The California Court of Appeal, Fourth Appellate District, has affirmed a trial court grant of summary judgment, ruling that costs and interest payable under an insurance policy's supplemental payment provision are not recoverable by a third party judgment creditor in a direct action against the insurer.
Appellant Kenneth Clark was injured while working at a construction site. Clark filed a personal injury action against the employer whose employee's negligence contributed to the accident. The employer's CGL provider, Reliance, defended the employer in the underlying action.
The Reliance CGL policy contained a "supplementary payments" provision, which provided that: "We will pay, with respect to any claim or suit we defend: ? [?] 5. all costs taxed against the insured in the suit. [?] 6. prejudgment interest awarded against the insured on the part of the judgment we pay. ? [?] 7. all interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the party of the judgment that is within the applicable limit of insurance. [?] These payments will not reduce the limits of insurance."
A jury trial resulted in a verdict for Clark. After the verdict was rendered but before judgment was entered, Reliance was declared insolvent and CIGA assumed handling its claims including the employer's defense in the underlying action. Subsequently, judgment was entered in the underlying action awarding Clark damages, plus costs and prejudgment interest. CIGA issued Clark a check in partial satisfaction of the judgment.
Clark then filed an action pursuant to Insurance Code section 11580, to recover the remaining costs and interest from CIGA. Clark asserted he was still owed $145,004.18 on the judgment comprised of the remaining statutory costs, prejudgment interest, Code of Civil Procedure section 998 costs, postjudgment interest on the damage award, plus additional postjudgment interest. CIGA moved for summary judgment, arguing that pursuant to San Diego Housing Com. v. Industrial Indemnity Co. (2002) 95 Cal.App.4th 669 (San Diego Housing), as a third party judgment creditor, Clark could not recover his costs and interest in a direct action against CIGA. CIGA's motion for summary judgment was granted and judgment was entered in CIGA's favor. Clark appealed.
The appellate court affirmed the trial court. On appeal, Clark argued that the costs and interest attached to the judgment in the underlying action were obligations imposed by law and within coverage of the policy's supplemental payments provision and thus could be recovered in a direct action against CIGA pursuant to section 11580. Although the appellate court agreed that costs and interest were within the supplemental payments provision, it relied on San Diego Housing to conclude that a third party judgment creditor is merely an incidental beneficiary of obligations, like the supplemental payments provision, that arise under the duty to defend, which is owed only to the insured. Unless the third party obtains an assignment by the insured of its rights under the insurance contract, the third party has no right to bring a claim upon a duty owed only to the insured. The appellate court affirmed the "general rule" articulated in San Diego Housing that a third party claimant may not bring a direct action against an insurance company on the contract because the insurer's duties flow to the insured. Because costs and interest are linked to the insurer's obligation to defend, and because the obligation to defend is a covenant that runs only to the insured, the supplemental payments provision gives the right to recover costs taxed against the insured only to the insured who was directly owed the defense duty. Unless the third party obtains an assignment by the insured of its rights under the insurance contract, the third party has no right to bring a claim upon a duty owed only to the insured.
The appellate court rejected Clark's contention that San Diego Housing was inapposite because it involved an insurer who refused to defend the insured because the appellate court in San Diego Housing specifically declared its ruling that the judgment creditor could not enforce an award of costs and interest in a section 11580 direct action against the insurer was not dependent upon whether the insurer had actually defended its insured.
Finally, Clark argued that it was within the contemplation of the insured and the insurer that the obligation to pay costs and interest under the supplemental payment provision would come into force when the award of such costs and interest was merged in a judgment, and at that point the judgment creditor is the intended beneficiary of the supplemental payment provision. The appellate court rejected this argument as well, reasoning that Section 11580 permits direct action subject to the terms and limitations of the policy. The supplemental payments provision is part of the insurer's duty to defend the insured. Although the insurer who fails to pay costs and interest on a judgment against its insured, might expose itself to a charge it has violated its duty to defend the insured, absent an assignment of that right to the judgment creditor it cannot be directly enforced by it.
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