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What’s Fair Is Fair: Court Of Appeal Affirms Order Granting Insurers’ Motion To Vacate Default Judgement Against Insured Based On Equitable Grounds

By Sander Alvarez

In Mechling v. Asbestos Defendants, filed on December 11, 2018, the California Court of Appeal affirmed four trial court orders granting an insurer’s motions to set aside millions of dollars in default judgments against a defunct insured. The court held that a trial court has inherent power to vacate default judgments on equitable grounds, including extrinsic mistake. Mechling provides welcomed comfort to insurers who may not be able to immediately defend a purported insured (defunct or not) upon first notice of a suit because coverage is unconfirmed and/or under investigation. The case is particularly relevant in the context of lost policy cases.

Mechling involved consolidated appeals in four asbestos suits filed against Associated Insulation of California (“Associated”)—and other asbestos defendants. Associated was an insulation contractor that ceased doing business in 1974. Associated was named as a defendant in numerous asbestos suits filed between 2009 and 2013. Although the suits were served on Associated’s last known agent for service of process, the suits were not served on Fireman’s Fund Insurance Company (“Fireman’s Fund”), Associated’s insurer. Associated did not appear in any of the suits during this time and, consequently, countless default judgments were entered against it in multiple California courts. Between 2013 and 2015, more than $40 million in default judgments reportedly were entered against Associated in San Francisco Superior Court alone, although Mechling only concerned four default judgments ranging from $350,000 to $1,960,458.

After receiving notice in 2016 of two suits pending against Associated, Fireman’s Fund retained counsel to defend Associated. Fireman’s Fund subsequently learned of the default judgments against Associated, and thereafter filed successful motions (on its own behalf) to set aside the default judgments. On appeal, the court affirmed the orders setting aside the default judgments.

The court prefaced its analysis by noting that “appellate courts are much more disposed to affirm an order which compels a trial on the merits than to allow a default judgment to stand.” (Citing and quoting Aldrich v. San Fernando Valley Lumber Co., 170 Cal.App.3d 725, 737 (1985).) It then held that, but for extrinsic mistake, “[a] reasonable inference from [the] facts is plaintiffs’ damages award would have been impacted had Fireman’s Fund presented a defense and challenged plaintiffs’ proof of causation and damages.” The court reasoned that Fireman’s Fund established extrinsic mistake inasmuch as, among other things, it “was not a named party and was not served with the complaints or other relevant pleadings.” The court also rejected plaintiffs’ contention that Fireman’s Fund had received notice of two matters in 2012 and failed to take any action then. The court rejected this argument because, in a 2012 letter, Fireman’s Fund advised plaintiffs that it searched all available records and had not located any Fireman’s Fund policies or references to policies it issued to Associated. The court explained that this letter “supports the conclusion that Fireman’s Fund had a satisfactory excuse for not defending” Associated at that time—i.e., because Fireman’s Fund “did not believe Associated was its insured.”

Although Mechling provides meaningful precedent and authority for insurers who need to set aside default judgments, insurers are cautioned to move expeditiously to set aside a default judgment upon discovering that one has been entered against an insured because a showing of diligence is a critical factor in establishing equitable grounds to set aside a default judgment.

Sander Alvarez is a Senior Counsel at Hunt Ortmann who specializes in insurance coverage litigation. For more information you can contact Mr. Alvarez at alvarez@huntortmann.com.

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