Second Appellate District Reconciles Insurance Code Section 1063.1 (c) (13) With Prior Case Law

City of Laguna Beach v. California Insurance Guarantee Association (CIGA), No. B214027 (March 3), an opinion from Division Two of the Second Appellate District, addresses this discrete question: Did the addition of subdivision (c) (13) to Insurance Code Section 1063.1 abrogate Denny’s Inc. v. Workers’ Compensation Appeals Board (2003) 104 Cal. App. 4th 1433?  Subdivision (c) (13) renders the  obligation of an insolvent excess workers’ compensation insurer a “covered claim” that CIGA must ordinarily reimburse.  However, the Court of Appeal concluded, supporting the trial court’s grant of summary judgment in favor of CIGA, CIGA still need not reimburse a permissibly self-insured employer for benefits paid to an employee for cumulative injury if the employer’s liability is based in part on a period of time when the employer was self-insured and chose not to buy excess insurance for the particular risk.

In Denny’s, an employee suffered a cumulative injury spanning from May 22, 1996 to May 22, 1997.  The employer was self-insured through July 31, 1996.  Thereafter it was covered by a primary policy from a private insurer.  When the insurer was declared insolvent, the employer sought reimbursement from CIGA.  The appellate court held that CIGA was an insurer of last resort and not intended to cover Denny’s as a self-insurer.  Denny’s, that court went on, “cannot reap the benefits of self-insurance without accepting its burdens.”

The appellate court here found that Denny’s can be reconciled with subdivision (c) (13).  Under a scenario where the employer has excess insurance for the entire year of liability, the excess insurer becomes insolvent, and a claim is made to CIGA, harmonization is clear.  There the coverage afforded by CIGA would not rescue the employer from its gamble and thus would not violate Denny’s logic.  When the employer took the risk for only part of the period of cumulative injury, the Court went on, reconciliation is still possible.  The Court illustrated that with a hypothetical that triggers the application of subdivision (c) (9) and takes the obligation out of the the realm of covered claims because CIGA was only designed to serve as an insurer of last resort.  Under this logic outlined by the Court, Denny’s does not conflict with subdivision (c) (13); it merely enforces the exception to covered claims in subdivision (c) (9).

March 3, 2010   Posted in: Blog