Intervention Nuances Under California Law

In the insurance defense context involving commercial insureds, it is not uncommon for an insurer to defend the employer as well as the employee under a reservation of rights (ROR) when coverage issues exist. In some cases, the employee disappears and is unavailable to assist with the investigation and defense. A common practice in this context has the insurance defense attorney answering for the absent employee. In other situations, the employee is initially available but then goes missing after an Answer has been filed on behalf of the employee. In either scenario, the employee is not available to the defense attorney appointed by the insurance company to assist with discovery responses and to provide appropriate certifications required by the civil procedure rules under state law.

The insured employee’s failure to respond to discovery or to provide certifications regarding discovery responses that the defense attorney has submitted can result in sanctions. In addition, the employee’s unavailability for a deposition can result in similar sanctions. It is not uncommon for plaintiff attorneys to recognize this in absentia problem and to capitalize upon it by sending discovery requests that require certification and noticing and re-noticing the absent employee’s deposition to build a record of noncompliance. The pot of gold at the end of this rainbow of opportunity is a request that the Answer of the absent employee be stricken and that a default judgment be entered against the employee.

When a plaintiff seeks to have the absent employee’s Answer stricken, the insurance company can either move to intervene into the underlying tort action before judgment is entered against the employee or, when judgment has been entered, the insurer can move to set aside the default judgment. As a general rule, the choice between whether to seek intervention or move to set the default judgment aside is determined by the stage the proceedings have reached when the insurer seeks to become involved.

The California Court of Appeals recently was called upon to analyze the insurer’s right to intervene without first setting aside the entry of default that had occurred as a result of sanctions arising from an absent employee’s failure to participate in the tort litigation by providing certified discovery responses and in an employee’s failing to show up for a properly noticed deposition.

In Western Heritage Ins. Co. v. Superior Court, 199 Cal.App.4th 1196,132 Cal.Rptr.3d 209 (2011), the California Court of Appeals discussed the rights of insurers in situations where an absent insured employee failed to cooperate in the litigation process and the trial court issued the ultimate sanction of striking the Answer of the absent employee. The facts of the accident revealed that the wrongful death tort claim arose out of an automobile accident. Western Heritage Insurance Co. (Western Heritage) provided a defense to the commercial employer as well as the employee under a reservation of rights. During pretrial proceedings, the employee failed to provide verified discovery responses or appear for her deposition in violation of trial court orders. During that process it was disclosed that Western Heritage had filed an Answer on the employee’s behalf without having first been in contact with the employee. Because of this, the trial court struck the employee’s Answer and a default was entered. Reacting to this development, Western Heritage moved to intervene in the underlying tort action. Prior to Western Heritage’s intervention, the trial court granted plaintiff’s motion in limine regarding liability. As a result of this order, Western Heritage was only permitted to dispute damages and not the liability of the absent employee. The California Court of Appeals issued an order to show cause and a stay of further trial court proceedings pending the Court of Appeals’ review of the record. The California Court of Appeals found that Western Heritage had the right to assert, on its own behalf, all defenses that otherwise would have been available to the insured parties whether as to liability or damages.

The trial court held that because Western Heritage was stepping into the shoes of the absent employee, that Western Heritage had no greater rights to litigate liability than its insured would have had. On appeal, Western Heritage challenged the trial court’s determination arguing that: (1) Western Heritage had the right to litigate all issues as an intervening party which could not be abridged; (2) that denial of an intervenor’s right to contest liability of a defaulted insured would defeat the whole purpose of the intervention right; and (3) intervening insurer’s are not “subrogated” and therefore limited to the rights of its insured, but rather, the intervening insurer had rights independent of the insured.

As an intervening insurer, Western Heritage argued that its rights were not dependant on, nor were they limited by, the rights of the defaulted insured. The California Court of Appeals agreed with Western Heritage and reversed the trial court’s ruling.

The Court began its analysis by recognizing that Western Heritage was a proper intervenor because when the absent employee defaulted, Western Heritage could be responsible for any judgment that was entered. As an intervenor, Western Heritage became an actual party to the lawsuit. An intervenor is not limited by procedural decisions made by a different party with which it is aligned in terms of interest.As an intervenor, the insurer was entitled to litigate the liability and damages issues that their insured was barred from litigating because otherwise there would be no purpose in allowing an insurer to intervene in order to protect its own interests while at the same time limiting the scope of the insurer’s defense to those issues to which its insured, because of the default, was limited to pursuing. Therefore, the Court held that an intervening insurer was not limited to those defenses to which its insured might be restricted due to the procedural default. According to the Court, “The entire purpose of the intervention is to permit the insurer to pursue its own interests, which necessarily include the litigation of defenses its insured is procedurally barred from pursuing.”

The Court then turned to the question of whether Western Heritage was required to vacate the default entered against the absent employee. Plaintiff had argued that because Western Heritage did not seek to set aside the default it had no basis to complain about the trial court’s intervention limitation order. This argument was rejected by the California Court of Appeals. The Court held that the intervening insurer is no different than any other non-defaulting co-defendant once intervention has been granted. Under established California law, admissions implied from the default of one defendant ordinarily are not binding upon a co-defendant who, by answering, expressly denies and places in issue the truth of the allegations thus admitted by the absent party. It made no logical difference whether the non-defaulting co-defendant was originally named as a defendant or joined the action by subsequent intervention. Simply put, a party’s default does not bind non-defaulting co-defendants. An intervening insurer was not required to move to vacate the insured’s default as to itself; the insured’s default simply had no effect on the insurer.

It is not an uncommon scenario to have an employee of an insured company go missing during the litigation process where the employee has been named as a defendant in a lawsuit. The absence of the employee from the litigation can result in unavoidable violations of court orders regarding discovery when discovery responses go uncertified or requests for depositions go unanswered. When the absence of the employee is discovered, enterprising plaintiff attorneys will oftentimes attempt to capitalize on that absence by setting up a scenario in the trial court which produces multiple violations of court orders regarding discovery which are then followed by a request for sanctions involving a striking of the absent employee defendant’s Answer. The California Court of Appeals’ decision in Western Heritage demonstrates that insurers have a right to intervene into the tort action and, as an independent party through intervention, the insurer can raise defenses to liability and damages notwithstanding restrictions imposed upon the non-responsive absent insured defendant. Whether other courts will prevent limitations on the intervening insurer’s rights is unclear. Therefore, insurers should use every effort to locate the absent insured employee to avoid this situation.