PARMA



2014 PARMA ANNUAL RISK MANAGERS CONFERENCE

FEBRUARY 9 – 12, 2014

Monterey Conference Center, Monterey, CA

“One Of These Things Is Not Like The Others?” – How and Why A JPA Is Not Like An Insurance Company

|Catherine A. Jones |

|Director, Risk Management Services |

|Kern County Superintendent of Schools Office |

|1300 17th Street – City Centre |

|Bakersfield, California 93303-1847 |

|(661) 636-4223; FAX: (661) 636-4418 |

|E-mail: cajones@ |

|Dennis Timoney. ARM |

|Chief Risk Officer |

|Special District Risk Management Authority |

|1112 I Street, Suite 300 |

|Sacramento, California 95814 |

|(916) 231-4141 FAX: (916) 231-4111 |

|E-mail: DTimoney@ |

|James P. Wagoner |

|McCormick, Barstow, Sheppard, Wayte & Carruth |

|7647 N. Fresno Street |

|Fresno, California 93720 |

|(559) 433-1300 FAX: (559) 433-2300 |

|E-mail: jim.wagoner@ |

|Lejf E. Knutson |

|McCormick, Barstow, Sheppard, Wayte & Carruth |

|7647 N. Fresno Street |

|Fresno, California 93720-1501 |

|(559) 433-1300 FAX: (559) 433-2300 |

|E-mail: lejf.knutson@ |

I. I. BASIC DISTINCTIONS BETWEEN JPA’S AND INSURERS 1

A. A Properly Crafted MOC Meets The Specific Needs Of Member Entities Through Carefully Tailored Language 1

B. Under California Statutes And Case Law, A Joint Powers Authority Is Not An Insurer And A Memorandum Of Coverage Is Not “Insurance” 2

C. Insurance Policies and Memoranda of Coverage Are Interpreted According To Different Rules 3

D. Unique Exclusions In MOCs 6

II. principle legal distinctions between A JPA AND AN INSURER UNDER CALIFORNIA LAW 7

A. Bad Faith Tort Liability Should Not Apply To Disputes Under A Memorandum of Coverage 7

B. Coverage Under An MOC Should Not Apply To “Willful” Injuries Caused By A Member Entity Or Its Employees 10

C. Priority of Coverage Between MOCs And Insurance Policies 13

D. Does The Rule Of “Horizontal Exhaustion” Apply To MOCs? 14

E. Can An Insurer Obtain “Contribution” From A JPA? 15

F. Priority Of Coverage As Between MOCs Covering Members Of JPAs And Policies Covering Employees Of Members 16

G. Priority of Coverage Between Automobile Self-Insurance And Personal Automobile Policies 19

III. Emerging Issues 21

A. Do JPAs Have An Obligation To Provide Independent “Cumis” Counsel Or Any Other Legal Obligations Under Civil Code §2860? 21

B. Do JPAs Have The Same Rights Of Recovery As Insurers Under The Doctrine Of Subrogation? 25

C. Does The Coverage Provided By An MOC “Stack” With Available Insurance Coverages In Situations Where A Loss Continues Over Several, Successive Policy Periods (i.e. “long-tail” injuries)? 29

I. BASIC DISTINCTIONS BETWEEN JPA’S AND INSURERS

A. A Properly Crafted MOC Meets The Specific Needs Of Member Entities Through Carefully Tailored Language

1. Section 990 of the Government Code provides that a local entity may: (1) insure itself for tort or inverse condemnation liability; (2) insure entity employees for liability resulting from an act or omission within the scope of employment; and (3) insure or contract to defend a claim against an entity or its employee. Govt. Code §§990(a)-(c).

2. However, an MOC affording coverage to a JPA need not cover all liability for which a public entity is authorized to insure. Cutler-Orosi Unified School Dist. v. Tulare County School Etc. Auth. (1994) 31 Cal.App.4th 617, 634.

3. MOCs are typically drafted to cover typical, common risks for the members while avoiding risks unique to individual members unless those individual members add additional coverage for those unique risks by endorsement and pay additional amounts for this additional coverage.

4. To the extent the pool secures reinsurance, the MOC should be consistent with the reinsurance except to the extent that the pool elects to accept non-reinsured liability.

B. Under California Statutes And Case Law, A Joint Powers Authority Is Not An Insurer And A Memorandum Of Coverage Is Not “Insurance”

1. A JPA pooling agreement does not meet the statutory definition of “insurance” because a self-insurer does not enter into a contract to indemnify another. Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 904; Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1977) 54 Cal.App.4th 772, 777; Southgate Recreation & Park Dist. v. Cal. Ass’n for Park & Recreation Ins. (2003) 106 Cal.App.4th 293, 297.

5. Statutory Requirements For Insurers’ Handling Of Claims Do Not Apply To JPAs

a. The California Unfair Insurance Practices Act, Ins. Code § 790.03, and the California Fair Claims Settlement Practices Regulations, 10 CCR §2695.2, do not apply to the handling of claims under MOC’s. Govt. Code §990.8(c).

b. The requirements for “reserves” in both the Insurance Code and in regulations do not apply to JPAs. Ins. Code § 923.5, 11558; 10 CCR §§ 2319.1-2319.3

C. Insurance Policies and Memoranda of Coverage Are Interpreted According To Different Rules

1. Different rules of interpretation apply to insurance contracts and MOCs because of fundamental differences in: (a) the relationship between and insurer and insured on the one hand and a JPA and its members on the other; and (b) the different methods by which insurance contracts and MOCs are drafted and accepted.

c. An insurance policy is viewed as an “adhesion contract” which is a product of the unequal bargaining power an insurer usually has over the insured. Vu v. Prudential Prop. & Cas. Ins. Co. (2001) 26 Cal.4th 1142, 1151; Love v. Fire Ins. Exch. (1990) 221 Cal.App.3d 1136, 1149 n.7; Tran v. Farmers Group, Inc. (2002) 104 Cal.App.4th 1202, 1212; Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 269.

d. Because of the insurer’s unequal bargaining power and the “take it or leave it” nature of an insurance policy, courts interpreting insurance policies apply certain rules in order to protect the insured’s coverage expectations, thereby trying to equalize the inherently “unequal” relationship between an insurer and its insureds. Univ. of Judaism v. Transamerica Ins. Co. (1976) 61 Cal.App.3d 937, 940-41; Ohran v. Nat’l Auto. Ins. Co. (1947) 82 Cal.App.2d 636, 648; Ruffino v. Queens Ins. Co. (1934) 138 Cal.App. 538, 537-38.

e. For example, courts disfavor any forfeiture of policy benefits on technical grounds which bear “no substantial relationship to the insurer’s risk.” University of Judaism v. Transamerica Ins. Co. (1976) 61 Cal.App.3d 937, 941.

f. Additionally, any ambiguities in the contract are construed against the insurer who was responsible for the drafting of the policy. Garcia v. Truck Ins. Exchange (1984) 36 Cal.3d 426, 438; State Farm. Mut. Auto Ins. Co. v. Partridge (1973) 10 Cal.3d 94, 102.

2. In contrast, Joint Powers Agreements and MOC’s are deemed to be voluntarily created by equally powerful parties to meet their specific needs.

a. A JPA is seen as the byproduct of its member’s authority and self-determination. City of S. El Monte v. S. Cal. Joint Powers Ins. Auth. (1996) 38 Cal.App. 4th 1629, 1639-40.

g. Similarly, a MOC is considered to be specifically tailored to meet the needs of its members. City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1639-40.

3. Because a JPA is not an insurer and its MOC differs from an insurance policy, courts do not apply the same principles used in interpreting insurance policies when interpreting self-insurance pooling agreements. Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 778; City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1634.

h. Instead, self-insuring pooling agreements are interpreted using rules of contract law which emphasize the parties’ intent. Southgate Recreation and Park Dist. v. California Assn. for Park and Recreation Ins. (2003) 106 Cal.App.4th 293, 297-98; City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1634.

i. Accordingly, courts seek to follow the intent of the parties to a MOC by giving the contractual terms their common meaning. Southgate Recreation and Park Dist. v. California Assn. for Park and Recreation Ins. (2003) 106 Cal.App.4th 293, 298; Century Transit Sys., Inc. v. Am. Empire Surplus Lines Ins. Co. (1996) 42 Cal.App.4th 121, 126; Civ. Code §§1636, 1638, 1639, 1644.

i) Contractual language must be construed in the context of the contract as a whole, and in the circumstances of the case. Century Transit Systems, Inc. v. American Empire Surplus Lines Ins. Co. (1996) 42 Cal.App.4th 121 126; see also Civ. Code §1641.

ii) However, because many of the terms of MOCs are derived from insurance policies, a number of cases interpreting MOCs have done so in reliance on principals of insurance law. City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629, 1645-46 (interpreting meaning of “occurrence” by cases defining the term in insurance policies); City of Laguna Hills v. S. Cal. Joint Powers Ins. Auth. (Cal. App. 2001) 2001 WL 1264549, *3 (relying on insurance case law to define meaning of “expected or intended” damages within a memorandum of coverage).

D. Unique Exclusions In MOCs

1. As a general matter, exclusions in MOCs are based on typical insurance policy exclusions, as augmented by equivalent exclusions in reinsurance contracts covering the JPAs.

2. In addition, exclusions are driven by decisions by JPAs not to spread certain risks among its members.

II. principle legal distinctions between A JPA AND AN INSURER UNDER CALIFORNIA LAW

E. Bad Faith Tort Liability Should Not Apply To Disputes Under A Memorandum of Coverage

1. Because coverage under a MOC acts in many ways as a substitute for insurance policy coverage, there is an issue of whether a JPA would be subject to the same legal duties of good faith and fair dealing as an insurer. Moreover, as lawyers commonly use insurer’s duties of good faith and fair dealing as potential “hammers” against insurance carriers in negotiations over coverage, it is increasingly common for members or their employees to attempt to raise the same duties of good faith as potential “hammers” in coverage disputes with JPAs.

2. The law implies in every contract a “covenant of good faith and fair dealing.” However, tort remedies for a bad faith breach of that implied covenant are considered extraordinary and are made available only when justified by public policy. Cates Constr., Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 47; Cal. Joint Powers Ins. Auth. v. Munich Reins. Am., Inc. (C.D.Cal. 2008) 2008 U.S.Dist.LEXIS 56654, *6.

3. Courts have permitted tort remedies for an insurer’s bad faith breach of the implied covenant based on a number of “special factors,” including: (1) the quasi-public nature of an insurer; and (2) the “special relationship” between an insurer and insured (i.e. characterized by elements of “public interest,” “adhesion” and “fiduciary-like” responsibility). Cal. Fair Plan Ass’n v. Politi (1990) 220 Cal.App.3d 1612, 1618; Waller v Truck Ins. Exch. (1995) 11 Cal.4th 1, 36; Egan v. Mut. of Omaha Ins. Co. (1979) 24 Cal.3d 809, 818; Crisci v Sec. Ins. Co. (1967) 66 Cal.2d 425, 429; Comunale v Traders & Gen. Ins. Co. (1958) 50 Cal.2d 654, 658; Love v. Fire Ins. Exchange (1990) 221 Cal.App.3d 1136, 1151; Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683-93.; Brown v. Guar. Ins. Co. (1957) 155 Cal.App.2d 679, 688.

4. When the relationship between the contracting parties does not involve adhesion or unequal bargaining power, courts have concluded that “bad faith” tort remedies are not justified. Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 46 (denying tort recovery for breach of a surety bond); Cal. Joint Powers Ins. Auth. 2008 U.S.Dist.LEXIS 56654, *10-11 (tort damages not available as against reinsurer because “elements of adhesion and unequal bargaining power are generally absent”); Erlich v. Menezes (1999) 21 Cal.4th 543, 548 (denying tort recovery for breach of contract to build a residence); Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 682-700 (denying tort recovery for breach of an employment agreement).

5. Based on this same reasoning, it has been held that insureds cannot be liable to their insurers for “bad faith” tort damages. Cal. Fair Plan Ass'n v. Politi (1990) 220 Cal.App.3d 1612, 1618 (no tort remedies available for an insureds breach of the covenant of good faith and fair dealing); Commercial Union Assurance Co. v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 920-921 (an insured cannot be held liable to an excess insurer for bad faith breach for failing to settle within its self-insured retention).

6. In addition, one decision holds that a “mutual protection trust” operating under an “inter-indemnity agreement” is not subject to “bad faith” tort remedies. Mundy v. Mut. Protection Trust (1990) 219 Cal.App.3d 127, 133.

7. As detailed above, JPAs and MOCs are not characterized by “adhesion” or “unequal bargaining power” among their members. City of South El Monte v. Southern Cal. Joint Powers Ins. Authority (1995) 38 Cal.App.4th 1629,1639-40; Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 778.

8. However, since an insurer can be liable in contract for breach of the covenant of good faith and fair dealing when it fails to accept a reasonable settlement offer within policy limits, a sound argument exists that a JPA could similarly be liable on a “breach of contract” theory for “bad faith” failure to accept a settlement offer within policy limits, even though there is no public policy basis to impose tort liability in such a case. Archdale v. Am. Int’l Specialty Lines Ins. Co. (2007) 154 Cal.App.4th 449, 468-471.

F. Coverage Under An MOC Should Not Apply To “Willful” Injuries Caused By A Member Entity Or Its Employees

1. California has long held that insurance indemnity coverage is not available for “willful” (i.e., intentionally caused) injuries as a matter of California public policy.

2. Ins. Code §533 providing that an “insurer” is not liable for a loss caused by a willful act does not apply to MOCs. However, “public policy” nevertheless precludes coverage for willful acts. Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18; J.C. Penney Ins. Co. v. M. K. (1991) 52 Cal.3d 1009, 1020; Tomerlin v. Canadian Indem. Co. (1964) 61 Cal.2d 638, 648. Thus, there is a strong argument that an MOC cannot provide coverage for injuries arising out of willful acts.

3. Additionally, on its face Civil Code §1668 would appear to invalidate coverage for “willful injury” under a MOC. Id. (“All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”) (emphasis added).

4. However, it is questionable whether §1668 would apply to coverage under a MOC because despite its language, California courts have determined that it does not apply to contractual indemnity agreements. See, e.g., Farnham v. Superior Court (1997) 60 Cal.App.4th 69, 74 (“Despite its purported application to ‘[a]ll contracts,’ section 1668 does not bar either contractual indemnity or insurance”); John E. Branagh & Sons v. Witcosky (1996) 242 Cal.App.2d 835, 838 (avoiding §1668 based on “the distinction between what may be termed a true exculpatory agreement whereby the promisee seeks to avoid liability to the promisor who has suffered damage because of the former's negligence, and an indemnity agreement whereby the promisee seeks to enforce the promisor's agreement to indemnify him if and when a claim is asserted against the promise”).

5. Under California Civil Code §2773, “[a]n agreement to indemnify a person against an act thereafter to be done, is void, if the act be known by such person at the time of doing it to be unlawful.” However, for §2773 to preclude coverage under a MOC, it may be required to show that the party seeking indemnity had actual knowledge that they were committing an unlawful act. See 20th Century Ins. Co. v. Stewart (1998) 63 Cal.App.4th 1333, 1336-1337 (holding that §2773 did not eliminate potential indemnity coverage for voluntary manslaughter “[b]ecause Guglietti did not have actual knowledge the revolver would fire when he pulled the trigger while pointing the revolver at DiGeronimo”); State Farm Fire & Casualty Co. v. Eddy (1990) 218 Cal.App.3d 958, 967-968 (“We shall assume for this discussion that transmission of genital herpes would constitute a misdemeanor under Health and Safety Code section 3198. The question is whether, at the time Eddy engaged in sexual intercourse with Greenstreet, he knew the act was unlawful. Civil Code section 2773, by its language, requires actual knowledge. Even if, in retrospect, Eddy perhaps should reasonably have known that he was exposing a person to or infecting her with a venereal disease (because of his medical and dating history), the indemnity agreement would not be void.”). As a result, Civil Code §2773 would not apply to preclude coverage for all “willful injuries.”

G. Priority of Coverage Between MOCs And Insurance Policies

1. As stated above, because coverage under a MOC will frequently overlap with concurrent coverage for the same loss or injury under an insurance policy, there are situations where priority of coverage questions arise between insurance policies and MOCs. Moreover, while the courts have developed several legal doctrines to allocate coverage between multiple insurance policies, there are outstanding questions whether and to what extent these same legal doctrines would apply to apportion coverage between an insurance policy and an MOC.

2. An insurance policy which states that the insurer has no obligation to defend or indemnify until “other insurance” is exhausted will, under certain circumstances, be secondary to any “other insurance” policies which apply. Carmel Dev. Co. v. RLI Ins. Co. (2005) 122 Cal.App.4th 502, 513-514; Comm. Redevelopment Agency v. Aetna Cas. & Sur. Co. (1996) 50 Cal.App.4th 329, 339 Olympic Ins. Co. v. Employers Surplus Lines Ins. Co. (1981) 126 Cal.App.3d 593, 600.

3. This rule of priority, however, does not apply to an MOC which is not “insurance” but rather is an arrangement by which public entities “pool their self-insured claims and losses.” Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 903.

4. Thus an excess policy is not, by definition, secondary in priority to a MOC under a standard “other insurance” provision. Schools Excess Liability Fund v. Westchester Fire Ins. Co. (2004) 17 Cal.App.4th 1275, 1285-1286; Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 777.

H. Does The Rule Of “Horizontal Exhaustion” Apply To MOCs?

1. Under the “horizontal exhaustion” rule, “all of the primary policies in force with respect to a loss will be deemed primary policies to each of the excess policies covering that same period.” Cmty. Redevelopment Agency v. Aetna Cas. & Sur. Co. (1996) 50 Cal.App.4th 329, 339.

6. Thus, “an excess or secondary policy does not cover a loss, nor does any duty to defend an insured arise, until all of the primary insurance has been exhausted.” Cmty. Redevelopment Agency v. Aetna Cas. & Sur. Co. (1996) 50 Cal.App.4th 329, 339; Olympic Ins. Co. v. Employers Surplus Lines Ins. Co. (1981) 126 Cal.App.3d 593, 600.

7. However, contribution only applies between insurers, as an insurer cannot secure contribution from its insured who may be “self-insured” for part of the relevant period. Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 72; Truck Ins. Exchange v. Amoco Corp. (1995) 35 Cal.App.4th 814, 823.

8. Though California Courts have not directly considered the issue, the “horizontal exhaustion” rule should not apply to a MOC since a MOC is not “insurance” but instead is the functional equivalent of a JPA member’s own funds. Govt. Code §990.8(c); Schools Excess Liability Fund v. Westchester Fire Ins. Co. (2004) 117 Cal.App.4th 1275, 1285-86.

I. Can An Insurer Obtain “Contribution” From A JPA?

1. Under the doctrine of “equitable contribution,” an insurer which pays more than its proportionate share of defense or indemnity costs can recover from an insurer that paid less the amount that the under-paying insurer should have paid but did not. Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1288-1289.

9. Conversely, because “[e]quitable contribution applies only between insurers” and therefore is inapplicable between an insurer and a self-insured, a self-insured entity should not be subject to “equitable contribution.” Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 72; Truck Ins. Exchange v. Amoco Corp. (1995) 35 Cal.App.4th 814, 828; Cty. of San Bernardino v. Pac. Indem. Co. (1997) 56 Cal.App.4th 666, 690-91.

10. Since a JPA is not an insurer, but rather a pool of self-insured entities, it follows that a JPA is not likely to be subject to “equitable contribution.” Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 904; Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 777; Southgate Recreation and Park Dist. v. California Assn. for Park and Recreation Ins. (2003) 106 Cal.App.4th 293, 297.

J. Priority Of Coverage As Between MOCs Covering Members Of JPAs And Policies Covering Employees Of Members

1. Under general principals of insurance law, where multiple policies apply to the same persons or organizations liable for a loss, the determination of priority “requires the following steps: (1) the determination of the person upon whom ultimate liability will be thrust by the legal principals of indemnity; and (2) the determination by analysis of the insurance policies involved of the extent of the coverage afforded by those policies to that person.” Transport Indem. Co. v. Am. Fid. & Cas. Co. (1970) 4 Cal.App.3d 950, 956.

a. In the context of non-public employers and their employees, the employer has the right of indemnity “for damages occasioned by the unauthorized negligent act of his employee...; that is, as between employer and employee in such situation, the obligation of the employee is primary and that of the employer is secondary....” Cont’l Cas. Co. v. Phoenix Constr. Co. (1956) 46 Cal.2d 423, 428-429.

b. Likewise, a vehicle owner has a right of indemnity against a permissive user under the provisions of Vehicle Code §17153. Am. Motorists Ins. v. Underwriters at Lloyd’s London (1964) 224 Cal.App.2d 81, 86-87; Hartford Accident & Indem. Co. v. Transport Indem. Co. (1966) 242 Cal.App.2d 90, 94-95.

11. However, when an employee of a public entity requests his or her public entity employer to provide a defense and indemnification for a lawsuit arising from an act or omission within the course and scope of employment, Govt. Code §§ 825, 825.4 and 996.4 require the entity to pay for the defense of the lawsuit and to pay for any judgment or settlement against the employee.

a. In doing so, the public entity can fulfill its obligation through “any insurance policy.” Govt. Employees Ins. Co. v. Gibraltar Cas. Co. (1986) 184 Cal.App.3d 163, 167 (italics in original).

b. If the employee’s defense or indemnity arose from an automobile accident in which the employee was driving his or her personal automobile in the course and scope of their employment, the public entity can fulfill its statutory obligation through the employee’s personal automobile policy. Gov't Employees Ins. Co. v. Gib. Casualty Co. (1986) 184 Cal.App.3d 163, 172; Younker v. Cty. of San Diego (1991) 233 Cal.App.3d 1324, 1331.

(1) This is because personal automobile policies typically contain language providing coverage to the named insured and “any other person or organization for his or its liability because of the acts or omissions of any insured.” See, e.g., Gov't Employees Ins. Co. v. Gib. Casualty Co. (1986) 184 Cal.App.3d 163, 179; Younker v. County of San Diego (1991) 233 Cal.App.3d 1324, 1329.

(2) For an accident involving public employee driving while in the course and scope of their employment, the public entity employer is considered to be an “insured” under standard personal automobile policy language which covers “[a]ny other person or organization for his or its liability because of the acts or omissions of any insured.” Gov't Employees Ins. Co. v. Gib. Casualty Co. (1986) 184 Cal.App.3d 163, 171; Younker v. County of San Diego (1991) 233 Cal.App.3d 1324, 1328-29; Oxnard Union High Sch. v. Teachers Ins. Co., 20 Cal.App.3d 842, 844-45 (1971).

c. However, in a typical non-auto situation where the public employee’s policy does not also cover the public entity, since the public entity does have an obligation to indemnify the employee under Govt. Code §§ 825, 825.4, the “primary liability” for defense and indemnity costs lie with the public entity. Pac. Indem. Co. v. Am. Mut. Ins. Co., 28 Cal.App.3d 983, 992 (1972)

K. Priority of Coverage Between Automobile Self-Insurance And Personal Automobile Policies

1. Vehicle Code §16020(a) requires “[a]ll drivers and all owners of a motor vehicle” to “at all times be able to establish financial responsibility pursuant to Section 16021” and “at all times carry in the vehicle evidence in for form of financial responsibility in effect for the vehicle.” This “evidence of financial responsibility” often takes the form of proof of insurance forms or self-insurance certificates. Veh. Code §16020(b)(1)-(2).

12. However, a public entity that self-insures is not required to establish financial responsibility under Vehicle Code §16021 through a certificate of self-insurance. Rather, a self-insured public entity can make the requisite showing of financial responsibility through a “showing that the vehicle is owned or leased by, or under the direction of, the United States or a public entity, as defined in Section 811.2 of the Government Code.” Veh. Code §16020(b)(4).

2. Under Vehicle Code §16053, the Department of Motor Vehicles “may in its discretion, upon application, issue a certificate of self-insurance” to an applicant for motor vehicle self-insurance. Vehicle Code §16053(a) enables an entity to obtain automobile self-insurance by filing documents demonstrating financial responsibility with the Department of Motor Vehicles. Veh. Code §16053(a).

13. If an entity obtains a certificate of self-insurance from the Department of Motor Vehicles pursuant to Vehicle Code §16053, Insurance Code § 11580.9(i) specifically provides that such certificate “shall be considered a policy of automobile insurance” for the purpose of determining priority of coverage. Grand Rent A Car Corp. v. 20th Century Ins. Co. (1994) 25 Cal.App.4th 1242; 1246, 1248; Pac. Intermountain Express v. Nat’l Union Fire Ins. Co. (1984) 151 Cal.App.3d 777, 781.

14. However, a public entity self-insurance pooling agreement does not amount to a certificate of self-insurance and therefore does not meet the requirements of Insurance Code §11580.9(d) requiring that an insurance policy which rates or describes the vehicle involved in the accident shall be primary. Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 779.

III. Emerging Issues

L. Do JPAs Have An Obligation To Provide Independent “Cumis” Counsel Or Any Other Legal Obligations Under Civil Code §2860?

Because liability coverage under a MOC is similar in some respects to liability coverage under an insurance policy, it is not uncommon for members or covered individuals tendering a suit or action for a defense under an MOC also to make a demand for “independent” or “Cumis” defense counsel of their own choosing pursuant to Civil Code §2860. However, there are several reasons why a member or employee entitled to a defense under a MOC may not be entitled to independent counsel, even though they would have such a right under a liability insurance policy.

Under California Statutes And Case Law, A Joint Powers Authority Is Not An Insurer

a. The California Insurance Code defines “insurance” as “a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event,” Ins. Code §22, emphasis added. An “insurer” is defined as “[t]he person who undertakes to indemnify another by insurance … .” Ins. Code §23 (emphasis added).

a. The statutes enabling public entities to self-insure through JPA’s by means of joint powers agreements provide that that pooling agreements such as memoranda of coverage “shall not be considered insurance nor be subject to regulation under the Insurance Code.” Govt. Code §990.8(c).

b. Furthermore, where contributions or premiums are based on loss history and the member agency ultimately pays back to the JPA amounts paid out on its behalf, there is “no shifting of the risk of loss. Thus, the arrangement lacks a fundamental feature of ‘insurance.’” Orange Cnty. Dist. v. Ass’n of Cal. Water Etc. Authority (1997) 54 Cal.App.4th 772, 777; Fort Bragg Unified Sch. Dist. v. Colonial Am. Cas. & Sur. Co. (2011) 194 Cal.App.4th 891, 906.

1. Because A JPA Is Not An Insurer, The Duties And Obligations Created By Civil Code §2860 Should Not Apply To A JPA

a. As written, Civil Code §2860 only applies where “the provisions of a policy of insurance imposed a duty to defend upon an insurer….” (Emphasis added). As such, it should not apply to MOC pooling agreements given that they “shall not be considered insurance nor be subject to regulation under the Insurance Code.” Govt. Code §990.8(c).

c. Also, California courts have held that public entities are not required to provide independent counsel when they are defending their employees, even if there is an actual conflict of interest between the employee and the public entity. Gov. Code §§995, 995.2(a)(3); City of Huntington Beach v. The Petersen Law Firm (2002) 95 Cal.App.4th 562, 568; DeGrassi v. City of Glendora (9th Cir. 2000) 207 F.3d 636, 643.

d. Since payment arrangements under a JPA are ultimately a form of joint self-insurance and not a form of loss shifting through an indemnity contract, the conflict of interest giving rise to the right to independent counsel may not be present in the first instance. Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 777; Fort Bragg Unified Sch. Dist. v. Colonial Am. Cas. & Sur. Co. (2011) 194 Cal.App.4th 891, 906.

e. Additionally, the right to independent counsel is designed to mitigate ethical issues regarding the conduct of the defense where the insurer and insured have opposing interests. Generally, the conflict arises because, if the insured is found liable, they have a financial interest in obtaining indemnity for the judgment under the insurance policy while the insurer has an opposite financial incentive to avoid indemnity. Civil Code §2860(a); San Diego Fed. Credit Union v. Cumis Ins. Soc'y (1984) 162 Cal.App.3d 358. However, since payment arrangements under an MOC are ultimately a form of joint self-insurance and not a form of loss-shifting through an indemnity contract, the same conflict of interest may not exist. Orange County Water Dist. v. Ass'n of Cal. Water Etc. Auth. (1997) 54 Cal.App.4th 772, 777; Fort Bragg Unified Sch. Dist. v. Colonial Am. Cas. & Sur. Co. (2011) 194 Cal.App.4th 891, 906.

f. However, a JPA may not be able to assign the same defense counsel to defend multiple codefendants who have filed opposing claims against each other (i.e. indemnity claims), because that would put assigned counsel on “both sides” of the same case. O'Morrow v. Borad (1946) 27 Cal.2d 794, 800-801.

g. Moreover, a JPA cannot assign counsel who would be ethically barred from defending an employee or entity based on counsel’s current or past representations of another party. Cal. Rules of Prof'l Conduct, Rule 3-310.

h. Practical Considerations: In some situations, it may be advisable for a JPA to “accept” a demand for independent counsel because the employee or entity has a preexisting working relationship with counsel that would make that counsel a good choice for the defense. In such cases, if the employee or entity makes a demand for independent counsel, the JPA can condition acceptance on also applying the restrictions provided by Civil Code §2860 (i.e. payment only at normal defense counsel rates, arbitration of fee disputes, disclosure of all information which does not involve a conflict of interest, etc.)

M. Do JPAs Have The Same Rights Of Recovery As Insurers Under The Doctrine Of Subrogation?

1. Because JPAs provide risk-sharing services which are similar to those provided by insurance policies, it is increasingly common for JPAs to seek reimbursement for losses paid from responsible third parties under the legal doctrines of indemnity and subrogation. However, there are unique features to the coverage provided under MOCs which can affect a JPAs ability to recover reimbursement for such losses in comparison to commercial insurers.

2. The doctrine of subrogation allows a party required to satisfy another’s loss to “step into the shoes” of the injured party to seek compensation for the amounts paid from the original wrongdoer who caused the loss. Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1291-1292; Caito v. United California Bank (1978) 20 Cal.3d 694, 704.

15. In the insurance context, “subrogation takes the form of an insurer's right to be put in the position of the insured in order to pursue recovery from third parties legally responsible to the insured for a loss which the insurer has both insured and paid.” (Fireman's Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1291-1292; American States Ins. Co. v. National Fire Ins. Co. of Hartford (2011) 202 Cal.App.4th 692, 701).

16. Subrogation rights pass automatically to the party compensating for the loss as a form of equitable assignment. American States Ins. Co. v. National Fire Ins. Co. of Hartford (2011) 202 Cal.App.4th 692, 701; see also National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Services Group, Inc. (2009) 171 Cal.App.4th 35, 55. As a result, there is no need to execute a contract or other assignment in order for the right of subrogation to pass to the compensating party. National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Services Group, Inc. (2009) 171 Cal.App.4th 35, 55; Patent Scaffolding Co. v. William Simpson Constr. Co. (1967) 256 Cal.App.2d 506, 510.

17. While the subrogation doctrine is not limited to insurance companies, the fact that coverage under a MOC technically is not “insurance” may allow JPAs to avoid some restrictions on subrogation-type claims that apply to insurance companies.

a. With respect to claims in small claims court (i.e. claims less than $5,000), C.C.P. §116.420(a) states that “[n]o claim shall be filed or maintained in small claims court by the assignee of the claim.” This provision has been used to bar insurers from pursuing subrogation claims in small claims court since they are technically equitable “assignees” of the original claim. Allstate Ins. Co. v. Mel Rapton, Inc., 77 Cal. App. 4th 901, 910 (2000); Allianz Insurance Co. v. Municipal Court, 126 Cal.App.3d 1043 (1981). However, since a JPA is, in essence, a self-insuring risk pool, it can be argued that the claim was not one which was “assigned” between two parties as required to fall within the language of C.C.P. §116.420(a).

b. Moreover, C.C.P. §116.420(b) contains a specific exception for when “a local government which is self-insured for purposes of workers' compensation and is seeking subrogation pursuant to Section 3852 of the Labor Code.” As a result, a JPA can pursue Labor Code § 3852 claims in small claims court while a normal worker’s compensation insurer cannot. Allianz Insurance Co. v. Municipal Court (1981) 126 Cal.App.3d 1043.

c. JPAs can pursue indemnity claims seeking coverage under CIGA (i.e. claims against insureds with an insolvent insurance carrier) while insurance carriers are barred from such claims. Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 903-904; Black Diamond Asphalt, Inc. v. Superior Court (2003) 114 Cal.App.4th 109, 120; Ins. Code § 1063.1(c)(5)

d. At the same time, JPAs, like insurers, are barred from pursuing actual subrogation claims against insured of insolvent insurers seeking coverage under CIGA. Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 909-910; Ins. Code § 1063.1(c)(9)(A).

i) The conclusion in Fort Bragg that JPAs may not be able to pursue subrogation claims against insureds covered by CIGA may be distinguishable because: (1) the JPA tried its claims at the trial court as “subrogation” claims; and (2) the JPA did not argue until the appeal that claims by JPA’S do not involve an actual “assignment” of rights between separate parties. See Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 909. As a result, cases by JPAs involving potential coverage under CIGA may require careful characterization of the reimbursement claims being asserted to avoid the “subrogation” label.

N. Does The Coverage Provided By An MOC “Stack” With Available Insurance Coverages In Situations Where A Loss Continues Over Several, Successive Policy Periods (i.e. “long-tail” injuries)?

1. Because liability coverage under a MOC functions in many respects as a substitute for liability coverage under an insurance policy, several issues arise regarding the allocation of losses between coverage under a MOC and coverage under a standard liability policy. These issues can become increasingly complex in situations where a single injury progressively occurs over multiple, successive policy periods, raising the question whether and to what extent coverage under an MOC would “stack” (i.e. contribute with) other available insurance liability coverages.

2. As a general rule, standardized insurance policies providing “bodily injury” or “property damage” indemnity coverage apply only to injuries which occur during the relevant policy period. Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 669-670 (1995); Remmer v. Glens Falls Indem. Co., 140 Cal.App.2d 84, 89-90 (1956).

3. However, in cases where the injury continuously and gradually occurs over several successive policy periods (e.g. pollution cases, asbestos injuries), all policies in effect while the injury is occurring and ongoing are potentially triggered. See Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 689 (applying “continuous injury trigger of coverage” in situations involving “continuous or progressively deteriorating damage or injury” over successive policy periods); see also State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 196-197.

4. In “continual injury” trigger situations, all insurers providing coverage during the time period when the injury is occurring and ongoing may be required to provide a defense and indemnity for the injury. Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 55-59; Montrose Chemical Corp. v. Admiral Ins. Co. (1995) 10 Cal.4th 645, 689.

18. Under this “long-tail” injury scenario, unless the affected policies have language to the contrary, an insured can effectively “stack” together the indemnity limits provided by multiple, successive policies and apply them to a single, continuous “long tail” injury. State of California v. Continental Ins. Co. (2012) 55 Cal.4th 186, 200-202. Under this approach, all of the affected polices can be treated as a single “‘uber-policy’ with a coverage limit equal to the sum of all purchased insurance policies.” Id., 201.

19. While coverage under an MOC may appear to be “stackable” with other insurance coverages in “long-tail” injury situations, there are several reasons why MOC coverage should not be “stackable” even in the absence of “anti-stacking” language in the MOC.

a. Coverage under an MOC is not “insurance” per se, but rather is an arrangement by which public entities “pool their self-insured claims and losses.” Fort Bragg Unified School Dist. v. Colonial American Casualty & Surety Co. (2011) 194 Cal.App.4th 891, 903.

b. Requiring coverage under an MOC to “stack” with other insurer’s coverage would be the equivalent of requiring an insured to pay partial compensation for its own losses. However, California courts have refused to require insureds to contribute towards otherwise insured losses based on periods of self-insurance. Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 72; Truck Ins. Exchange v. Amoco Corp. (1995) 35 Cal.App.4th 814, 823; County of San Bernardino v. Pac. Indem. Co. (1997) 56 Cal.App.4th 666, 689-691; Cal. Pac. Homes v. Scottsdale Ins. Co. (1999) 70 Cal.App.4th 1187, 1193-1195.

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