A liability policy’s “supplemental payment” clause did not allow a third-party judgment creditor to recover costs and interest in a direct action brought against the California Insurance Guarantee Association. ( Clark v. California Ins. Guarantee Assn. (2011) 200 Cal.App.4th 391)
Facts
Kenneth Clark (Clark) filed a personal injury lawsuit against D.J. Scheffler, Inc. (Scheffler). Scheffler’s commercial general liability insurer, Reliance Insurance Company (Reliance), provided Scheffler with a defense against Clark’s lawsuit.
Clark obtained a substantial verdict against Scheffler. However, before a judgment was entered against Scheffler, Reliance was declared insolvent. As a result, the California Insurance Guarantee Association (CIGA) assumed Scheffler’s defense. Ultimately, a final judgment was entered in favor of Clark and against Scheffler for damages, costs and interest. CIGA paid Clark the full damage portion of the award, but did not pay all of the costs and interest.
Clark as judgment creditor then filed an action against CIGA pursuant to California Insurance Code section 11580 to recover the remaining costs and interest. Clark argued that he was entitled to recover the costs and interest from CIGA pursuant to the Reliance policy’s “supplemental payment” clause, which provides that in any suit the insurer defends, the insurer will pay all costs and interest assessed against the insured. CIGA countered that a judgment creditor bringing a direct action against the debtor’s liability insurer has no right to recover costs and interest an insurer would have been obligated to pay to the insured under the supplemental payments provision. The trial court agreed with CIGA and entered judgment in favor of CIGA.
Holding
The Court of Appeal affirmed, agreeing that costs and interest are not recoverable by a third party judgment creditor in a direct action against the insurer under a liability policy’s supplemental payment provision. Citing San Diego Housing Com. v. Industrial Indemnity Co . (2002) 95 Cal.App.4th 669, the appellate court reasoned that a third party judgment creditor is merely an incidental beneficiary of contractual obligations that flow only to the insured, such as the duty to defend. The court reiterated San Diego Housing’ s holding that costs and interest recoverable under a supplemental payments provisions are linked to the insurer’s duty to defend , and are owed only to the insured . Thus, unless the third party judgment creditor has an assignment of the insured’s rights under the insurance contract, the third party judgment creditor has no right to recover under the supplemental payments clause of the insured’s policy.
Comment
The appellate court closely followed its prior ruling in San Diego Housing , which held that a third party judgment creditor may not enforce an award of costs in a direct action against the insurer. Absent an assignment of the insured’s rights, the third party judgment creditor may not enforce rights owed to the insured under a supplemental payment clause.