ motions to intervene and declined to set aside the default.  (Id. at 1084-1085.)

The Ninth Circuit reversed the first ruling, holding that the insurers were entitled to intervene as of right.  (Id. at 1082, 1090-1092.)  The Court found that California law applied and that the insurers had a legally protectable interest in intervening to defend the action, based on California’s direct action statute, Insurance Code section 11580.  (Id. at 1089-1093.)  The opinion noted that California courts have “repeatedly held that insurers have a protectable interest under § 11580 in preventing defaults by their insureds that are incapable of defending themselves or otherwise unwilling to do so,” because this statute permits plaintiffs to seek recovery on judgments from the defendants’ insurers.  (Id. at 1090 and 1090 fn. 14.)

The Ninth Circuit also rejected the DTSC’s argument that the insurers forfeited their interests under Section 11580 by declining to concede their policies covered the loss.  (Jim Dobbas, supra, 54 F.4th at 1091.)  The Court held that “what is dispositive here is that the insurers timely sought to intervene to defend their helpless insured and prevent a default judgment.”  (Id.)  The Court added that an “insurer’s coverage position is irrelevant under the direct action statute so long as the insurer timely acts to defend a helpless insured and prevent its  default.”  (Id.) Accordingly, the Court held that “under the California direct action statute, a primary or excess insurer that seeks to timely intervene in a tort action for the stated purpose of defending its insured that is either unwilling or incapable of defending itself has a protectable interest for purposes of Rule 24(a)(2), no matter what position, if any, the insurer has taken as to coverage.”  (Id. at 1091-1092.)  The Court noted that “we express no view on the coverage implications, if any,” of an intervening insurer’s decision to decline coverage or to refrain from reserving its rights.  (Id. at 1092 fn. 17; emphasis in original.)

Finally, the Court held that it did not have appellate jurisdiction concerning the District Court’s order declining to set aside the default, because that is not an appealable order and an appeal would be premature before a default judgment was entered.  (Id. at 1092.)  The Ninth Circuit suggested that the District Court might reconsider that ruling on remand.  (Id at 1092 fn. 18.)

In sum, Jim Dobbas makes clear that the California rule permitting insurers to intervene to defend claims against suspended or otherwise defunct insureds applies in federal court under Federal Rule of Civil Procedure 24(a).  Jim Dobbas also recognizes that an insurer that intervenes to defend claims against a defunct insured can do so while contesting coverage or reserving its rights.  The decision illustrates that, when an insurer intervenes in an action to defend claims against a suspended corporate insured, the insurer may wish to advise both the plaintiff and the insured that the insurer is reserving its rights, to avoid arguments by the plaintiff that the insurer waived coverage defenses when it intervened.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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