Metropolitan News-Enterprise


Friday, August 8, 2003


Page 3


C.A.: CIGA Must Cover Judgment for Breach of Duty to Defend


By DAVID WATSON, Staff Writer


A judgment against an insolvent insurer for breach of duty to defend is not a “loss adjustment expense” exempted from coverage by the California Insurance Guarantee Association under the Insurance Code, this district’s Court of Appeal ruled yesterday.

The ruling requires CIGA, which covers the obligations of defunct California insurers, to pay a $47,386 judgment obtained in 1999 by Arch Woodliff against LMI Insurance Company. Woodliff, who owned an apartment building, sued the company for failing to defend him under a commercial property liability insurance policy against housing discrimination claims.

When the insurer declared insolvency in 2000 without satisfying the judgment, Woodliff tendered it to CIGA, and when CIGA declined to pay it, sued.

Writing for Div. Four, Presiding Justice Charles Vogel rejected CIGA’s contention-accepted by Los Angeles Superior Court Judge Owen Lee Kwong-that the judgment was exempted from CIGA coverage by Insurance Code Sec. 1063.2(h). That section provides that CIGA coverage “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.”

Vogel declared:

“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....[W]hen, 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.”

Vogel said Woodliff’s judgment was not, as CIGA argued, the “functional equivalent” of attorney fees the insurer might have expended in defending him.

“Instead,” he wrote, “the claim was a judgment entered against LMI following trial in which the court had found LMI had breached its contract with Woodliff by failing to defend him. The mere fact the judgment amount is based upon the attorney fees Woodliff incurred in defending after LMI declined his tender and before LMI became insolvent and a liquidator was appointed does not transform Woodliff’s claim into a demand for payment of loss adjustment expenses.”

Justice Daniel A. Curry concurred, but Justice J. Gary Hastings dissented.

“[T]he majority concludes that the phrase ‘loss adjustment expense’ can only mean attorney fees and costs incurred by a carrier who accepts its duty to defend, not attorney fees and costs incurred by the insured when the carrier refuses to defend,” Hastings explained. “Based on this interpretation, the majority concludes that section 1063.2 does not apply to this claim. This is a much too narrow reading of section 1063.2.”

The dissenting justice added:

“I do not agree with the conclusion that the phrase can refer only to attorney fees and costs when they are incurred by the carrier. Here, the insured incurred the ‘loss adjustment expense’ LMI would have incurred had it not refused tender of the defense.”

The case is Woodliff v. California Insurance Guarantee Association, B160114.


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