The California Court of Appeal has held that an insurer that refuses to defend its insured in a third-party lawsuit cannot later file a complaint in intervention in that litigation, because the insurer, having denied coverage, does not have a direct interest in the outcome of the lawsuit. ( Hinton v. Beck (2009) 176 Cal.App.4th 1378.)
Facts
Jonni Hinton sued Eldon Beck for personal injuries he sustained in a farming accident. Beck tendered his defense to his liability insurer, Grange Insurance Group, which refused to defend or indemnify him.
Hinton and Beck then entered into an agreement whereby Hinton would not execute any judgment against Beck in exchange for an assignment of Beck’s rights against Grange. Hinton served a statement of damages in excess of $6 million on Beck and then filed a request for entry of default. At that point, Grange sought permissive intervention pursuant to Code of Civil Procedure section 387(a). Although the trial court initially allowed Grange’s complaint in intervention, it later reconsidered the matter and granted Hinton’s motion to strike Grange’s complaint. Grange appealed the order.
Holding
The Court of Appeal affirmed, finding that the trial court did not abuse its discretion in striking Grange’s complaint in intervention. The Court of Appeal noted that trial courts have discretion to allow intervention under section 387(a) when (1) the intervenor has a direct and immediate interest in the litigation, (2) the intervention will not enlarge the issues in the case, and (3) the reasons for intervention outweigh opposition by the existing parties. Focusing entirely on the first factor, the court concluded that Grange did not have a direct and immediate interest in the litigation because it had already denied coverage and refused to defend Beck.
To support this conclusion, the court compiled various California cases which held that an insurer that disclaims liability on its policy has no interest justifying intervention. When an insurer refuses to defend, the insured is relieved of his obligation to allow the insurer to manage the litigation, and the insurer loses its right to control the litigation; the insurer in essence rejects its opportunity to contest the liability of its insured. The insurer cannot later inject itself into the litigation, because it lost its right to control the litigation when it refused to defend or indemnify.
The court rejected Grange’s argument that it had a direct and immediate interest in the lawsuit because it might ultimately be required to pay the judgment against Beck pursuant to Insurance Code section 11580. Nearly all of the cases cited by Grange to support this theory involved situations where the insurer had not in fact denied coverage. Also, in the one case in which the insurer did deny coverage ( Noya v. A.W. Coulter Trucking (2006) 143 Cal.App.4th 838), the court stated in dicta that the insurer had a direct interest, but the court still denied the insurer’s motion to intervene.
The Hinton court noted Grange’s arguments based on the second and third factors — namely, that intervention would not enlarge the issues in the case and that the reasons for intervention outweigh opposition by the existing parties. However,the court concluded that Grange’s lack of a direct interest in the litigation was “dispositive,” and thus did not reach the two remaining factors.
Comment
It is unclear what remains of the three-factor test for allowing intervention under section 387(a). Although the Hinton court claimed to apply the three-factor test, it totally disregarded the second and third factors. Thus, at least under Hinton , the “direct and immediate interest” factor is a threshold inquiry, and courts will not even look to the second or third factors unless a direct interest exists.