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Bi-Coastal Payroll Services, Inc. v. California Insurance Guarantee Association

May 29, 2009


APPEAL from a judgment of the Superior Court of Los Angeles County, Maureen Duffy-Lewis, Judge. Reversed and remanded with instructions. (Los Angeles County Super. Ct. No. BC336237).

The opinion of the court was delivered by: Mosk, J.



We issued an order to show cause regarding dismissal of the appeal as untimely, and the parties responded with letter briefs on the timeliness of the notice of appeal. We hold that plaintiffs' duty to file their notice of appeal arose from the service of their notice of entry of judgment, not the service of the trial court's earlier minute order, which order did not strictly comply with the requirements of California Rules of Court, rule 8.104(a)(1), and that their appeal is therefore timely. In the unpublished portion of this opinion, we hold that the trial court properly sustained the demurrer to the second, third and fourth causes of action because those claims are barred by Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal.3d 775 (Isaacson), but that plaintiffs should be granted leave to amend to plead a cause of action for reimbursement as recognized in Isaacson.


On July 7, 2005, plaintiffs and appellants (plaintiffs)*fn2 filed a complaint against defendant and respondent California Insurance Guarantee Association (CIGA) for declaratory relief. A month later, plaintiffs filed a first amended complaint, again seeking only declaratory relief. In response, CIGA filed a motion to strike and a demurrer. The trial court granted the motion to strike, but overruled the demurrer. After CIGA answered, plaintiffs sought and obtained leave of court to amend their complaint. In addition to declaratory relief, the second amended complaint asserted causes of action for an accounting, negligence, and breach of fiduciary duty. CIGA responded with a motion to strike and a demurrer to the accounting, negligence, and breach of fiduciary duty causes of action. The trial court sustained the demurrer without leave to amend, leaving only the declaratory relief cause of action.

As discussed in detail below, plaintiff voluntarily dismissed the declaratory relief cause of action and the parties stipulated to entry of judgment in favor of CIGA. In a minute order served on the parties, the trial court accepted the stipulation and entered judgment. Plaintiffs thereafter gave formal notice of entry of judgment and filed a notice of appeal.


Plaintiffs are related corporations formed for the purpose of providing personnel or payroll services to the entertainment industry. Pursuant to plaintiffs' service agreements with the certain production companies, plaintiffs were required to obtain and did in fact obtain workers' compensation coverage for the employees they provided to those companies.

Plaintiffs determined to meet their workers' compensation insurance requirements through a ―high-deductible‖ program. In a high-deductible program, the insured is ultimately responsible for all claims up to a certain amount, which in this case was $350,000. Plaintiffs procured high-deductible policies through Legion Insurance Company (Legion). Plaintiffs also obtained a separate high-deductible reimbursement policy through Mutual Indemnity (U.S.) Ltd. (Mutual) to cover plaintiffs' obligations under the deductible. Plaintiffs posted several million dollars in collateral with Mutual based on the amounts paid as losses on claims, presumably as collateral to secure the plaintiffs' ability to satisfy the $350,000 deductible.

Under the high-deductible policy, Legion was required to administer and pay the claims up to the deductible amount and then to seek reimbursement for amounts paid under the deductible from Mutual, with whom one of the plaintiffs, Media Services, had placed on deposit the necessary funds and securities.

On April 25, 2003, the Insurance Commissioner of Pennsylvania liquidated Legion. Thereafter, all of plaintiffs' California claims with Legion were transferred to CIGA*fn4 for adjustment and payment as required under California Insurance Code section 1063, et seq. Accordingly, CIGA became statutorily responsible for defending, handling, reserving, paying, and settling the workers' compensation claims filed under the Legion policy.

The total incurred losses (amounts paid and reserved) by CIGA on plaintiffs' claims are part of the contractual formula used by Mutual to calculate the amount of collateral necessary to cover obligations pursuant to the Mutual deductible reimbursement policy. Additionally, the manner in which CIGA administers plaintiffs' claims directly determines how much of the deductible plaintiffs ultimately will be responsible to pay through reimbursement on each workers' compensation claim. Further, by defending, handling, managing, reserving, paying, and settling the claims, CIGA's acts and omission affect the amount of premiums that plaintiffs have paid and will pay in the future.

In or about June 2004, plaintiffs obtained balance sheets, income statements, and underwriting summaries providing incurred amounts on claims administered by CIGA. Plaintiffs believed the reserves set by CIGA were disproportionately high in relation to the age of the individual claims, representing an aggressive reserving policy on the part of CIGA. Plaintiffs also learned that CIGA set substantial reserves to cover incurred but not yet reported losses (IBNR), even though most of the claims being administered by CIGA were several years old.

During the same period, CIGA commenced sending demand letters to the various payroll companies seeking direct reimbursement for benefits paid under the Legion policies. The demand letters sought reimbursement for amounts under the deductible that Legion is contractually obligated to pay pursuant to the policies. Concerned with their significant exposure on these claims, and the fact that millions of dollars in collateral had been placed with Mutual to secure their obligations, plaintiffs made numerous requests to CIGA to audit CIGA's handling and reserving of the claims files. Plaintiffs' requests were prompted by: 1) a need to obtain an accurate assessment of the amount of its reserves and IBNR's in order to secure the release of the posted collateral through Mutual; and 2) to assure that CIGA was not overpaying on its claims, such that plaintiffs would be billed for costs and expenses that should not be passed on to plaintiffs by CIGA.

Despite CIGA's demand for reimbursement for benefits paid under the Legion policies, CIGA refused to provide meaningful access to the claims files. Although CIGA implicitly acknowledged that the plaintiffs ultimately were liable for the deductible amounts by directing its demand letters to plaintiffs, CIGA in bad faith refused to allow meaningful access to the claims files in an attempt to conceal its claims mishandling, over reserving, and late reporting of claims to the detriment of plaintiffs.

On December 15, 2004, plaintiffs requested the production of ten litigated files in CIGA's possession. In response, CIGA only agreed to provide plaintiffs access to a certain portion of the claims files and only after plaintiffs or plaintiffs' third party expert executed a confidentiality and indemnification agreement. Plaintiffs, however, were not required to identify an expert prior to reviewing the claims files; had no obligation to indemnify and defend CIGA; and CIGA had no statutory or other authority to withhold documents to which plaintiffs are statutorily entitled.

On January 25, 2005, plaintiffs' counsel sent a draft protective order to address CIGA's privacy concerns by agreeing to keep the contents of the claims files confidential and to not disclose its contents to any entity, including plaintiffs, without the express consent of CIGA. In the proposed protective order, plaintiffs also agreed to require all consultants hired by plaintiffs to execute a confidentiality agreement prior to reviewing the claims files to further protect the employees' privacy.

On February 9, 2005, CIGA responded to plaintiffs' proposed protective order by not only refusing to allow access to the claims files unless plaintiffs first executed CIGA's agreement, but also requiring that a release be executed by the workers' compensation claimant prior to the production. In response, plaintiffs sent a letter on February 11, 2005, further agreeing to modify the proposed protective order by providing 20 days notice to the injured worker to object to the production by sending notice to the claimant's last known address or to his or her attorneys' last known address.

On June 16, 2005, CIGA summarily rejected plaintiffs' compromise proposal.


A. Order to Show Cause re ...

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