Sensation Leather, Inc. v. CA Ins. Guarantee Assn.

Filed 11/14/08 Sensation Leather, Inc. v. CA Ins. Guarantee Assn. CA2/4

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION FOUR

APPEAL from a judgment of the Superior Court of Los Angeles County, Michael L. Stern, Judge. Affirmed.

The Dodell Law Corporation, Herbert Dodell and Gerald L. Miller, for Plaintiff and Appellant.

Black, Compean, Hall & Eli, Daniel Eli, Frederick G. Hall and Jacqueline L. Shulman, for Defendant and Respondent.

Appellant Sensation Leather, Inc. (Sensation) suffered damage to its inventory at the hands of entities insured by an insolvent Arizona insurance company. After obtaining a judgment in California against the tortfeasors in 1999, Sensation successfully obtained recovery of the judgment from the insurance companys receiver in an Arizona proceeding. Sensation also sought to recover postjudgment interest for the period between 1999 and the date of the Arizona judgment. The Arizona Court of Appeals held, however, that Sensation could not recover postjudgment interest. The issue presented is whether Sensation can recover from respondent, California Insurance Guarantee Association (CIGA), postjudgment interest denied by the Arizona court. Resolution of this issue turns on whether the postjudgment interest sought by Sensation constitutes a covered claim under Insurance Code section 1063.1, subdivision (c)(1)(A) (section 1063.1(c)(1)(A)).^[1] We conclude it does not and affirm the trial courts order sustaining CIGAs demurrer to Sensations complaint.

FACTUAL AND PROCEDURAL BACKGROUND

A. Underlying Litigation

In June 2007, Sensation filed a complaint against CIGA. As this is an appeal from a judgment on an order sustaining CIGAs demurrer, the following facts, alleged in the complaint or derived from exhibits to the complaint, are deemed true.

In February 1993, Concrete Phases, Inc. purchased a commercial general liability insurance policy from American Bonding Company (ABC), an Arizona insurance company admitted to do business in California. Hoffman Management and Construction (Hoffman), a general contractor, was an additional insured under an endorsement to the policy.

During the policy period, Hoffman undertook some remodeling work for Concrete Phases. The work generated considerable concrete dust, which infiltrated Sensations store and damaged its inventory of silk and leather apparel. In December 1993, Sensation brought suit against Hoffman to recover its losses; in 1995, it amended its complaint to include Concrete Phases. The defending parties tendered their defense to ABC, but ABC declined to defend.^[2]

In January 1995, a California Superior Court appointed a conservator for ABC, which had become insolvent. Subsequently, at the request of the Director of Insurance, the Superior Court of Maricopa County, Arizona placed ABC into receivership and appointed a receiver. In February 1997, the receiver approved a rehabilitation plan that stayed all claims against ABC except those adjudicated by the receiver.

In September 1999, while ABC was still in receivership, Sensation obtained a judgment against Hoffman and Concrete Phases in the amount of $429,906.53. The judgment included general damages of $125,000, special damage of $250,000, prejudgment interest of $50,000 and $4,906.53 in costs.^[3]

In July 2000, Sensation submitted a claim to the receivership in Arizona. The claim was not formally denied by the receiver until 2003, after Sensations counsel sent a letter inquiring about the status.^[4] In April 2004, the special master reversed the receivers decision and approved the claim, which had grown to over $600,000 when postjudgment interest was included. The receiver appealed to the superior court. In October 2004, while that appeal was pending, ABCs receivership was converted to a liquidation. In February 2005, Sensation submitted a claim to the liquidator, based on the $429,906.53 judgment plus postjudgment interest of $216,248.61. In July 2005, the Arizona Superior Court entered judgment in favor of Sensation in the amount of $646,155.14. The receiver again appealed.

In August 2006, the Arizona Court of Appeals affirmed in part, but vacated that portion of the judgment awarding postjudgment interest. In its opinion, the court explained: (1) at the time the special master approved the claim, ABC was in receivership, and the rehabilitation plan then in effect allowed no payment of interest on claims; and (2) the original claim submitted by Sensation recognized that no interest would be paid. Sensation pointed out that ABCs status had changed from receivership to liquidation after the claim was submitted and before the superior court entered judgment, and contended that Arizona law allowed for payment of interest during the liquidation phase. The appellate court concluded, however, that the amount of Sensations claim was fixed prior to the date of the order converting the receivership to a liquidation and that it specifically excluded interest. Accordingly, [t]he interest was not allowable in the receivership proceeding, and the right to receive that interest was not revived by the liquidation order.

Sensations complaint against CIGA was filed after the Arizona Appellate Courts determination became final. The complaint asserted a right to recover from CIGA the $216,248.61 representing the postjudgment interest denied in the Arizona proceeding. The complaint alleged: CIGA is obligated to pay and discharge covered claims of its insolvent insurer members imposed by law and within the coverage of an insurance policy of the insolvent insurer that are timely presented to the liquidator. Sensations original third party claims upon ABC . . . constituted obligations imposed by law and within the coverage of the subject policy issued by ABC to Concrete Phases and Hoffman, and are thus covered claims under the mandate of . . . the California Insurance Code^[5]

B. The Demurrer

CIGA demurred to Sensations complaint, relying on section 1063.1(c)(1)(A), which generally limits CIGAs liability to the obligations of the insolvent insurer, . . . imposed by law and within the coverage of an insurance policy of the insolvent insurer. CIGA contended the postjudgment interest on the 1999 California judgment sought by Sensation in its complaint did not fit within the statutory definition because the Arizona Appellate Court specifically held that the subject post-judgment interest was not an obligation of ABC, and specifically refused to impose that obligation on ABC by law.

In the opposition to the demurrer, Sensation mentioned that Hoffman assigned or transferred its rights under the CGL policy against ABC to Sensation and that [w]hile ABC was in Receivership, [Sensation] pursued recovery of the Judgment . . . pursuant to the aforementioned assignment. In its reply, CIGA seized on this fatal admission, and added a new argument in support of the demurrer: That section 1063.1, subdivision (c)(9)(B), which generally bars recovery for any claim by any person other than the original claimant under the insurance policy in his or her own name, also barred the claim.

The trial court sustained the demurrer without leave to amend. The minute order does not specify the basis for the courts ruling. At the hearing, the court stated that under its interpretation of the Arizona Appellate Courts decision, post-judgment interest is not an obligation of [ABC] and the claim set forth in Sensations complaint was not a covered claim.

DISCUSSION

A. Standard of Review

In reviewing the sufficiency of a complaint against a general demurrer, we are guided by long-settled rules. We treat the demurrer as admitting all material facts properly pleaded . . . . (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, quoting Serrano v. Priest (1971) 5 Cal.3d 584, 591.) We also consider matters which may be judicially noticed (ibid.) and accept as true facts that may be implied or inferred from those expressly alleged (Marshall v. Gibson, Dunn & Crutcher (1995) 37 Cal.App.4th 1397, 1403).

In resolving the appeal, we are neither limited by plaintiffs theory of recovery nor bound by the trial courts reasoning. If the complaint states a cause of action under any theory, regardless of the title under which the factual basis for relief is stated, that aspect of the complaint is good against a demurrer. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 38.) If the trial court relied on an improper ground in sustaining the demurrer, the reviewing court will still affirm if a proper ground for sustaining the demurrer exists, whether or not the defendants asserted the proper ground in the trial court. (Cantu v. Resolution Trust Corp. (1992) 4 Cal.App.4th 857, 880, fn. 10.)

B. CIGA Statutory Obligations

CIGA was established by the Legislature to provide insurance against loss arising from the failure of an insolvent insurer to discharge its obligations under its policies. (2 Witkin, Summary of Cal. Law (10th ed. 2005) Insurance, 12, p. 35.) CIGAs role is somewhat akin to that of the Federal Deposit Insurance Corporation in banking, and serves to enhance public confidence in the insurance industry. (Collins-Pine Co. v. Tubbs Cordage Co. (1990) 221 Cal.App.3d 882, 885.) CIGA assesses its members when one of them becomes insolvent, thereby establishing a fund from which insureds with the insolvent insurer can obtain financial and legal assistance. [Citation.] Member insurers then recoup assessments paid to CIGA by means of a surcharge on premiums to their policy holders. [Citation.] In this way the risk of an insurers insolvency is spread throughout the insurance consuming public, which in effect subsidizes CIGAs continued operation. [Citation.] (2 Witkin, supra, Insurance, 12, p. 35.)

While CIGAs general purpose is to pay the obligations of an insolvent insurer, it is not itself an insurer and does not stand in the shoes of the insolvent insurer for all purposes. (Stonelight Tile, Inc. v. California Ins. Guarantee Assn. (2007) 150 Cal.App.4th 19, 32, quoting R.J. Reynolds Co. v. California Ins. Guarantee Assn. (1991) 235 Cal.App.3d 595, 600.) Its duties are not co-extensive with the duties owed by the insolvent insurer under its policy. [Citation.] (Stonelight Tile, Inc., supra, at p. 32, quoting Industrial Indemnity Co. v. Workers Comp. Appeals Bd. (1997) 60 Cal.App.4th 548, 556-557.) CIGA is authorized by statute to pay only covered claims of an insolvent insurer, those determined by the Legislature to be in keeping with the goal of providing protection for the insured public. [Citation.] [Citation.] (Stonelight Tile, Inc.,supra, at p. 32, quoting Industrial Indemnity, supra, 60 Cal.App.4th at p. 557.)

Covered claims are defined generally in section 1063.1(c)(1)(A) as the obligations of an insolvent insurer, including the obligation for unearned premiums, (A) imposed by law and within the coverage of an insurance policy of the insolvent insurer. The issue presented is whether Sensations claim for postjudgment interest on the 1999 California judgment is a covered claim under section 1063.1(c)(1)(A).

C. Postjudgment Interest

Under section 11580, injured parties such as Sensation (referred to as third party claimants) may recover a judgment obtained against a tortfeasor in a direct action against the tortfeasors insurer.^[6] The issue here is whether postjudgment interest assessed on a judgment against an insured comes within the definition of covered claim.^[7] This was answered in San Diego Housing Com. v. Industrial Indemnity Co. (2002) 95 Cal.App.4th 669 (San Diego Housing), where the injured parties, a local housing commission and housing authority, had sued the insured, a general contractor hired to build a low-income housing project, and obtained a judgment. The plaintiffs then proceeded against the general contractors insurer, IIC, in a separate action brought under section 11580. The trial court found in favor of the plaintiffs, awarding not just the amount of the judgment obtained in the action against the contractor, but postjudgment interest for the years that the litigation between the plaintiffs and IIC was pending.

The Court of Appeal reversed the award of interest, concluding that a third party claimant could not recover postjudgment interest in a direct action against an insurance company under section 11580. The court based its decision on the general rule that a third party claimant may not bring a direct action against an insurance company on the contract because the insurers duties flow to the insured. (San Diego Housing, supra, 95 Cal.App.4th at p. 685.) Acknowledging that a party who obtains a final judgment against the insured becomes a third party beneficiary of the insurance policy and may enforce the terms which flow to its benefit pursuant to Insurance Code section 11580, the court agreed with IIC that costs and interest are not the types of policy proceeds recoverable by a person or entity who is not itself the insured. (San Diego Housing, supra, 95 Cal.App.4th at p. 685.) Costs and interest were instead, clearly linked to the insurers obligation to defend. (Id. at p. 691.) The obligation to defend is a covenant in the policy that runs only to the insured. (Ibid.) Although the policy permitted recovery of all interest on the entire amount of any judgment (id. at pp. 690-691, italics deleted) defended by the insurer, there was no such suit defended by IIC, and the plaintiffs could not create one through operation of law under section 11580, subdivision (b)(2). (Id. at p. 693.)

The conclusion that follows from the courts holding in San Diego Housing, is that a third party claimant such as Sensation cannot directly recover interest flowing from a judgment against the insured because the interest was generated as a result of the insurers breach of its duty to defend, and the right to recover for such breach belongs to the insured alone. When pursuing recovery from the insurance company itself, the third party could take an assignment of rights from the insured and pursue the insurance company for breach of its duty to defend the insured based on that assignment.^[8] (Smith v. State Farm Mut. Auto. Ins. Co. (1992) 5 Cal.App.4th 1104, 1110-1111.) However, the statutes governing CIGA exclude from the definition of covered claims claims asserted by an assignee.^[9] Thus, when pursuing recovery from CIGA, the option of obtaining assignment from the insured is not available. ( 1063.1, subd, (c)(9)(B); see, e.g., Baxter Healthcare Corp. v. California Ins. Guarantee Assn. (2000) 85 Cal.App.4th 306, 314-315 (Baxter) [successor corporation could not assert against CIGA insurance claim owned by dissolved corporation].) Because Sensation can assert a claim for postjudgment interest only as an assignee, its claim against CIGA cannot be a covered claim.

Sensation contends that San Diego Housing is inapposite because it involved the interpretation of a particular insurance policy, and the issue of which party or parties (i.e., the insured or the judgment creditor) was able to enforce the policy language requiring payment of interest. We disagree. The courts analysis in San Diego Housing is directly on point. Like the plaintiffs in San Diego Housing, Sensation is a third party claimant whose right to recover its 1999 California judgment from ABC -- and from CIGA, after ABCs insolvency -- derives from section 11580. The court in San Diego Housing held that neither policy language nor section 11580 provided support for the third party claimants entitlement to costs and interest, as these expenses derive from the insurers duty to defend and are therefore recoverable only by the insured. (See Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2004) 15:1042, pp. 15-180 -

15-181 [citing San Diego Housing for the proposition that costs of suit taxed against the insured and prejudgment interest are not recoverable under 11580(b)(2)].) Thus, Sensations only route to recovery of postjudgment interest was through assignment. (See Smith v. State Farm Mut. Auto. Ins. Co., supra, 5 Cal.App.4th at pp. 1110-1111.) Had ABC remained solvent, Sensation could have pursued recovery of postjudgment interest from ABC based on the assignment it apparently obtained from Hoffman. However, under section 1063.1, subdivision (c)(9)(B), it cannot assert an assigned claim against CIGA.^[10] (See Industrial Indemnity Co. v. Workers Comp. Appeals Bd., supra, 60 Cal.App.4th at p. 557, quoting Saylin v. California Ins. Guarantee Assn. (1986) 179 Cal.App.3d 256, 263 [covered claims are not coextensive with an insolvent insurers obligations and CIGA cannot and does not stand in the shoes of the insolvent insurer for all purposes].)

Sensation further contends that the San Diego Housing rule will lead to an absurd result and leave unprotected every insured or third party claimant whose claim was reduced to judgment by denying them an essential element of that judgment. Its concern is misplaced. Sensation does not represent a typical claimant. As the Arizona Court of Appeals recognized, Sensation elected to proceed in Arizona with the understanding interest would not be recovered. Moreover, Sensation itself is partly responsible for the delay. Damages were incurred in 1993, 15 years ago, but Sensation failed to obtain a judgment until 1999. It then waited nearly a year to submit a claim to the receiver in Arizona. The claim sat until 2003, when Sensations counsel finally inquired about its status. As CIGA was not responsible for the delay in payment for Sensations losses -- indeed, was unaware of the claim until Sensation concluded years of litigating against other parties -- we perceive no reason CIGA should be held liable for payment of postjudgment interest on the 1999 California judgment.

DISPOSITION

The judgment is affirmed. Respondent is awarded its costs on appeal.

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

MANELLA, J.

We concur:

WILLHITE, Acting P. J.

SUZUKAWA, J.

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^[1] Statutory references herein are to the Insurance Code.

^[2] ABC apparently took the position that the claim fell under a pollution exclusion.

^[3] The Arizona Court of Appeals discussed a fact not set forth in the complaint: That before trial started, Hoffman transferred to Sensation all claims and causes of action it had against ABC; in return, Sensation agreed to restrict its collection efforts to insurance proceeds.

^[4] The receivers denial of Sensations claim was apparently based on untimeliness, collusion, failure to cooperate, and lack of causation.

^[5] The complaint did not allege that any type of claim had been submitted to CIGA prior to initiating the action, but alleged: Sensation has performed each and every possible act, and has complied with all possible conditions required on said claimants part to be entitled to payment of the unpaid portions of the Judgment entered in its favor in the underlying action, except as to those conditions, if any, which . . . were excused or waived . . . or those conditions for which performance is or was impossible.

^[6] Section 11580, subdivision (b)(2) provides that liability insurance policies issued or delivered in California must contain a provision stating that whenever judgment is secured against the insured . . . in an action based upon bodily injury, death, or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.

^[7] To support that it does, Sensation relies primarily on this courts decisions in Aloha Pacific, Inc. v. California Ins. Guarantee Assn. (2000) 79 Cal.App.4th 297 and Woodliff v. California Ins. Guarantee Assn. (2003) 110 Cal.App.4th 1690, asserting that a court judgment constitutes a quintessential obligation imposed by law. The decision in Aloha Pacific supports that the 1999 California judgment itself constituted a covered claim. It does not assist in resolving the issue present here, viz., whether a covered claim includes postjudgment interest on a judgment. Similarly, in Woodliff, we reiterated that a judgment against an insolvent insurer qualifies as a covered claim under section 1063.1(c)(1)(A) (Woodliff v. California Ins. Guarantee Assn. supra, 110 Cal.App.4th at p. 1698), but did not address postjudgment interest.

^[8] As previously noted, Sensation apparently obtained an assignment of rights from Hoffman.

^[9] Section 1063.1, subdivision (c)(9)(B) provides: Covered claims does not include . . . any claim by any person other than the original claimant under the insurance policy in his or her own name, his or her assignee as the person entitled thereto under a premium finance agreement as defined in Section 673 and entered into prior to insolvency, his or her executor, administrator, guardian or other personal representative or trustee in bankruptcy and does not include any claim asserted by an assignee or one claiming by right of subrogation, except as otherwise provided in this chapter.

^[10] In its reply brief, Sensation relies on Nowlon v. Koram Ins. Center, Inc. (1991) 1 Cal.App.4th 1437, 1443-1444, for the proposition that the Legislature intended to include third party claimants in the statutory definition of a claimant. As the court made clear in Baxter a party may come within the definition of claimant pursuant to section 1063.1, subdivision (g), [but not] survive the legislative choice that [it is] not [an] original claimant[] pursuant to section 1063.1, subdivision (c)(9). (Baxter, supra, 85 Cal.App.4th at p. 312.) The issue before us is not whether a third party claimant may ever be a claimant, but whether a third party claimant such as Sensation can be an original claimant for purposes of recovery of postjudgment interest. As the duty to pay such interest is owed only to the insured for the reasons discussed in San Diego Housing, Sensation can obtain the right to recover such interest only through assignment and cannot, therefore, be an original claimant with respect to such interest or assert a claim against CIGA to recover it.