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California court finds insurer potentially liable for default judgment

01.02.08 | INSIGHTS

By Samuel H. Ruby
Shareholder-in-Charge, San Francisco 415.352.2723

A Los Angeles appellate court has held that an insurer may be liable for a default judgment despite policy language indicating otherwise. Belz v. Clarendon America Ins. Co., — Cal. Rptr. 3d — (2007).

A homeowner sued a contractor over alleged construction defects. The contractor’s insurer investigated the claim, but the contractor had disappeared and the claim was denied. When the homeowner sued the contractor, the insurer was not notified, and the contractor did not defend himself. The homeowner obtained a default judgment and (as a judgment creditor) sought to enforce it against the insurer.

The policy provided that the insurer would not be liable “for any default judgment entered against any insured . . . before notice to the Company giving the Company a reasonable time in which to protect its and its insured’s interests.” Principally on that basis, the insurer moved for summary judgment. The trial court granted the motion, but the Court of Appeal reversed.

The court interpreted the clause in question to be a notice clause. Applying the general rule that late notice is a defense only when the insurer proves actual and substantial prejudice, the court held that the mere fact that notice was not given prior to the default judgment did not preclude liability. The court rejected arguments that a showing of prejudice was not required or that prejudice should be presumed in the case of a default judgment. The court remanded the case for further proceedings, while expressing “no view as to exactly what” the insurer will have to prove “to satisfy the prejudice requirement.”

Update: The opinion is now published as 158 Cal. App. 4th 615, 69 Cal. Rptr. 3d 864.

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