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February 21, 2012

The Problem Of Suspended Corporations In The Present Economic Downturn, Part 3Posted by on February 21, 2012 | Comments

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This is the third article in a three-part series on suspended corporations. Part One in the series can be found here and Part Two can be found here.

The Right Of The Insurer To Intervene And New Issues Created By The Presence Of The Insurer

As noted, the Kaufman & Broad Communities, Inc. decision indicates that an insurer may intervene in a lawsuit against its insured where its insured is a suspended corporation. The right to intervene arises from California Insurance Code Section 11580,29 which permits a party securing a judgment against a suspended corporation to proceed directly against the suspended corporation's insurance carrier to enforce the default judgment.30 In order to prevent an entry of default judgment, an insurer may intervene in a lawsuit to contest its insured's (the suspended corporation) liability and damages.31

The intervening insurer, however, may not expand the scope of issues in the lawsuit to include coverage issues,32 despite the fact that the insurer, as an intervenor, is a party to the lawsuit.33 Instead, the intervening insurer must wait until a subsequent action is filed to litigate insurance coverage issues, but even then can only litigate coverage "to the extent that the issues relevant to coverage were not actually litigated in the first lawsuit."34

The law is still developing with respect to which coverage issues are properly reserved for a subsequent direct action. For instance, is the subsequent suit limited to the ultimate issues of coverage, such as whether an exclusion applies, or can facts that support liability and may impact coverage also be litigated? Without a clear answer to these questions, a practitioner representing an intervening insurer must develop a strategy with respect to the adjudication of issues in the initial lawsuit.

How Is An Intervening Insurer To Be Referred To During The Course Of The Litigation?
When an insurance company intervenes in a lawsuit to which its insured, a suspended corporation, is a party, the insurer becomes an actual party to the suit,35 as opposed to the suspended corporation in a representative capacity.36 This makes sense, as the purpose of intervention is to afford the insurer an opportunity to protect its interests by contesting the liability and damages claims against its named insured, the suspended corporation.37 This, however, also creates some uncertainty with respect to how the insurance carrier is to be referred to during the litigation.

Evidence of liability insurance is inadmissible to prove negligence or other wrongdoing.38 Further, evidence of liability insurance is generally "regarded as both irrelevant and prejudicial to the defendant."39 With respect to an intervening insurer, then, any reference to the insurer in front of a jury would likely prejudice its insured, the suspended corporation. So how should the intervening insurer be referred to during the course of the litigation?

During the pretrial process, referring to the intervening insurer as a party would likely pose little threat of prejudice to the suspended corporation. The same, however, is not true of the trial itself, where reference to the intervening insurer in front of the jury would likely result in substantial prejudice to the insured. With this in mind, a court will likely identify the intervening insurer as a party during the pretrial process only. Should the case proceed to jury trial, and the client of the attorney representing the intervening insurer need to be identified, either by the court, or the attorney stating an appearance, the court will likely identify the suspended corporation as the attorney's client, and direct the attorney to do the same. Another possibility would be to not identify a client, but instead indicate that the attorney is representing the interests of the suspended corporation. Regardless of how it is done, the court and parties to the suit must refrain from referring to the intervening insurer in front of the jury.

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