| The California Court of Appeal for the Fourth District affirmed the decision of the San Diego Superior Court denying a third party’s motion to intervene in a Declaratory Relief Action between the prior owner of the subject property and its insurer because the third party could not show a direct interest in the coverage action to support intervention.
Royal Indemnity Company (“Royal”) sued its former insured, United Enterprises, Inc. (“United”) for declaratory relief seeking a declaration that Royal did not have a duty to defend or indemnify United for environmental contamination on property formerly owned by United. The current owner of the property, Flat Rock Land Company (“Flat Rock”), had filed suit against United and other parties in separate federal and state actions to seek recovery of environmental cleanup costs on the property. Flat Rock sought to intervene in the coverage action and the San Diego Superior Court denied intervention.
On appeal, Flat Rock contended the trial court erred in denying its motion to intervene because Flat Rock had a legitimate interest in making coverage arguments that may affect recovery of damages and environmental cleanup costs from United. Flat Rock argued it had a “direct and immediate interest” in the coverage litigation justifying permissive intervention under California Code of Civil Procedure § 387 because coverage rulings would affect Flat Rock’s right to pursue Royal as a “potential” judgment creditor of United.
The Court of Appeal relied on City and County of San Francisco v. State (2005) 128 Cal.App.4th 1030 for guidelines on permissive intervention. The Court noted that California’s requirement of direct and immediate interest means “the interest must be of such a direct and immediate nature that the moving party will either gain or lose by the direct legal operation and effect of judgment.” The federal rules on permissive intervention are similar in that they require the proposed intervener’s claim and the main action have a question of law or fact in common and the intervention will not unduly prejudice or delay the rights of the original parties. In order to determine whether Flat Rock had a sufficient direct interest to intervene in the coverage dispute, the Court looked to the rules governing the ability of a third party claimant, such as Flat Rock, to sue an insurer to resolve coverage issues regarding an insured.
Generally, a third party who is not in privity of contract lacks standing to sue an insurer to resolve coverage questions on a policy issued to an insured. Several exceptions to this rule exist to confer standing on an injured third party to seek redress against an insurer. Under Insurance Code § 11580, an injured third party who is a judgment creditor has standing to seek payment under an insurance policy. A third party assignee of the insured’s claims also has standing to sue the insurer without privity of contract. In addition, where an insurer joins the injured third party as a codefendant in a declaratory relief action to determine coverage, the third party may raise coverage issues in that action.
Here, Flat Rock did not have privity of contract with Royal and thus, lacked standing to sue Royal to resolve coverage questions about United’s rights under the policy. Furthermore, it could not show that any of the exceptions applied. Flat Rock was not a judgment creditor because there was not yet a judgment as to United’s liability to Flat Rock. Flat Rock’s argument that it was a “potential” judgment creditor or a “potential” beneficiary under the policy was insufficient. Furthermore, Flat Rock was not an assignee of any of United’s rights against Royal. In addition, while an insurer is allowed to join an injured third party as a codefendant in a declaratory relief action to determine coverage, Royal had not joined Flat Rock and Royal was not required to do so.
In determining that Flat Rock had not shown sufficient direct interest to support intervention in the coverage action between Royal and United, the Court of Appeal also rejected Flat Rock’s reliance on Thompson v. Mercury Casualty Co. (2000) 84 Cal.App.4th 90 (“Thompson”) and Haynes v. Farmers Ins. Exchange (2004) 32 Cal.4th 1198 (“Haynes”). Those cases concerned interpretation of permissive user coverage in auto policies under unique factual circumstances. None of the insureds nor insurers objected to the declaratory relief action brought by the third party claimants. Here, the court noted the coverage issues involved long term environmental contamination liability and not permissive user coverage issues, and Royal and United were “vigorously” objecting to Flat Rock’s proposed intervention.
The Court of Appeal also noted that Flat Rock did not yet have a protectable interest in the insurance proceeds and thus, there was “not enough of a direct interest for Flat Rock to simply claim that policy proceeds from Royal, based upon future coverage of United, should potentially be available to it.” Such an interest was purely speculative since it was contingent on Flat Rock prevailing against United in the underlying action. Furthermore, since the declaratory relief action between Royal and United raised issues regarding interpretation of an insurance contract, it had no bearing on Flat Rock’s suit against United for environmental contamination liability. Flat Rock had only a contingent financial interest in the coverage action which was insufficient to support intervention.
This opinion is not final. Though it has been certified for publication, it may be withdrawn from publication, modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.
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