In a case before the Ninth Circuit, WSHB attorneys Tom Vandenburg and Nick Gedo successfully argued that the district court erred in refusing to grant intervention in a complex environmental tort case in which WSHB represented the insurers of a defunct defendant.

Facts of the Case

In 2014, the California Department of Toxic Substances Control and the Toxic Substances Control Account (DTSC) brought a claim pursuant to the comprehensive Environmental Response, Compensation and Liability Act as well as state law seeking reimbursement for costs of remediating hazardous materials allegedly present at a site in Elmira, California. Before the suit was filed, a certificate of cancellation was filed with the Delaware Secretary of State which effectively cancelled the legal existence of defendant, Collins & Aikman Products. Accordingly, the Delaware Court of Chancery granted DTSC's petition to appoint a receiver who would serve as a representative of Collins & Aikman with the power, but not the obligation, to defend any claims made against that company. This receiver failed to submit an answer to DTSC's 2014 complaint and a result, the district court entered a default judgment.

In the course of this environmental tort action, two primary insurers and one excess insurer of Collins & Aikman timely filed a motion seeking to intervene in the litigation in order to defend their defunct insured and to try to set aside the default. The district court denied the motion to intervene on the grounds that, under F.R.C.P. 24(a)(2), the insurers did not have a protected interest in the action because the primary carriers had not accepted coverage or even issued a reservation of rights, and the excess insurer had neither a right nor a duty to defend.

On appeal, the Ninth Circuit disagreed and held, that according to the California Direct Action statute (Cal. Ins. Code §11580), all three insurers had a "legally protected interest in defending their helpless insured and preventing the entry of default judgment." The court therefore reversed the district court's refusal to allow intervention and left open a reconsideration of the motions to set aside the default judgments.

What is a Legally Protected Interest Under FRCP Rule 24(a)(2)

FRCP 24(a)(2) governs the right to intervene in an action. It requires an applicant to satisfy the following:

  • It has a significant, protectable interest as to the property of transaction that is the subject of the action, and
  • There is a "demonstrable relationship between the legally protected interest and the claims at issue." United States v. City of Los Angeles, 288 F.3d 391, 397 (9th Cir. 2002).

In reaching its holding, the Ninth Circuit relied on Donaldson v. United States, 400 U.S. 517 (1971) and Wilderness Soc'y v. U.S. Forest Serv., 630 F.3d 1173 (9th Cir. 2011) (en banc). These two cases interpreted the word "interest" to mean "a right or other advantage that the law gives one person as against another person, rather than read more broadly to refer to anything that a person wants, whether or not the law protects that desire." Given that definition, the panel determined that the source of any interest of the insureds in this action must be pursuant to state law.

The panel also noted that, in Cassier v. Thyssen-Bornemisza Collection Fund, 142 S.Ct. 1502 (2022), the U.S. Supreme Court directed lower courts to apply federal common law and choice of law principles of the forum state. Under these principles, the court applied California substantive law and found that the insurers had a legally protected interest under Rule 24(a)(2) as long as they provided a defense to their insureds, whether or not they had accepted coverage unconditionally or under a reservation of rights.

California's Direct Action Statute: California Insurance Code §11580

WSHB attorneys successfully argued to the panel that, pursuant to California's direct action statute (Cal. Ins. Code §11580), "a primary or excess insurer that seeks to timely intervene in a tort action for the stated purpose of defending itself has a protectable interest for the purposes of Rule 24(a)(2) no matter what position, if any, the insurer has taken as to coverage." The court agreed and ruled that the insureds had a protected interest pursuant to the direct action statute as well as pursuant to F.R.C.P. 24(a)(2).

The Result

In an excellent result for our client, the court held that the California direct action statute secured a protected legal interest for all three insurers and that they had a right to protect and defend their insureds against the entry of a default judgment. The Ninth Circuit ruled that the District Court should have granted intervention, and reversed and remanded. The Court allowed the current default to remain, but noted that the District Court can revisit the motion to set aside default. This holding represents a more expansive interpretation of the phrase "legally protected interest" under Rule 24 than that adopted by many other jurisdictions and will allow insurers to intervene more easily in litigation involving defunct/uncooperative insureds, regardless of their position on coverage.

Congratulations to our skilled attorneys, Tom Vandenburg and Nick Gedo, in successfully arguing this complicated and involved legal issue!

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