A federal district court in California has ruled that an insurer for a corporation that had been suspended by California regulators and named a defendant in a lawsuit had to defend the corporation, in the absence of a policy provision stating otherwise.
The Case
On September 11, 2012, the Regents of the University of California sued Howard S. Wright Construction Company for alleged defects and damages to buildings on the University of California-Davis campus. On October 31, 2012, Wright Construction filed a cross-complaint against Dura Art Stone, Inc., and various other subcontractors alleging claims for breach of contract and declaratory relief.
After receiving notice of the Regents action, Travelers Property Casualty Company of America, which had issued a commercial general liability insurance ("CGL") policy to Dura, agreed to intervene on behalf of Dura. The Regents suit settled and was dismissed.
On November 21, 2016, Travelers filed a complaint against Liberty Surplus Insurance Company, which also had issued a CGL policy to Dura. Travelers contended that Liberty had a duty to defend and indemnify Dura and to pay the fees and costs Travelers had incurred on behalf of Dura.
Liberty moved for summary judgment.
The District Court's Decision
The district court denied Liberty's motion.
In its decision, the district court explained that throughout the Regents lawsuit, Dura had been suspended by the California Secretary of State for failing to comply with its obligations under the California Corporations Code and by the California Franchise Tax Board for failing to comply with its tax obligations. Under Section 23301 of the California Revenue and Taxation Code, the district court added, a suspended company was barred from exercising its corporate powers, rights, and privileges – including its right to engage in litigation activities and defend itself.
Indeed, the district court said, it was a crime under California Revenue and Taxation Code § 19719(a) for any person "to exercise the powers, rights, and privileges of a corporation that has been suspended."
However, the district court pointed out, Section 19719(b) specifically excluded "any insurer, or counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation" from coming within the scope of this statute.
Therefore, the district court ruled, although a suspended corporation was legally barred from defending itself, an insurance company "may provide a defense for said corporation," so long as the insurer did so "in its own name, [] not in the name of the suspended corporation." The purpose of this exemption was to "protect[] insurers" that were "obligated to defend suspended corporations."
The district court then ruled that although Dura was unable to defend itself, both Travelers and Liberty could have defended Dura, albeit not in Dura's name.
Next, the district court found no provision in the Liberty policy indicating that Liberty's duties were to be extinguished or modified in any way if Dura was suspended. Thus, the district court stated, it could not hold as a matter of law that Dura's suspension had relieved Liberty of its duty to defend, and it denied its summary judgment motion on that ground. The district court concluded that Liberty had a duty to contribute to Travelers for the money Travelers had incurred in defense of the Regents suit.
The case is Travelers Property Casualty Co. of America v. Liberty Surplus Ins. Co., No. 2:16-2752 WBS EFB (E.D. Cal. Feb. 22, 2018). Attorneys involved include: For Travelers Property Casualty Company of America, a Connecticut corporation, Plaintiff: Raymond E. Brown, LEAD ATTORNEY, Aguilera Law Group, APLC, Costa Mesa, CA; Kari Marie Myron, The Aguilera Law Group, Aplc, Costa Mesa, CA. For Liberty Surplus Insurance Co., a Massachusetts corporation, Defendant: Bao Natalie Vu, David Henry Waters, LEAD ATTORNEYS, Burnham Brown, Oakland, CA.