The Ninth Circuit recently offered guidance to insurers looking to intervene in federal litigation on behalf of defunct insureds in California Department of Toxic Substances Control v. Jim Dobbas, Inc. (“Jim Dobbas”).[1]  Specifically, Jim Dobbas held California’s direct-action statute permits both primary and excess insurers to intervene as a matter of right in federal litigation on behalf of a defunct insured, regardless of the coverage position taken by those insurers.

Jim Dobbas was an environmental tort action brought by the California Department of Toxic Substances (“DTSC”) under state and federal law for the remediation of hazardous materials at a site in Elmira, California, against, inter alia, a company incorporated under the laws of Delaware called Collins & Aikman.[2]  Collins & Aikman had previously owned the site in question, and filed for Chapter 11 bankruptcy in 2005.[3]  During the pendency of this bankruptcy, DTSC reached an agreement to carve out environmental litigation DTSC from the bankruptcy stay, with an explicit agreement any judgment obtained by DTSC against Collins & Aikman would be funded by Collins & Aikman’s historic insurance policies.[4]  In 2013 the Delaware Secretary of State filed a certificate of cancellation with terminated the legal existence of Collins & Aikman.[5]

In 2014, DTSC initiated the subject litigation and successfully petitioned the Delaware Court of Chancery to appoint a receiver for Collins & Aikman to be sued.[6]  The appointment order specified the receiver had the power, but not the obligation to defend Collins & Aikman in litigation; it also specified DTSC would be responsible for the cost of the receiver.[7]  After Collins & Aikman was added as a defendant, the receiver declined to file any responsive pleading on its behalf, and a default was entered.[8]  More than four years later, DTSC moved for a default judgment against Collins & Aikman in the amount of $3.2 million.[9]

At this point, DTSC for the first time notified three of Collins & Aikman’s past insurers, Allianz, Century, and Continental, of the pending litigation and impending default judgment.[10]  The three insurers immediately moved to intervene as a matter of right under Federal Rule of Civil Procedure 24(a)(2) and to set aside the default entered against Collins & Aikman.  The district court denied these motions.[11]  As to Century and Continental, the district court reasoned they had no interest in the litigation, as they were refusing to defend Collins & Aikman under a reservation of rights; as to Allianz—which had issued a reservation of rights—the district court reasoned as an excess insurer, it had no interest in the litigation until a primary policy had been exhausted, and that condition had not yet occurred.[12]  The district court’s reasoning for denying the insurers’ motions to set aside the defaults was not clearly noted in the record on appeal.[13]

Jim Dobbas opened its analysis with a discussion of whether the insurers had jurisdictional standing to intervene.[14]  The court concluded as the insurers sought to intervene to defend Collins & Aikman, they sought relief identical to an existing party, and thus satisfied standing requirements.[15]

The court then turned to analyze whether the insurers met the standard under Rule 24(a)(2) for invention as a matter of right, specifically whether the insurers “claim[ed] an interest relating to the property or transaction that is the subject of the action, and [are] so situated that disposing of the action may as a practical matter impair or impede the movant’s ability to protect its interest, unless existing parties adequately represent that interest.”[16]  The key question for Jim Dobbas was whether the insurers had an “interest” under Rule 24(a)(2).[17]  The court then provided a lengthy discussion of the paucity of Supreme Court authority on what exactly constitutes an “interest” for these purposes, and how the Ninth Circuit has applied these few available authorities in the past.[18]  Jim Dobbas ultimately arrived at the standard that, in order to satisfy Rule 24(a)(2), a putative intervenor must establish both an asserted interest “protectable under some law,” and “a relationship between the legally protected interest and the claims at issue.”[19]

Next, the court engaged in a choice of law analysis to determine California law should apply, before turning to the central question—whether the insurers had an interest “protectable under some law.”[20]  The insurers’ primary argument was they had a legally protectable interest under California’s direct-action statue, California Insurance Code § 11580, which provides when a judgment is obtained against an insured, the judgment creditor may bring an action directly against the insurer in order to satisfy the judgment.[21]  In contrast, DTSC argued the insurers had no such interest, as they refused to admit coverage.[22]

Jim Dobbas sided with the insurers, reasoning an “insurer’s coverage position is irrelevant under the direct-action statute so long as the insurer timely acts to defend a helpless insured and prevent its default.”[23]  The court extended its reasoning to Allianz, the excess carrier, on the grounds an excess carrier has an interest equal to a primary carrier in preventing a default against its insured, regarding of whether its duty to defend has been triggered.[24]

Lastly, the court concluded it lacked jurisdiction to consider the district court’s denial of the motions to set aside the default, as such an order is interlocutory.[25]  Rather, the district court was advised it was free to reconsider that ruling on remand.[26]  Circuit Judge Collins filed a concurring opinion; while he agreed with the majority’s outcome and analysis in most part, he felt it was unnecessary to analyze standing, the development of Rule 24 caselaw, and choice of law principles, as no party had briefed these issues, and he accordingly declined to join these sections of the court’s opinion.[27]

Conclusions

Jim Dobbas is a thorough opinion, touching on a number of issues of interest to insurers seeking to intervene in litigation on behalf of a defunct insured.  But the most important takeaway is its central holding—based on California’s direct-action statute, both primary and excess insurers may intervene in federal litigation on behalf of a defunct insured as a matter of right under Rule 24, regardless of the coverage position taken by those insurers.  Further, to the extent other states and territories within the Ninth Circuit (Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and Northern Mariana Islands) have their own equivalents to California’s direct-action statute, this rule should readily apply thereunder as well.

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Sources

[1] California Dep’t of Toxic Substances Control v. Jim Dobbas, Inc., __ F.4th__, No. 20-15029, 2022 WL 17348632 (9th Cir. Dec. 1, 2022) (all pinpoint citations to Westlaw star pagination).

[2] Id. at *2.

[3] Id.

[4] Id. at *2-*3.

[5] Id. at *3.

[6] Id.

[7] Id.

[8] Id. at *4.

[9] Id.

[10] Id.

[11] Id. at *4-*5.

[12] Id. at *5.

[13] Id.

[14] Id.

[15] Id. at *5-*6.

[16] Id. at *6.

[17] Id. at *7.

[18] Id. at *7-*9

[19] Id. at *9.

[20] Id. at *9-*10.

[21] Id. at *10.

[22] Id. at *11.

[23] Id.

[24] Id. at *11, fn. 16.

[25] Id. at *12

[26] Id. at *12

[27] Id. at *12-*13.