A trial court properly granted an insurer’s motion to set aside default judgments against its insured based on the equitable ground of extrinsic mistake. (Mechling v. Asbestos Defendants (2018) 29 Cal.App.5th 1241)
Facts
From the 1960’s through the early 1970’s, Associated Insulation of California (Associated) allegedly sold asbestos-containing products. During that time-frame, Associated had liability policies through Fireman’s Fund Insurance Company (Fireman’s Fund). In 1974, Associated ceased operations, and at some point, its corporate powers were suspended.
Beginning in 2009, plaintiffs William Mechling, James Greely, Omar Barstad, and Alexander Corns (collectively plaintiffs) filed personal injury actions against Associated and other defendants for injuries arising out of plaintiffs’ alleged exposure to asbestos. Plaintiffs served the complaints on Associated, but Associated did not respond to the complaints or notify Fireman’s Fund of the lawsuits. At some point, two of the plaintiffs – Mechling and Greeley – sent copies of their complaints to Fireman’s Fund and made a “demand for coverage.” In March 2012, Fireman’s Fund responded that it had searched its records but could not find any evidence that it had ever issued any policies to Associated.
Between 2013 and 2015, the trial court entered default judgments against Associated in all four cases. The default judgments ranged from $350,000 to $1,960,458. Plaintiffs served notice of entry of the default judgments on Associated, but not on Fireman’s Fund.
After entry of the default judgments, Fireman’s Fund located insurance policies appearing to provide coverage for Associated. In February 2016, Fireman’s Fund retained counsel, and in July 2016, Fireman’s Fund moved to set aside the default judgments on equitable grounds. The trial court granted Fireman’s Fund’s motion, and the plaintiffs appealed.
Holding
The California Court of Appeal affirmed. The appellate court noted that a trial court has inherent power to vacate a default judgment on equitable grounds, including the ground of “extrinsic mistake.” To qualify for equitable relief based on extrinsic mistake, the defendant must demonstrate: (1) a meritorious defense; (2) a satisfactory excuse for not presenting a defense to the action; and (3) diligence in seeking to set aside the default once the mistake has been discovered. Here the trial court acted within its discretion in concluding that Fireman’s Fund had satisfied all three requirements.
Specifically, Fireman’s had shown a meritorious defense because it was reasonable to infer that plaintiffs’ damages awards would have been lower if had Fireman’s Fund had challenged plaintiffs’ proof of causation and damages. In addition, Fireman’s Fund had shown a satisfactory excuse for not presenting a defense because: (a) even though Fireman’s Fund received notice of the Mechling and Greely lawsuits in 2012, at that time Fireman’s Fund mistakenly thought that Associated was not an “insured”; and (b) Fireman’s Fund never received any notice of the Barstad and Corns lawsuits before entry of the default judgments in those cases. Last, once the mistake was discovered, Fireman’s Fund had acted diligently in seeking to set aside the defaults.
Under the circumstances, the trial court could find that there were “exceptional circumstances” warranting equitable relief. Thus, the trial court did not abuse its discretion in granting Fireman’s Fund’s motion to set aside the default judgments.
Comment
Note that the appellate court’s review of the trial court’s ruling was governed by the deferential “abuse of discretion” standard. Under that standard, an appellate court will reverse the trial court only if the trial court’s decision is “so irrational or arbitrary that no reasonable person could agree with it.” Here, the trial court’s order was neither irrational nor arbitrary, and was consistent with the general policy that cases should be decided on their merits rather than by default.