CIGA Responsible for Defense Costs Unpaid by Insolvent Insurer

In a decision today in Woodliff v. California Insurance Guarantee Association, the Second District Court of Appeal rules that CIGA is responsible to pay a judgment for breach of the contractual duty to defend that had been obtained by and insured against his insurer prior to the insurer's insolvency.

CIGA argued successfully in the trial court that because the judgment called for payment of defense costs, it was the functional equivalent to an award of "loss adjudstment expense," which CIGA is not required to pay under Insurance Code section 1063.2(h).

The Court of Appeal, in a 2-1 decision [Justice Hastings dissenting] reversed:

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 . . . the insured's judgment 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.

The opinion is available from the court in PDF or Microsoft Word format.

Comments

[Brenda Friday]

What will the CIGA surcharge be in 2004?