The California Court of Appeal has held that a third-party claimant did not have standing to bring a declaratory relief action against the insured’s liability insurer to determine the scope of coverage under the insured’s policy. ( Otay Land Company v. Royal Indemnity Company (2008) 169 Cal.App.4th 556)
Facts
United Enterprises, Inc. (United) owned real property on which it operated a trap and shooting range. Flat Rock Land Company (Flat Rock) eventually acquired the property.
After Flat Rock acquired the property, Flat Rock discovered that the property had become contaminated during the time that United owned the property. Flat Rock thus sued United, seeking recovery of environmental cleanup costs incurred in connection with the property. United tendered defense of the action to its liability insurer, Royal Indemnity Company (Royal), and Royal agreed to defend United under a reservation of rights.
Royal then filed a declaratory relief action against the insured, United, seeking a determination that Royal did not have any duty to defend or indemnify United in the underlying action brought by Flat Rock. Royal did not name the third-party claimant, Flat Rock, as a defendant in the declaratory relief action. Flat Rock filed a motion to intervene in Royal’s declaratory relief action in order to “assist” United in litigating the coverage issues. However, the trial court denied Flat Rock’s motion to intervene, and that ruling was affirmed on appeal. (See Royal Indemnity Co. v. United Enterprises, Inc. (2008) 162 Cal. App.4th 194.)
Flat Rock then filed its own separate declaratory relief action against Royal, alleging that Flat Rock had a legitimate interest in making coverage arguments that might affect Flat Rock’s ability to recover damages and cleanup costs from United in the underlying action. The trial court dismissed Flat Rock’s complaint, finding that Flat Rock did not have standing to sue Royal for a declaration as to Royal’s duties to United. Flat Rock appealed.
Holding
The Court of Appeal affirmed the trial court’s dismissal of Flat Rock’s complaint for declaratory relief action against Royal. The appellate court reasoned that Flat Rock was not an “insured” under United’s policy through Royal, and that Flat Rock’s presence in the case was not necessary to resolve the coverage dispute between United and Royal. At most, Flat Rock was merely a “potential” judgment creditor of the insured and thus a “potential” beneficiary of the proceeds in the event coverage was found. Accordingly, the appellate court ruled that Flat Rock lacked standing to sue Royal to resolve coverage questions arising under the policy United had through Royal.
Comment
If a liability insurer files a declaratory relief action against its insured to determine coverage, the insurer has the option of joining the third-party claimant as a co-defendant. However, as this case suggests, the third-party claimant does not necessarily have an equivalent right to bring a declaratory relief action against the insured’s liability insurer. Of course, if the third-party claimant has already obtained a judgment against the insured, or if the third-party claimant has received an assignment of the insured’s rights, then the third-party claimant would have sufficient standing to bring an action against the insured’s liability insurer.