What Baseball Has Taught Me About The Insurance Appraisal Process

Ryan Hutson | Butler Weihmuller Katz Craig LLP | May 10, 2019

Anyone who has ever watched baseball knows that umpires sometimes make an incorrect call. In appraisal of a property insurance claim, sometimes the umpire can make a mistake as well. 

Just as in baseball, yelling and kicking dirt on the umpire’s proverbial home plate will never resolve or change the incorrect call during an appraisal process.  Only by following the proper procedure can a baseball team’s manager get a call reviewed by video replay and, potentially, have the bad call overturned. The same holds true in insurance appraisals.

A federal judge recently ruled that an incorrect appraisal award by a court-appointed umpire was binding on the parties, even where the umpire later attempted to issue a “corrected” award.  Guzman v. American Security Insurance Company, No. 18-cv-61195, 2019 WL 1383230 (S.D. Fla. March 27, 2019).  While the umpire later claimed his first award was not final, the court found that the umpire lacked the authority to unilaterally modify the award where: 1) the insurance policy expressly stated that a decision by any two of the three appraisers was binding, and; 2) the “wronged” party did not follow the statutory procedures to obtain a modification to the award.

In Guzman, the insured brought a claim against the insurance company for disputed damage claims arising from Hurricane Irma.  After the initial filing of the suit, the parties agreed to stay litigation and complete the appraisal process available under the policy.  Each party hired their own appraiser, but they were unable to reach agreement on the scope of loss. As they also could not agree on an umpire, one was appointed by the court, and together the three inspected the property.

Five days after the joint inspection, the umpire emailed his signed appraisal award in the amount of $121,800.30.  Importantly, the email stated, “See attached for review and comment.  If one or both of you find this agreeable, please sign, scan, and return to me.  I will then get out the originals.”   

Within 40 minutes of the appraisal award, the insurer’s appraiser sent an email objecting to the Appraisal Award and asking for an itemization of the award.  The insured’s appraiser, however, quickly signed the copy of the award previously signed by the umpire and submitted it. 

Seeing his mistake, the umpire emailed both appraisers the same day, requesting missing documents from the insured’s appraiser and indicating that he would “hold off” on the final appraisal award until after those documents were produced.  About 12 days later, the umpire issued a revised appraisal award for $90,704.27.  This lower award prompted the insured to file a Motion to Confirm the initial appraisal award.

In ruling that the initial appraisal award was binding on the parties, the court focused on the language of the appraisal provision of the policy at issue. Specifically, the provision allowed that if the appraisers disagree, they shall submit their difference to an umpire, and a “decision agreed to by any two will be binding”. While the umpire later indicated by email that the initial award was not final, there was nothing in the initial signed award that indicated it was not final.  Thus, the court found that once a second appraiser, in this case the insured’s, signed the award, the award became binding by the express and unambiguous terms of the insurance policy. 

For future attorneys about to step up to the proverbial plate, the court in Guzman hinted at a possible way the Defendant insurer could have handled the umpire’s incorrect award, even once it was signed by both the umpire and the opposing appraiser. 

While the appraisal process is not governed by the Florida Arbitration Code, Florida courts apply the procedures provided by the Arbitration Code to the confirmation process of an appraisal award.  Specifically, the court noted that Florida Statute §682.12 controls the confirmation of arbitration awards.  Under §682.12, a court shall confirm an arbitration award unless an insurer moves to vacate, modify or clarify an award pursuant to Florida Statutes 682.10, 682.14 or the award is vacated pursuant to 682.13. 

Florida Statute 682.10 states in part that an arbitrator may modify, clarify or correct an award where a party makes a motion to the arbitrator/umpire within 20 days of the award, allowing the opposing party 10 days to object to the motion.  The court may then submit the claim to the arbitrator to consider whether to modify or correct the award.

In this case, the insurer never filed a motion to modify, clarify or correct the award.  While the insurer’s attorney expressed his objections to the award via email, the court highlighted that the insurer never made a formal motion or request for modification or correction. 

All the emails in the world and all the back-tracking of the umpire couldn’t overturn the wrong call, but one proper motion by the insurance company “team manager” could have potentially reset the whole scenario.  It is a valuable lesson to future attorneys going to bat through the appraisal process.  If the umpire gets it wrong, file a timely motion with the court to start the review process; don’t just kick dirt at the umpire.

Say What? Statutes of Repose/Limitation May Not Be Defenses in Arbitration?

David K. Taylor and Kyle M. Doiron | Bradley Arant Boult Cummings LLP | May 2, 2019

Most private construction contracts contain binding arbitration clauses and apply the “law of the state where the project is located.” While arbitration is less formal than court/litigation, legal defenses are often raised, including whether a claim is barred by a statute of limitation or, in the case of construction claims, a statute of repose. A statute of repose, as opposed to a statute of limitation, with a few exceptions, means that no matter when the claimed defect is “discovered,” the claim is barred if not brought within a specific period of time after substantial completion. For example, in Tennessee a claim must be brought within four years of substantial completion or that claim is barred by the statute or repose. However, a recent arbitration ruling raises concerns about whether such statutes will apply in arbitration.

Most statutes of repose (and limitation) apply to “any and all actions.” In a recent arbitration case, an owner brought a $1.5 million defective work claim against its prime contractor 10 years after substantial completion of a project that was located in Tennessee. The contractor moved to dismiss the claim based upon Tennessee’s four-year statute of repose. However, the owner cited a few reported court cases (none from Tennessee) and argued that the word “action” in the statute of repose was intended by the legislature to apply only to court cases, not to arbitration. One point made by the owner was that the statute of repose was passed decades prior to any state passage of arbitration laws allowing courts to enforce arbitration agreements. The contractor argued that if statutes of repose (and limitation) do not apply when the parties agree to binding arbitration, contractors (and subcontractors) would have unlimited liability for years–even decades–after substantial completion.

A few states have surprisingly adopted the owner’s argument. However, in most of those cases, the state legislatures jumped in to clarify the law (but not in time for the particular contractor who had lost the argument).

The Tennessee arbitration panel ruled that the four-year statute of repose did not apply in arbitration, even though it was undisputed that the arbitration was commenced 10 years after the project was completed. The panel commented that this problem was up to the Tennessee Legislature to fix. The contractor was then forced to defend the owner’s alleged defect claim. While the panel ultimately found in favor of the contractor, the legal and arbitration fees were extensive and would have been avoided if the arbitration panel had applied the statute of repose.

What can be done to avoid such a result? One way is not to agree to arbitration. However, there are many other reasons to choose arbitration, and it has become the preferred method of dispute resolution in most design and construction contracts. Another suggestion is to check each state’s statute of repose to determine if the applicable state statutes use the same word “action” and then review any published case law on the issue. A proactive approach might include lobbying state legislatures to amend their statutes to ensure that “arbitration” is included in the definition of “action.” Finally, a helpful contract drafting suggestion would be to include, in any contract that calls for binding arbitration, a provision that states that in any arbitration the parties agree that the arbitrator(s) must apply any applicable statutes of repose and limitation.

Dispute Resolution in the USA

Caitlyn Slovacek, Robert J. Ward and Robert M. Abrahams | Schulte Roth & Zabel | April 29, 2019

Litigation

Court system

What is the structure of the civil court system?

The United States Supreme Court is the highest federal court and is provided for in article III of the United States Constitution. The Supreme Court consists of the Chief Justice of the United States and eight associate justices. With discretion and within certain guidelines, the Supreme Court reviews a limited number of the cases it is asked to decide. Those cases may begin in state or federal courts, and they usually involve important constitutional or federal law questions.

The Constitution also grants Congress the authority to establish additional federal courts. To date, Congress has established trial and appellate courts below the Supreme Court.

The district courts are the general trial courts of the federal system. Within the limits set by the Constitution and Congress, district courts have jurisdiction over civil and criminal matters arising under federal law. There are 94 district courts throughout the United States with about 3,200 judges. There is at least one district court in each state, the District of Columbia and Puerto Rico. Each district also includes a bankruptcy court.

There are also two special trial courts in the federal system: the Court of International Trade and the Court of Federal Claims. The Court of International Trade has nationwide jurisdiction over cases involving international trade and customs issues. The Court of Federal Claims has nationwide jurisdiction over most claims for monetary damages against the United States, disputes over federal contracts claims, including unlawful ‘taking’ of private property by the federal government, and a variety of claims against the United States.

Above the trial courts are 12 regional circuits, which each have an appellate court, a United States Court of Appeals. Each such circuit court hears appeals from the district courts located within its circuit, as well as appeals from decisions of federal administrative agencies. The Federal Circuit Court of Appeals has specialised jurisdiction to hear appeals from the Court of International Trade, the Court of Federal Claims and other specific types of cases, such as those involving patent laws.

Federal court jurisdiction

The jurisdiction of United States federal courts, unlike the jurisdiction of the state courts, is limited. The two most common types of civil cases arise under either federal question jurisdiction or diversity jurisdiction. Federal question jurisdiction includes claims involving disputes over federal constitutional issues or federal statutes. Diversity jurisdiction, rather than being based on the subject matter of the claim, depends on the citizenship of the parties. When citizens of different states (United States or foreign) are on opposite sides of the dispute, parties may seek to commence the case in federal court or to remove a case commenced in state court to federal court. To commence or remove a claim based on diversity, there must be complete diversity among the parties. Complete diversity only occurs if no plaintiff and no defendant is a citizen of the same state; this includes the citizenship of corporations that are parties to an action. The citizenship of a corporation for diversity purposes is both its state of incorporation and its principal place of business. For example, if the action includes one plaintiff from the state of Delaware and a corporation that is considered a citizen of Delaware is a defendant, complete diversity does not exist. On the other hand, if plaintiffs are residents of the United States and none of the defendants are citizens of the United States, such as foreign corporate entities, complete diversity will be satisfied. Diversity jurisdiction also requires that the matter in controversy exceed the sum or value of US$75,000.

Judges and juries

What is the role of the judge and the jury in civil proceedings?

In a civil action, the Seventh Amendment to the Constitution preserves the right to a jury trial for federal actions. In the absence of an express statutory provision, if the action can be fairly characterised as a legal claim that would have been triable by a jury at common law in England in the late 18th century, then such claim can be brought before a jury. A party seeking to invoke its right to jury trial must make a demand that is served on the other parties in the action within 14 days after service of the last pleading directed to the issue to be tried (Federal Rules of Civil Procedure (FRCP) rules 5(d) and 38(b)).

In a jury trial, the jury is responsible for deciding issues of fact. The judge decides issues of law.

Under Article III of the United States Constitution all federal judges are nominated by the President of the United States and confirmed by the United States Senate. Nominees are typically recommended by the members of the United States Senate or House of Representatives, who are of the President’s political party.

As a result of concerted efforts in the nomination and confirmation processes, the federal bench has become increasingly more diverse in recent years.

Limitation issues

What are the time limits for bringing civil claims?

The time limits for bringing civil claims are referred to as statutes of limitation. The statutes of limitation depend on the type of claim. A federal court adjudicating state claims will apply the relevant statute of limitations prescribed by the state legislature or state common law. For federal claims, the court will apply the statute of limitations as prescribed by federal statute or federal law. Some common federal statutes of limitation are:

  • one year for private actions based on violations of the federal securities laws involving misrepresentations in public statements (eg, Securities Act of 1933 sections 11 and 12);
  • two years or five years for private actions based on violations of federal securities laws involving fraud or deceit (eg, Securities Exchange Act of 1934 section 10(b)) (the earlier of two years after the discovery or five years after the violation occurred); and
  • four years for private actions based on violations of federal antitrust laws.

Parties may also enter into tolling agreements to stay the running of the limitations period. This is often done while parties are discussing settlement.

Pre-action behaviour

Are there any pre-action considerations the parties should take into account?

There is only one pre-action consideration regarding discovery that parties should take into account. Parties may petition the court before an action is filed to ask the court for an order authorising the petitioner to depose certain persons in order to perpetuate testimony (FRCP rule 27). However, the petitioner bears the burden of demonstrating the following:

  • that the action is cognisable in federal court but the petitioner cannot presently bring it or cause it to be brought;
  • the subject matter of the expected action and the petitioner’s interest;
  • the facts the petitioner wants to establish by the proposed testimony and the reasons to perpetuate it;
  • the names or descriptions of persons whom the petitioner expects to be adverse parties; and
  • the names and expected substance of each deponent’s testimony.

Starting proceedings

How are civil proceedings commenced? How and when are the parties to the proceedings notified of their commencement? Do the courts have the capacity to handle their caseload?

A civil action is commenced by filing a complaint with the court. On or after filing the complaint, the plaintiff may present a summons to the clerk to obtain a signature or seal. Next, the summons and a copy of the complaint must be served on the defendants within 90 days after the complaint was filed. The method of service varies depending on the type and availability of the defendant. Unless service is waived, proof of service must be filed with the court. The court, upon motion or its own notice, will dismiss the action if service is not completed within 90 days after filing (FRCP rules 3 and 4).

After an action has commenced, the federal court system generally hears and resolves matters in a timely manner. The federal courts are well equipped with over 600 trial court judges and over 150 appellate court judges. Moreover, the limited jurisdiction of the federal courts greatly reduces the number of potential filings.

Timetable

What is the typical procedure and timetable for a civil claim?

After process has been served, defendants must serve an answer or motion to dismiss the complaint (a responsive pleading) within 21 days of personal service. If personal service was waived, the defendant has 60 days after the request for waiver to serve a responsive pleading. Under the compulsory counterclaim rule, a party must assert any counterclaim that it has against the opposing party if the claim arises out of the same transaction or occurrence that is the subject matter of the opposing party’s claim. Although not required, a defendant may also assert a cross-claim (a claim against another defendant) if the claim arises out of the same transaction or occurrence that is the subject matter of the original action or relates to any property that is the subject matter of the original action (FRCP rule 13). Either party may also join third parties to an action, who may be liable for a portion of the original claim or against whom a party may have additional claims related to the same transaction (FRCP rule 14).

In any action, the court may order the attorneys and unrepresented parties to appear for pretrial conferences to expedite the disposition of the action, encourage management, discourage wasteful pretrial activities and facilitate settlement. In most circumstances, parties must confer as soon as practicable – at least 21 days before a scheduling conference is to be held or a scheduling order is due. In accordance with local rules, the district judge or magistrate judge will issue a scheduling order that limits the time to join other parties, amend pleadings, complete discovery and file motions. The scheduling order will be issued within the earlier of 90 days of any defendant being served with a complaint or 60 days after any defendant has appeared in the action. The court may hold a final pretrial conference to formulate a trial plan (FRCP rule 16).

Case management

Can the parties control the procedure and the timetable?

Parties must submit discovery plans detailing the timing, form of disclosure and the subject matters to be discovered. The discovery plan should also address whether the parties require an expedited schedule. The court may or may not accept the parties’ discovery plan, and some federal courts require extraordinarily short deadlines for pretrial activity. In all cases, the court will issue a scheduling order addressing such matters. The court, upon request of the parties, may modify the schedule for good cause shown (FRCP rules 16 and 26(f)).

Evidence – documents

Is there a duty to preserve documents and other evidence pending trial? Must parties share relevant documents (including those unhelpful to their case)?

There is an affirmative duty to preserve documents and other evidence even before a trial has commenced. Once a party reasonably anticipates litigation, the party must suspend any routine document destruction or retention policies and put in place a process to ensure the preservation of relevant documents. During the course of discovery, parties will make requests detailing the types of documents to be produced by the other side. Before a discovery request is received, all parties must disclose certain information about the location and availability of potentially discoverable information (FRCP rule 26(a)(1)(A)). The scope of discovery is generally very broad, and includes relevant documents that would be unhelpful to a party’s case.

Evidence – privilege

Are any documents privileged? Would advice from an in-house lawyer (whether local or foreign) also be privileged?

The admission of evidence in federal courts is governed by the Federal Rules of Evidence (FRE). FRE 501 provides that for federal claims, federal common law governs an assertion of privilege unless the Constitution, federal statute or rules prescribed by the Supreme Court state otherwise. Federal common law recognises, inter alia, the attorney-client privilege and the spousal privilege.

The attorney-client privilege protects confidential communications between an attorney and his or her clients made for the purpose of rendering legal advice. This includes communications with in-house counsel, as long as counsel is acting in its capacity as an attorney. The federal common law also recognises the extensions of the attorney-client privilege, known as the joint defence and common defence privileges. These privileges protect attorney-client privileged information shared between parties and their attorneys with a common interest in an actual or potential litigation against a common adversary.

The federal rules also specifically recognise an attorney-work product protection. The FRCP restrict the discovery of documents prepared in anticipation of litigation. The work product protection, however, may be overcome if the party shows substantial need and cannot without undue hardship obtain the substantial equivalent by other means (FRCP rule 26(b)(3)).

For claims based on state law, state statutory or common law governs the application of privilege (FRE 501).

Evidence – pretrial

Do parties exchange written evidence from witnesses and experts prior to trial?

Typically, evidence is exchanged before trial in the form of deposition testimony. However, a party may, by written questions, depose any person, including a party (FRCP rule 31). In addition, unless otherwise stipulated by the parties or ordered by the court, any expert witness a party intends to call at trial must provide a written report containing:

  • a statement of all opinions and the basis and reasons for them;
  • the facts or data relied on to form such opinions;
  • any exhibits that will be used to summarise or support such opinions;
  • the witness’s qualifications, including any publications authored in the previous 10 years;
  • a list of cases in which the witness has testified as an expert during the previous four years; and
  • a statement of compensation for the study and testimony in the case (FRCP rule 26(a)(2)).

Evidence – trial

How is evidence presented at trial? Do witnesses and experts give oral evidence?

At trial, evidence is typically presented through oral testimony. Both lay and expert witnesses testify. Both plaintiffs and defendants are allowed to ask any witness questions. The party calling a witness will conduct a direct examination of the witness. The opposing party may then conduct a cross-examination of the witness. If a witness is unavailable for trial, deposition testimony may be admitted in certain circumstances. Objects and written evidence may also be presented at trial.

Interim remedies

What interim remedies are available?

Except to the extent that federal rules apply, federal district courts can utilise provisional remedies available in the state in which the district court is located (FRCP rule 64). Additionally, district courts under the federal rules may order preliminary injunctions. A party seeking a preliminary injunction must demonstrate substantial likelihood of success on the merits, a threat of irreparable harm or injury, that the balance of equities tips in its favour and that the grant of an injunction would serve the public interest. If a party fears that immediate and irreparable injury will occur before a hearing on a preliminary injunction will occur, the party can seek a temporary restraining order either on notice or ex parte (without written notice to the adverse party or its attorney). A temporary restraining order is an extraordinary remedy and is usually only granted in an emergency. For both a preliminary injunction and a temporary restraining order, a moving party must provide the court with security in the amount the court determines is proper to cover the cost and damages sustained by any party if found to have been wrongfully enjoined or restrained (FRCP rule 65).

Remedies

What substantive remedies are available?

The federal courts have the power to grant the same legal and equitable remedies as the state courts, such as money damages, injunctions and specific performance. A federal court reviewing state claims under diversity jurisdiction can award the same remedies available for such claims under state law. Federal claims are usually based upon federal statutes and regulations, which in many cases provide the specific remedies available for such claims. Most statutes provide for legal and equitable remedies similar to those available under state law.

Interest is typically payable on money judgments. The interest rate is not fixed. Instead, the rate allowed on most judgments for civil actions in a federal court can be calculated based on government securities rates as published by the board governors of the Federal Reserve System, for the calendar week preceding the date of the judgment (28 USC section 1961).

Enforcement

What means of enforcement are available?

Once a judgment is entered, enforcement is sought through supplementary proceedings. Unless specific federal statutes apply, federal courts will apply the procedure of the state where the court is located for supplementary proceedings. For example, federal courts will follow the local state court rules providing for discovery about a judgment creditor’s assets. A money judgment will be enforced through a writ of execution: a court order directing an officer of the court to seise the property of judgment debtor and transfer proceeds to a judgment creditor (FRCP rule 69). The federal courts may also order the performance of specific acts, and if a party fails to comply within the established time the court may, inter alia, order that the act be done by some other person, issue a judgment divesting a party of title in real or personal property, issue a writ of attachment or sequestration, or hold the disobedient party in contempt (FRCP rule 70).

Public access

Are court hearings held in public? Are court documents available to the public?

Except occasionally, all steps of the federal judicial process are open to the public. The public can usually observe the court sessions, review court calendars, watch a proceeding, and access dockets and case files and records. At certain times, access to court records and proceedings may be limited; for example, in a high-profile trial for which courtroom space is not sufficient to accommodate everyone, the court may restrict access. In addition, the court may restrict access for privacy or security reasons, including actions involving juveniles or confidential informants. Finally, the court may seal certain documents that contain confidential business records (including trade secrets), certain law enforcement reports and juvenile records.

Costs

Does the court have power to order costs?

Unless otherwise provided by federal statute, the court may, with discretion, order costs – other than attorneys’ fees – to the prevailing party (FRCP rule 54(d)). The court may also award reasonable attorneys’ fees and other non-taxable costs in a certified class action (FRCP 23(h)). Costs are not synonymous with expenses. Costs are typically limited to court fees and witness fees. However, the court may review requests for unusual costs. In addition, under FRCP rule 11, the court may sanction an attorney, and require a monetary payment to help defray the opposing party’s legal expenses if the court finds that rule 11 was violated. Under rule 11, attorneys must certify that the claims were brought in good faith, and the court may sanction an attorney for failure to do so.

A claimant may be required to provide security for defendant’s costs when plaintiffs are residents of a foreign country or if provided by federal statute.

Funding arrangements

Are ‘no win, no fee’ agreements, or other types of contingency or conditional fee arrangements between lawyers and their clients, available to parties? May parties bring proceedings using third-party funding? If so, may the third party take a share of any proceeds of the claim? May a party to litigation share its risk with a third party?

In most districts, attorney conduct including fee arrangements will be governed consistently with local state rules, but some district courts and courts of appeal have not adopted any rules governing attorney conduct and others may apply federal common law rules. However, under the prevailing state ethics rules that govern attorneys in most districts, attorneys may contract for contingency fee arrangements and recover a percentage of the final award, except in criminal and domestic relations matters. Attorneys may not share fees received with any third parties.

There is no prohibition against legal financing. Investors may provide funding to litigants in return for a percentage of the final award. A party to a litigation may also share its risk through an insurance or indemnification agreement.

Insurance

Is insurance available to cover all or part of a party’s legal costs?

Individuals or corporations may obtain insurance to cover both liability and legal costs. However, as a matter of public policy, intentional and criminal acts may not be covered by insurance.

Class action

May litigants with similar claims bring a form of collective redress? In what circumstances is this permitted?

Litigants with similar claims may pursue a class action in federal courts. Litigants may only sue or be sued as representative parties on behalf of all members if:

  • the class is so numerous that joinder of all members is impracticable;
  • there are questions of law or fact common to the class;
  • the claims or defences of the representative parties are typical of the claims or defences of the class; and
  • the representative parties will fairly and adequately protect the interests of the class (FRCP rule 23).

Similarly, a shareholder of a corporation or a member of an unincorporated association may also bring a collective action (commonly known as a derivative action) on behalf of the corporation or association to enforce a right that the corporation or association may properly assert but has failed to enforce. The plaintiff must fairly and adequately represent the interest of shareholders or members who are similarly situated in enforcing the right of the corporation or association (FRCP rule 23.1).

Currently pending before the United States Senate is comprehensive class action reform legislation. If enacted, the new legislation would alter almost all aspects of class action litigation. For example, it would impose a stricter typicality requirement, the disclosure of class counsel’s conflicts of interest, a demonstration of a reliable and administratively feasible way to identify the class members, a limitation on class counsel’s recovery of attorneys’ fees, as well as other various procedural changes, including timing of discovery and appeals.

Appeal

On what grounds and in what circumstances can the parties appeal? Is there a right of further appeal?

Appeals in the federal system are limited, because the circuit courts generally may only review final judgments of the district courts and a few specific interlocutory orders. A district court decision is appealable if it is considered final (28 USC section 1291). There are no statutory definitions of ‘final’. The Supreme Court has stated that a final judgment is one that ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment’ (Catlin v United States, 324 US 229 (1945)). Ultimately, whether a judgment is final will largely depend on the case.

The circuit courts may review certain interlocutory orders. Such appealable orders include orders granting, modifying, or refusing injunctions; orders appointing receivers or refusing to wind up receiverships; and decrees determining the rights and liabilities of the parties to admiralty cases (28 USC section 1292(a)). The district court may also certify for immediate appeal certain orders that involve a controlling question of law as to which there is substantial ground for difference of opinion. In order to appeal, after certification by the district court, a party must seek permission from the circuit court to bring such appeal (28 USC section 1292(b)).

Cases from the circuit courts may be reviewed by the Supreme Court pursuant to a writ of certiorari, granted based upon the petition of any party to a civil case or by certification from the Court of Appeals on any question of law (28 USC section 1254). A writ of certiorari is essentially an application to the Supreme Court requesting that the court review the matter. The Supreme Court does not accept all applications; it typically chooses to hear a small number of cases involving important questions about the Constitution or federal law.

Foreign judgments

What procedures exist for recognition and enforcement of foreign judgments?

There is no general federal statute or treaty on foreign judgments. Under federal common law, foreign judgments may be recognised as long as the judgment appears to have been rendered by a ‘competent court, having jurisdiction of the cause and parties, and upon due allegations of proof, and an opportunity to defend against them, and its proceedings are according to a course of civilised jurisprudence, and are stated in a clear and formal record’ (Hilton v Guyot, 159 US 113, 205-06 (1895)). The requirement of a reciprocal agreement is not straightforward. Federal courts with diversity jurisdiction will typically apply the state law regarding recognition of foreign judgments, and some states have rejected the reciprocity requirement. Meanwhile, federal courts with federal question jurisdiction will apply the federal common law, which does require reciprocity. Until the Supreme Court or Congress provides further guidance, the requirements for the enforcement of foreign judgments will continue to vary across jurisdictions and types of matters.

Foreign proceedings

Are there any procedures for obtaining oral or documentary evidence for use in civil proceedings in other jurisdictions?

The district courts may, with discretion, issue an order pursuant to a letter rogatory or request made by a foreign or international tribunal, and direct a resident of the district to give testimony, make a statement or produce a document or thing (28 USC section 1782).

Arbitration

UNCITRAL Model Law

Is the arbitration law based on the UNCITRAL Model Law?

Congress enacted the Federal Arbitration Act (FAA) in 1925 to validate agreements to arbitrate and to provide mechanisms for their enforcement. The Supreme Court has held that the FAA applies in both federal question and diversity jurisdiction matters, and in some cases pre-empts state statutes precluding arbitration. The FAA is not based on the UNCITRAL Model Law, and differs from it in several ways, including the basis for setting aside an award, the power to modify or correct an award, the procedure for the appointment of arbitrators and the arbitral tribunal’s power to rule on its own jurisdiction.

Arbitration agreements

What are the formal requirements for an enforceable arbitration agreement?

According to FAA section 2, an agreement will be valid, irrevocable and enforceable, except upon such grounds as exist at law or equity for the revocation of any contract, if there is a written provision or contract evidencing a transaction involving commerce to settle by arbitration a controversy arising thereafter, or a transaction or refusal to perform the whole or part thereof of such contract, or an agreement in writing to submit to arbitration an existing controversy arising out of such contract, transaction or refusal. Generally, courts will apply the ordinary state-law principles that govern the formation of contracts to determine the validity of an agreement. An agreement to arbitrate is considered a separate contractual undertaking; the validity of an arbitration clause does not depend on the validity of the underlying contract.

Choice of arbitrator

If the arbitration agreement and any relevant rules are silent on the matter, how many arbitrators will be appointed and how will they be appointed? Are there restrictions on the right to challenge the appointment of an arbitrator?

Typically, parties will specify the procedure for the appointment of arbitrators, or adopt procedural rules of an administering arbitral institution such as the American Arbitration Association (AAA), JAMS or the International Chamber of Commerce International Court of Arbitration, which provide default rules for the appointment of arbitrators. In the absence of a contractual provision regarding the procedure for the appointment of arbitrators or the adoption of the procedure of an administering arbitral association, the appointment of arbitrators shall be made upon application to the court. The court may designate and appoint any arbitrator or arbitrators as the case may require. If the contract is silent about the number of arbitrators, the court shall appoint a single arbitrator for the action (FAA section 5).

Arbitrator options

What are the options when choosing an arbitrator or arbitrators?

The available arbitrator options will depend on the chosen arbitral association or court. Generally each arbitral association or court maintains a roster of available mediators and arbitrators. Eligibility for such rosters is based on the each association or court’s own criteria and evaluation. For example, the JAMS roster is mainly composed of retired judges and other professional neutrals. The AAA roster tends to include arbitrators with more varied industry experience. Usually the arbitral association or court can provide arbitrators with sufficient knowledge or experience to address the complexity of the issues presented.

Arbitral procedure

Does the domestic law contain substantive requirements for the procedure to be followed?

The domestic statutory law provides almost no requirements regarding the procedure to be followed. The arbitrators once appointed typically control the procedure, conducting the hearings, administering oaths and making awards. The FAA grants an arbitrator or arbitrators the power to summon the attendance of witnesses. The courts defer to the arbitrator on procedural matters.

If the parties have contractually adopted an administering arbitral association’s rules, those rules will bind the arbitrator or panel’s actions. The AAA provides different rules of procedure depending on the type of case (commercial, construction, labour, international, etc). Any procedural rules in the arbitration agreement will overrule the institutional rules.

Court intervention

On what grounds can the court intervene during an arbitration?

Federal courts have jurisdiction to hear arbitration-related issues for matters with federal question jurisdiction or diversity jurisdiction. Judicial intervention is commonly sought when the arbitration demand is made (to compel or stay a proceeding) or after the award (to enforce, modify or vacate). However, during an arbitration, parties may turn to the courts to enforce a subpoena issued by the arbitrator. If a person summoned to testify refuses or fails to appear, the parties may petition the district court in which the arbitrator (or a majority of the arbitrators) sits to compel attendance or punish said persons for contempt (9 USC section 7).

Interim relief

Do arbitrators have powers to grant interim relief?

The FAA does not provide for provisional remedies, but the majority view is that arbitrators can and should grant preliminary injunctive relief to preserve the status quo pending arbitration. Likewise, administering arbitral associations often give arbitrators the power to grant interim relief.

Award

When and in what form must the award be delivered?

Under the FAA, there are no formal requirements regarding the delivery and form of the award. The rules of the administering arbitral association may require, or the parties may stipulate, that the award be in writing and signed by the majority of arbitrators. The timing of the award may also be governed by the administering arbitral association or the arbitration agreement.

Appeal

On what grounds can an award be appealed to the court?

An award can be appealed to the courts on limited grounds. The FAA lists the following grounds for vacating an award:

  • where the award was procured by corruption, fraud or undue means;
  • where there was evident partiality or corruption in the arbitrators, or any one of them;
  • where the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehaviour by which the rights of any party have been prejudiced; or
  • where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.

Once an action on the award is brought to the courts, the normal rules governing the appeal of a court decision or an order will attach.

Enforcement

What procedures exist for enforcement of foreign and domestic awards?

Foreign and domestic awards are enforced through the courts. Domestic awards may be enforced under FAA section 9. The party seeking enforcement need not commence a civil action, but rather can make an application to the appropriate federal district for an order confirming the award within one year after the award is issued. The party seeking confirmation must also serve the adverse party with notice of the application.

There are two methods under which foreign commercial arbitral awards may be recognised and enforced. First, as part of the FAA, the United States has adopted the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (9 USC section 201). A party seeking to enforce an award must establish a prima facie case for enforcement under the New York Convention, and provide an original or certified copy of both the award and arbitral agreement to the appropriate judicial forum. Enforcement may be challenged on five grounds:

  • absence of a valid arbitration agreement;
  • lack of fair opportunity to be heard;
  • the award exceeds the scope of the submission to arbitration;
  • improper composition of the arbitral tribunal or improper arbitral procedure; and
  • the award has not yet become binding or stayed.

The party opposing enforcement has the burden to prove the invalidity of the award.

Alternatively, the United States has also adopted the Inter-American Convention on International Commercial Arbitration. Foreign commercial arbitral awards will be recognised and enforced on the basis of reciprocity; if the foreign state has ratified or acceded to the Inter-American Convention, such award will be recognised and enforced (9 USC section 304). If both the requirements for the application of the New York Convention and the Inter-American Convention are met, unless expressly agreed otherwise, the Inter-American convention will apply if the majority of parties to the arbitration are citizens of a state or states that have ratified or acceded to the Inter-American Convention or are a member state of the Organization of Americans. In all other cases, the New York Convention will apply (9 USC section 305).

Costs

Can a successful party recover its costs?

In general, parties normally bear their own costs, unless otherwise agreed in the arbitration clause. The arbitrator may award administrative costs if the parties have contracted for such or the rules of the administering arbitral association so provide. Typically, costs do not include attorneys’ fees, but an arbitrator may award attorneys’ fees when allowed by the governing law, such as when authorised by a specific statute, when the applicable arbitration rules so provide or as a matter of contract as provided for by the parties.

Alternative dispute resolution

Types of ADR

What types of ADR process are commonly used? Is a particular ADR process popular?

According to a recent study, all of the federal courts authorise some form of ADR. The types of ADR procedures used in federal courts include mediation, arbitration, early neutral evaluation, summary jury trial and settlement week. The most commonly authorised form of ADR across the district courts is mediation. The next most common forms are arbitration and early neutral evaluation.

Requirements for ADR

Is there a requirement for the parties to litigation or arbitration to consider ADR before or during proceedings? Can the court or tribunal compel the parties to participate in an ADR process?

The requirement to consider ADR varies from court to court. Some district courts require litigants to consider the use of an alternative dispute resolution process. In addition, some district courts mandate that parties in certain cases utilise mediation, early neutral evaluation and, if the parties consent, arbitration. Judges in some districts are authorised to refer cases without party consent to mediation or early neutral evaluation.

Dispute Resolution in California

Peter S. Selvin | TroyGold PC | April 29, 2019

Litigation

Court system

What is the structure of the civil court system?

In the US, there are parallel state and federal court systems, consisting in each case of a trial court, an intermediate appellate court and a Supreme Court. While there are a number of important differences between the two systems, the focus of this chapter is the California state court system.

The trial court in the state court system is the Superior Court. Each county in the state has its own set of Superior Courts. These are the courts of primary jurisdiction for all civil disputes involving amounts in controversy in excess of US$25,000. See the California Code of Civil Procedure (CCP), section 86.

Trials and pretrial matters are generally supervised by a single, ‘all-purpose’ Superior Court judge who is assigned to the case at the inception of the proceeding. Litigants have the ability to exercise one peremptory challenge to the assignment of such a judge.

The next level up is the California Court of Appeals, which is the state’s intermediate appellate court. There are six districts of the Court of Appeals, which have jurisdiction over appeals arising from the Superior Courts located within certain geographic regions of the state. Thus, for example, the Second Appellate District is the appellate district that handles appeals arising from, among other trial courts, the Los Angeles Superior Courts.

Each appellate district may be further sub-divided into divisions, which are individual units of three-judge panels who hear appeals. Thus, an appeal from a judgment rendered by the Los Angeles Superior Court will mandatorily be heard by one of the divisions of the Second Appellate District.

The California Supreme Court represents the top level of appellate review in California. The Supreme Court is based in San Francisco and consists of seven justices who participate together in connection with the determination of matters as to which the court has granted review or has otherwise determined to hear.

The California court system does not include specialist commercial or financial courts.

Judges and juries

What is the role of the judge and the jury in civil proceedings?

The traditional distinction between the role of the judge and jury in civil matters is that while the jury determines all issues of fact, the judge controls all issues of law. The judge exercises this function, in part, by ruling on jury instructions and on motions for directed verdict or non-suit.

During the course of the trial, the judge is permitted to ask questions of witnesses, although most judges exercise this right sparingly. Unlike the practice in many civil law countries, the judge does not perform an inquisitorial role during a civil trial.

The right to a jury trial in a civil matter is guaranteed under both the US and California Constitutions. The principal exceptions are where the underlying right or claim is equitable in nature or where the parties have stipulated to arbitration or some other recognised alternative dispute resolution (ADR) procedure. Importantly, and in the absence of an enforceable arbitration provision, pre-dispute jury trial waivers are not enforceable in California. See Grafton Partners, LP v Superior Court 36 Cal 4th 944 (2005).

Judges who sit on the state court’s trial bench (the Superior Court) may in some cases be appointed by the Governor or compete in a general election for ‘open’ seats. As to those judges who are appointed by the Governor, there is strong impetus for the appointment of ‘diverse’ candidates.

Limitation issues

What are the time limits for bringing civil claims?

California’s CCP sets out the limitations periods that apply to particular claims or causes of action. For example, under section 339(1) of the CCP, an action for negligence is governed by a two-year statute of limitations. By contrast, an action for breach of a written contract is governed by a four-year statute of limitations as provided by CCP section 337.

Importantly, these time limitations may have different rules pertaining to the accrual of the limitations period. For example, a cause of action for breach of contract generally begins to run from the time of breach, irrespective of whether the plaintiff had actual or constructive knowledge of the breach. By contrast, some causes of action in tort do not accrue until the plaintiff either knows or should have known of the underlying injury or circumstances giving rise to the claim.

Parties may suspend, or toll, the running of particular statutes of limitation by agreement. Thus, it is not uncommon for parties who are exploring settlement to enter into a ‘tolling agreement’, whereby the running of the statutes of limitations is tolled during the time such an agreement remains in effect.

Pre-action behaviour

Are there any pre-action considerations the parties should take into account?

Normally there are no prerequisites to filing suit. However, certain pre-action steps may be required to be undertaken by a plaintiff either because of the nature of the claim or the underlying agreement.

Some kinds of civil claims, including those against governmental entities such as cities, counties and the state, require that the plaintiff assert an administrative claim, and have that claim denied, before bringing a civil suit. In addition, the pursuit of certain employment claims sometimes requires that the former employee obtain a ‘right to sue letter’ from the California Labor Commissioner.

Alternatively, there may be pre-suit requirements set out in the parties’ underlying contract or agreement. For example, a loan agreement or promissory note may require that the payee or beneficiary give the borrower or obligor a written demand for payment, and an opportunity to cure, before filing suit. Other agreements may require pre-suit mediation or resort to some other form of ADR before bringing civil litigation.

As to orders at the inception of a case concerning disclosure of documents, witnesses or other information, this is an area where state and federal practice differ.

Under state court practice, the disclosure of documents, witnesses and other information is generally controlled by the discovery process – that is, the party seeking the production of documents, the identification of witnesses or other information is obliged to serve formal requests concerning same on the adverse party.

In federal court, by contrast, Rule 26 of the Federal Rules of Civil Procedure requires voluntary disclosure near the inception of a case (and in any event before either side may commence formal discovery) of the documents on which a party will rely; the names and identities of key witness; and other basic information that is supportive of the underlying claim or defence. Although this disclosure under Rule 26 may be supplemented, documents or witnesses not disclosed by a party through this means may be excluded at trial.

Starting proceedings

How are civil proceedings commenced? How and when are the parties to the proceedings notified of their commencement? Do the courts have the capacity to handle their caseload?

A civil action is commenced by filing suit and causing the summons and complaint to be served on the defendants. Parties joined as defendants in a civil action in California generally learn of the pendency of the suit when they are formally served with the summons and complaint. Under California Rule of Court 3.110(b), service of the complaint must be accomplished within 60 days after the filing of the complaint, and proof of service attesting to same must be filed with the court within that time period.

The state court system in California has been facing chronic fiscal problems for a number of years. This has resulted in judges pushing civil cases into mediation or other forms of ADR in an effort to relieve this pressure on the court’s docket. By contrast, the accepted wisdom is that the dockets of California’s federal courts are not as congested. In addition, it is widely believed that federal court judges are more inclined to dispose of cases before trial by way of granting motions to dismiss or motions for summary judgment.

Timetable

What is the typical procedure and timetable for a civil claim?

Under the CCP, the plaintiff in a civil suit must effectuate service of the summons on the defendant within 60 days after the filing of suit. Following the effectuation of service, the plaintiff may commence discovery against the defendant after the passage of a statutory 10-day hold period, which itself can be modified by the court (see CCP section 2031.020(b)).

Early on in the proceeding, the court normally holds a case management conference (CMC) at which the trial date and various pretrial dates and deadlines are set.

In Los Angeles Superior Court, the timeline to reach trial is approximately 16 to 18 months after the filing of a civil complaint.

Case management

Can the parties control the procedure and the timetable?

The parties, through their counsel, will have input at the CMC concerning the setting of trial and pretrial dates, but ultimately the judge will have the final say concerning both the setting of those dates and the pace at which the action proceeds to trial.

Evidence – documents

Is there a duty to preserve documents and other evidence pending trial? Must parties share relevant documents (including those unhelpful to their case)?

In federal court cases, the parties are mandated under Rule 26 of the Federal Rules of Civil Procedure to exchange documents early in the case. By contrast, there is no such requirement in state court practice for the voluntary exchange of documents at or near the inception of the case. Instead, production of documents in state court practice is generally governed by formal discovery.

There is a duty on the part of parties to preserve evidence, especially electronically stored information (ESI), when a claim is asserted or suit is brought. Based on recent appellate precedent, most notably Zublake v UBS Warburg (217 FRD 309 (2003)), parties have an affirmative obligation to preserve ESI once litigation is filed (and in some circumstances even before that), and a failure to do so can have catastrophic consequences.

Even as to information or documents not consisting of ESI, a party could face a claim of spoliation of evidence if that party fails to preserve evidence pending trial. Such claim could be asserted either by way of an affirmative cause of action or, more commonly, by the adverse party either commenting to the jury on, or obtaining a jury instruction about, that failure to preserve evidence. In either event, such failure to preserve evidence pending trial could create enormous substantive and atmospheric problems for the party who fails to preserve such evidence.

Importantly, and as regards ESI, a California lawyer’s responsibility is not fully discharged by simply instructing a client to comply with e-discovery rules. The duty extends to the attorney’s obligation to make sure that the client follows through thoroughly with respect to the disclosure and production of such evidence. See, eg, Formal Opinion No. 2015-193 of the Standing Committee on Professional Responsibility of the California State Bar.

Evidence – privilege

Are any documents privileged? Would advice from an in-house lawyer (whether local or foreign) also be privileged?

There are both common law and statutory privileges that apply to evidence in the form of documentary evidence and testimony. The most notable of these privileges is the attorney-client privilege, which is codified in California Evidence Code section 950 et seq.

Where this privilege is invoked in connection with the production of documents, the party invoking the privilege must ordinarily supply the other side with a ‘privilege log’ that identifies the documents withheld on this ground by date, author, recipient and, in some cases, subject matter. See CCP section 2031.240 and Hernandez v Supreme Court (112 Cal App 4th 285, 291-292 (2003)). The furnishing of such a ‘privilege log’ is required so that the party who has propounded the document request will have the ability the test the application of the privilege in respect to particular documents. Where the parties are unable to informally resolve their disputes concerning the application of the privilege, the court or a discovery referee may sometimes conduct an in camera review of the documents. Importantly, the California Legislature in 2017 amended CCP 2016.080 to authorise the use of informal, court-supervised discovery conferences to streamline the process of enforcing rights to civil discovery.

The advice of in-house counsel is normally privileged from disclosure by the attorney-client privilege. In some cases, however, in-house counsel will serve both a legal and non-legal role. In those cases, the court will often have to ascertain the predominant role that individual was serving before determining the application of the privilege. See Chicago Title Ins Co v Supreme Court (174 Cal App 3d 1142, 1151-1152 (1985)).

There is another privilege that is becoming increasingly significant in California. Cal Evidence Code section 1119 bars the introduction of anything said, or anything communicated in writing, if the statement was made, or the writing was prepared ‘for the purpose of or in the course of a mediation’. The California Supreme Court has ruled in Cassel v Superior Court, 51 Cal 4th 113 (2011) that this privilege trumps a client’s ability to sue his or her lawyer for malpractice on account of the lawyer’s alleged conduct during the course of a mediation. In 2017, the California Law Revision Commission proposed a recommendation to the Legislature that mediation confidentiality not be applied for purposes of supporting or defending a claim of attorney malpractice connected to the mediation.

Evidence – pretrial

Do parties exchange written evidence from witnesses and experts prior to trial?

Witness lists and trial exhibits (other than those for impeachment) are normally exchanged shortly before trial. Parties are not required to identify the expected subject matter of any of the witness’ anticipated trial testimony.

In the case of expert witnesses, CCP section 2034 governs their identification and disclosure. In brief, any of the parties to a civil lawsuit may issue an expert witness ‘demand’ to the other parties. The issuance of such a demand requires all parties to identify any expert witnesses they anticipate calling in the case and to specify the subject areas of each expert’s anticipated testimony. Except in very narrow circumstances, experts not properly identified in response to a party’s ‘demand’ will not be permitted to testify at trial.

Evidence – trial

How is evidence presented at trial? Do witnesses and experts give oral evidence?

Evidence at trial is presented by oral testimony of witnesses, including experts. In addition, evidence at trial usually also includes documentary evidence.

The plaintiff normally presents its case first, which is then followed by the defendant’s case. Rebuttal evidence is then presented after the defendant’s case.

Interim remedies

What interim remedies are available?

There are several pre-judgment remedies available in civil cases in California.

Where the plaintiff sues in contract for a liquidated amount, the plaintiff may apply for a writ of attachment. This is a pre-judgment remedy that operates to create a lien on some of the defendants’ assets pending the conclusion of trial. Thus, if a writ of attachment is levied on a defendant’s bank account, only the sums in that account over and above the amount of writ will be available for defendant’s use pending trial.

A party seeking a writ of attachment will typically at the same time request the issuance of a temporary protective order (TPO). The TPO enjoins a defendant from transferring, hypothecating or pledging a particular piece of property (which is often also the subject of an accompanying attachment application) pending the outcome of the case.

There are various instances where the appointment of a receiver is indicated. For example, where a loan secured by real estate is in default, the lender will often bring suit for judicial foreclosure and seek the appointment of a receiver. In such instances, the appointment of a receiver will effectively divest the borrower of control over the real estate collateral pending the outcome of the suit.

Finally, various forms of injunctive relief are also available in civil lawsuits, although the Mareva order, or ‘freeze order’, available in UK courts is not available in California. By contrast, the attachment and TPO remedies discussed above run only against specific items of property. In addition, and again unlike a Mareva order, pre-judgment or interim remedies issued by US courts are not enforced by their foreign counterparts with respect to property located in other jurisdictions.

Remedies

What substantive remedies are available?

The typical remedies available in civil proceedings are money damages, injunctive relief and declaratory relief.

As to monetary damages, the court’s award of such damages may also include recovery of costs (which are normally recoverable as a matter of right by statute), pre-judgment interest (also recoverable as a matter of right by statute where the amount of the money damages was in a liquidated amount at the time of filing) and attorneys’ fees (but only where the recovery of attorneys’ fees is authorised by the parties’ contract or available by statute). Punitive damages are also recoverable, but generally only in tort actions or where otherwise available by statute. In this regard, recent decisions of the US Supreme Court have placed constitutional limits on the permissable amount of punitive damages in relation to actual damages.

Enforcement

What means of enforcement are available?

A distinction must be made between disobedience or non-compliance with a money judgment and disobedience or non-compliance with a court order requiring that party do, or refrain from doing, certain things.

There is no sanction for a party’s failure to satisfy a money judgment. Instead, the judgment creditor has certain rights to levy execution or otherwise enforce a money judgment, but the judgment debtor incurs no direct sanction for resisting such enforcement efforts.

The disobedience of a court order requiring that a party do, or refrain from doing, certain things, however, subjects the non-complying party to the possibility of contempt. In this regard, contempt proceedings are quasi-criminal in nature, and the non-complying party may be subjected to fines or imprisonment, or both, for its disobedience.

Public access

Are court hearings held in public? Are court documents available to the public?

Except in extraordinary circumstances, civil proceedings are open to the public, as are the pleadings or court filings that are filed by parties in a civil action, which are available to public view, inspection and copying. Thus, in keeping with the strong public policy favouring access to court records, judicial records may be sealed only if the court finds ‘compelling reasons’, see, for example, Pintos v Pac Creditors Ass’n, 605 F3d 665, 677-78 (9th Cir 2010). In this regard, a litigant’s desire to avoid embarrassment or annoyance caused by public disclosure of court records is not considered to be a sufficiently compelling reason to warrant the sealing of the record of legal proceedings Oliner v Kontrabecki, 745 F3d 1024 (9th Cir 2014).

In some cases, the parties will seek to ‘seal’ some or all of their pleadings or court filings. In some cases, this is done to shield trade secrets or other proprietary information from public disclosure. The procedure for filing pleadings under court seal is set out in the California Rules of Court.

Costs

Does the court have power to order costs?

Costs incurred by a prevailing party in civil litigation are recoverable as a matter of right in California (see CCP section 1032). Those costs are claimed by the prevailing party by filing a cost bill following entry of judgment. Importantly, the costs recoverable under this procedure are limited in nature (for instance, filing and motion fees), and do not normally include attorneys’ fees, which are only recoverable where specifically authorised by statute or the parties’ underlying agreement.

Section 1030 of the CCP permits the superior court to order a non-resident plaintiff (including a foreign corporation) to post a bond to secure the payment of the defendant’s costs and attorneys’ fees. The threshold requirement for obtaining such relief is relatively low, namely that the plaintiff resides out of state or is a foreign corporation, and there is a ‘reasonable possibility’ that the defendant will prevail. The purpose of this provision is to enable a California resident to secure the recovery of its costs (and, where authorised, its attorneys’ fees) against an out-of-state or foreign plaintiff. Although CCP section 1030 is a state statute, the federal courts have the inherent power to require plaintiffs to post security for costs and typically follow the forum state’s practices in this area.

In a recent development, the California Supreme Court decided that a party who is dismissed from a lawsuit pursuant to a settlement agreement is entitled to the recovery of statutory costs under CCP section 1032(a)(4). See DeSaulles v Community Hospital of the Monterey Peninsula, 62 Cal 4th 1140 (2016).

There have been two recent developments concerning the recovery of costs, particularly as they relate to electronically stored information (ESI).

CCP section 1033.5 was recently amended to allow for the recovery (as part of the costs awarded to a prevailing party) of fees ‘for the hosting of electronic documents if a court requires or orders a party to have documents hosted by an electronic filing service provider’.

In addition, under CCP section 1985.8, which applies to subpoenas seeking ESI, allows the court in particular circumstances to allocate the cost of the retrieval and production of ESI from a third-party custodian of the ESI to the party who serves the subpoena seeking those records.

Funding arrangements

Are ‘no win, no fee’ agreements, or other types of contingency or conditional fee arrangements between lawyers and their clients, available to parties? May parties bring proceedings using third-party funding? If so, may the third party take a share of any proceeds of the claim? May a party to litigation share its risk with a third party?

Contingent fee agreements are authorised in California. Such agreements typically allow counsel for a prevailing party to share in some percentage of that party’s recovery.

Third-party litigation funding arrangements are also permitted. Under such an arrangement, a third party will provide financing to the plaintiff or its counsel for the prosecution of the lawsuit in exchange for a percentage interest in the recovery.

Although no appellate cases in California have directly addressed these issues, other state courts have expressly found that third-party funding arrangements are enforceable and do not violate the early common law prohibitions on champerty. See, for example, Charge Injection Technologies v DuPont, 2016 Del Super LEXIS 118. Indeed, another Delaware case, Carlyle Investment Management LLC v Moonmouth Company, SA, 2015 Del Ch LEXIS 42 held that communications between a claimant and a litigation funding firm is subject to protection from discovery by reason of the work product doctrine.

Insurance

Is insurance available to cover all or part of a party’s legal costs?

There are various forms of liability insurance that may provide for both the funding of a party’s defence in a lawsuit, as well as any indemnity payment that an insured party may make – for example, a payment in settlement or a payment to satisfy a judgment.

Typical forms of such liability insurance include commercial general liability (CGL) insurance and directors’ and officers’ (D&O) liability insurance. Where it is triggered, CGL insurance usually obligates an insurer to defend its insured in the litigation and also to pay those amounts (within the policy limits) that its insured becomes legally obligated to pay. By contrast, D&O insurance usually provides reimbursement to an insured entity for sums advanced by that entity for the defence of its directors and officers.

Importantly, as a matter of both statute and public policy, punitive damages are not insurable under California law. Thus, even though a liability carrier may be obligated to defend its insured in respect of all causes of action (whether covered or uncovered) that are asserted against its insured (Buss v Superior Court, 16 Cal 4th 35 (1997)), the liability carrier will ordinarily issue a ‘reservation of rights’ as to those claims that include a request for punitive damages or that are otherwise not covered under the policy.

In 2014, the California Supreme Court issued an important decision that limited an insurer’s duty to defend advertising injury claims, Hartford Casualty Ins v Swift Distribution, 59 Cal 4th 277 (2014).

Class action

May litigants with similar claims bring a form of collective redress? In what circumstances is this permitted?

Class actions are permitted in California. Class litigation is permitted where the following are applicable:

  • commonality – there must be one or more legal or factual claims common to the entire class (in some cases, it must be shown that the common issues will predominate over individual issues, such as the amount of damages due to a particular class member);
  • adequacy – the representative parties must adequately protect the interests of the class;
  • numerosity – the class must be so large as to make individual suits impractical (in other words, that the class action is a superior vehicle for resolution than numerous individual suits);
  • typicality – the claims or defences must be typical of the plaintiffs or defendants. See Vasquez v Superior Court (4 Cal 3d 800 (1971)); and
  • ascertainability – there is some case authority suggesting that a class should not be certified unless its members are ‘ascertainable.’ See Xavier v Phillip Morris USA, Inc, 787 F Supp 2nd 1075, 1089 (ND Cal 2011).

In addition to the state court rules, there is a federal statute, the Class Action Fairness Act of 2005 (CAFA), which is found at United States Code (USC) sections 1332(d), 1453 and 1711-1715. This statute expands federal subject matter jurisdiction over certain large class action lawsuits. As a general matter, this statute allows removal to federal court of certain class actions that are originally filed in state court. The principal purpose of the statute is to curtail ‘forum-shopping’ by plaintiffs in friendly state courts by expanding federal subject matter jurisdiction.

In a recent case, CAFA’s ‘mass action provision’ was applied where numerous individual actions were sought to be coordinated under applicable state court procedures. In the case, the Ninth Circuit held that the action was properly subject to removal to federal court (Corber v Xanodyne Pharmaceuticals, 771 F.3d 1218 (9th Cir 2014)).

As perhaps a harbinger of things to come, a proposed bill was recently introduced into the US Congress whose purpose is to reform class action litigation. The author of the bill, Rep Rob Goodlatte (R Va), was also one of the authors of the Class Action Fairness Act, which was enacted in 2005. The pending bill introduced by Rep Goodlatte goes much further in making the prosecution of class action litigation more difficult.

There is now a widespread perception among businesses of all sizes that class action practice, especially in California, has become abusive. Among other things, it is widely perceived that many of these suits are contrived by plaintiffs’ counsel in order to generate fees and do not confer any meaningful benefits on the class members.

The key highlights of the proposed bill include the following:

  • restrictions on fee awards to class counsel, so that the amount of such fee awards will in no event exceed the total amount of money directly distributed to and received by all class members;
  • requiring the existence of third-party litigation funding – that is, disclosure of the identity of any person or entity (other than a class member or class counsel) who has a contingent right to receive compensation from any settlement or judgment in the action;
  • requiring that an order certifying a class not be issued unless the party seeking to maintain such class action affirmatively demonstrates that each proposed class member suffered ‘the same type and scope of injury as the name class representative’; and
  • requiring disclosure and prohibition of conflicts, especially where any proposed class representative or named plaintiff is a relative of, a present or former employee of, or a present or former client of class counsel.

Although the proposed bill was only recently introduced, and has not been passed by Congress or become law, its introduction reflects a swing of public sentiment in reaction to perceived class action abuses.

Appeal

On what grounds and in what circumstances can the parties appeal? Is there a right of further appeal?

Under state procedural rules, there is an automatic right to appeal an appealable order or judgment. Where the underlying order is not directly appealable, such as a discovery order or an order denying a motion for summary judgment, a party may seek discretionary appellate review by way of a petition for writ of mandate. Because such petitions are rarely granted, the main avenue for obtaining appellate review is by way of a direct appeal, which is usually prosecuted at the conclusion of a civil action.

Even though parties to a civil case may have an automatic right to seek appellate review, the scope of appellate review is often quite narrow. Thus, an appellate court will not ordinarily engage in an independent weighing of the facts, evaluation of the evidence or gauging of the credibility of the witnesses. Thus, appellate review from a judgment following a jury verdict will often be limited to alleged errors of law committed by the trial court, such as errors in the jury instructions. By contrast, where the issue is one of pure law, such as an appeal following the granting of summary judgment, the standard of review will be that of de novo review – that is, the Court of Appeal will review the matter in the first instance and will not be bound by the determinations of the lower court.

Foreign judgments

What procedures exist for recognition and enforcement of foreign judgments?

As to the enforcement in the US of money judgments that have been issued by foreign courts, California has adopted the Uniform Foreign Money Judgment Recognition Act of 1962. See CCP section 1713 et seq. That statute allows a party who has been awarded a final money judgment by a foreign court to apply for recognition of that judgment in the US. Once recognition has been obtained, the judgment may be enforced in the same manner as a judgment issued by a US court. According to its terms, this statute applies to any foreign money judgment that is final, conclusive and enforceable where rendered even though an appeal may be pending or the judgment is subject to appeal. However, there are several enumerated grounds for non-enforcement of a foreign money judgment.

Foreign proceedings

Are there any procedures for obtaining oral or documentary evidence for use in civil proceedings in other jurisdictions?

The controlling statute here is a federal statute 28 USC section 1782. In brief, that statute provides that a US district court may entertain a request from a litigant involved in a pending foreign proceeding to compel a person residing within the district court’s jurisdiction to provide testimony or produce documents for use ‘in a proceeding in a foreign or international tribunal’. As the foregoing statute is federal in nature, the applicable case law in this area derives entirely from litigation in the federal courts. Put differently, California’s superior courts effectively have no role in the area of compelling the production of testimony or documentary evidence in aid of litigation pending outside the US.

Arbitration

UNCITRAL Model Law

Is the arbitration law based on the UNCITRAL Model Law?

No. As more fully discussed below, a distinction needs to be made in the procedural law applicable to arbitration and the substantive law governing a claim that is in arbitration.

At the threshold, the applicable procedural law governs such matters as the enforcement of arbitration provisions found in the contract or agreement between the parties, and also the enforcement of awards rendered after arbitration. In this regard, there are three primary sources for this procedural law in connection with arbitration proceedings taking place in California or governed by its law. First, there is a federal statute, the Federal Arbitration Act, 9 USC section 1 et seq, which in some cases will pre-empt contrary state procedural rules. Second, there is the California Arbitration Act, which is found at CCP sections 1280 et seq. Third, the arbitral organisation itself may have rules governing the appointment of arbitrators, the conduct of the hearing and similar issues.

As distinct from these procedural rules, the substantive law to be applied in an arbitration proceeding may be California law, federal law, the law of a foreign nation or some other form of substantive law. As arbitration is ordinarily a matter of contract, it is typical that the parties’ contract will specify the substantive law to be applied. In the absence of such an express election, the arbitrator may be obliged to apply conflicts of law principles to determine the substantive law to be applied.

Arbitration agreements

What are the formal requirements for an enforceable arbitration agreement?

An agreement to arbitrate a dispute is typically embodied in a provision in a written contract between the parties. See CCP section 1281.

In this regard, the US Supreme Court decision in AT&T Mobility v Conception, 563 US 321, 131 S Ct 1740 (2011) held that the Federal Arbitration Act (the FAA) pre-empts state laws that prohibit outright the arbitration of a particular types of claims. Recent California appellate decisions have applied the Court’s ruling in Conception to enforce agreements to arbitrate. Iskanian v CLS Transportation Los Angeles, LLC, 59 Cal 4th 348 (2014) (FAA pre-empts prohibition of class action waivers in employment cases). But see McGill v Citibank, NA, 2 Cal 5th 945 (2017), declaring to be unenforceable pre-dispute arbitration provisions that waive the right to seek to public injunctive relief – ie, injunctive relief that has the primary purpose and effect of prohibiting unlawful acts that threaten future injury to the general public.

The appellate courts in California are also coming to grips with the enforceability of browserwrap agreements. These agreements are typically found on websites in the form of ‘terms and conditions’ for website use. In one recent case, the court declined to compel a claimant to pursue his claim via arbitration where the arbitration provision was contained in such a browserwrap agreement. The court held that the website at issue failed to put a reasonably prudent user on inquiry notice of the terms of the supposed contract. For this reason, the court declined to compel arbitration of the claim. Long v Provide Commerce, 245 Cal App 4th 855 (2016).

Another issue that the appellate courts in California dealt with in 2017 was whether non-signatories to an agreement containing an arbitration provision are bound by, or can themselves enforce, the agreement to arbitrate. The key cases in this area included Garcia v Pexco, LLC, 11 Cal App 5th 782 (2017) (agent may bind principal to terms of arbitration agreement); Hutcheson v Eskaton Fountainwood Lodge, 17 Cal App 5th 937 (2017) (relative holding healthcare power of attorney not authorised to bind principal to arbitration agreement); Jensen v U-Haul Co of California, 18 Cal App 5th 295 (2017) (employee was not third-party beneficiary of rental contract and therefore arbitration provision contained therein could not be enforced).

Finally, the California Legislature passed a law prohibiting mandatory pre-dispute arbitration provisions in contracts for goods or services in certain specified instances. Under the new law, which amends Civil Code sections 51.7, 52 and 52.1, any waiver of the right to seek judicial redress must be knowing, voluntary and expressly not made as a condition of entering into a contract or as a condition of providing or receiving goods or services. This new law applies to all agreements entered into, modified, renewed or extended on or after 1 January 2015. As the US Supreme Court has made it clear that courts applying the FAA will invalidate state laws that single out arbitration agreements for special burdens or scrutiny, it is uncertain whether this law will survive any future US Supreme Court challenge.

Choice of arbitrator

If the arbitration agreement and any relevant rules are silent on the matter, how many arbitrators will be appointed and how will they be appointed? Are there restrictions on the right to challenge the appointment of an arbitrator?

If the parties’ agreement is silent on this point, then the selection and number of arbitrators is ordinarily determined by reference to the arbitral organisation’s procedural rules on that subject. In the absence of such rules, CCP section 1282(a) provides for the appointment of a single neutral arbitrator.

As to the parties’ right to challenge the appointment of a particular arbitrator, the arbitral organisation’s procedural rules will likewise typically address both removal for cause and the right of either party to exercise a peremptory challenge. In the absence of such rules, CCP section 1281.91 sets forth the grounds for the disqualification of an arbitrator.

Arbitrator options

What are the options when choosing an arbitrator or arbitrators?

Selection of arbitrators can be governed in a particular case by at least two sets of rules.

First, the controlling arbitration clause may itself (and typically does) specify how many arbitrators are to be selected and the manner of their selection. In addition, the rules of the particular arbitral organisation (eg, JAMS, International Chamber of Commerce (ICC), etc) that the parties have selected may outline the manner in which arbitrators shall be selected.

In terms of the pool of candidates, there are some arbitral organisations that are focused on, or specialise in, the resolution of disputes in certain substantive areas of the law. For example, the ICC and the International Dispute Resolution division of the American Arbitration Association (AAA) specialise in international or cross-border disputes, and the arbitrators from these organisations generally come from a pool of practitioners, and in some cases former judges, with experience in that specific area.

Outside the international area, the private ADR organisations that have a large presence in California (AAA, ADR Services, JAMS) have a variety of individual neutrals, with each having a particular focus or emphasis on his or her area of practice. There is thus visibility and transparency to individual lawyers and their clients concerning who within these ADR organisations would be the ‘right fit’ in particular cases.

Arbitral procedure

Does the domestic law contain substantive requirements for the procedure to be followed?

As noted above, both the FAA and the California Arbitration Act address such matters as the enforcement of arbitration provisions found in the contract or agreement between the parties, and also the enforcement of awards rendered after arbitration. As the procedural outcomes under these two statutes may be quite different, practitioners should exercise care in drafting the language in the underlying agreement that contains the arbitration provision.

In this regard, there continue to be unresolved conflicts between state and federal courts concerning such issues as whether state or federal procedures govern the enforcement of arbitration agreements in the State Court (Los Angeles Unified School District v Safety National Casualty Corporation, 13 Cal App 5th 471 (2017)) and whether state substantive law that disadvantages arbitration is trumped by the FAA (Kindred Nursing Centers Limited Partnership v Clark, 197 L Ed 2nd 806 (2017)).

Court intervention

On what grounds can the court intervene during an arbitration?

Normally, once a matter has been sent to arbitration the role of the court is usually limited to proceedings to confirm or vacate an arbitration award.

Interim relief

Do arbitrators have powers to grant interim relief?

Depending on the rules of the arbitral organisation, interim relief can be granted in arbitration. Such relief can be requested from an emergency arbitrator (providing the arbitral organisation allows for such), the arbitral panel itself or the national courts of the country where the arbitration is held.

The key determinant as to the availability of such relief is the language of the arbitration agreement itself; namely, whether it confers power on the tribunal to grant interim measures.

In the absence of such a provision, the CCP contains a carve-out that allows a party to an arbitration proceeding to seek provisional relief in the Superior Court, including the proviso that an application in court for such provisional relief does not waive the applicant’s right of arbitration. (See CCP sections 1281.8(b) and (d).)

Award

When and in what form must the award be delivered?

The rules of the arbitral organisation usually specify both the form and the timing of the arbitral award.

In the absence of such rules, CCP section 1283.4 provides that the award must be in writing and include a determination of all the questions submitted to the arbitrators for determination of the controversy. In addition, CCP section 1283.3 provides that the award shall be made within the time fixed in the parties’ agreement or, if not so fixed, within such time as the court orders on petition of a party to the arbitration.

Appeal

On what grounds can an award be appealed to the court?

Appellate review of an arbitration award is extremely limited. In the first instance, an arbitration award must be ‘confirmed’ by the superior court. This means that following the conclusion of the arbitration proceeding, the prevailing party must petition the superior court to ‘confirm’ the arbitration award, that is, enter it in the form of an enforceable judgment (see CCP section 1285).

In the overwhelming number of instances, the superior court will ‘confirm’ the arbitration award and enter it as an enforceable judgment. This is because the grounds for vacating (or declining to ‘confirm’) the award are extremely limited. See CCP section 1286.2. Thus, an arbitration award will not be vacated even where an arbitrator made errors of fact or errors of law. See Moncharsh v Heily & Blase (3 Cal 4th 1 (1992)). Put simply, the superior court does not engage in an evaluation of the merits of the controversy when making its determination to confirm an arbitration award.

By contrast, where an arbitration agreement provides that the arbitrator’s decision may be reviewed by the Superior Court for errors of fact or law, the scope of review will be broader than as otherwise provided under CCP 1286.2. See Harshad & Nasir Corporation v Global Sign Systems, Inc, 14 Cal App 5th 523 (2017).

As to whether an order granting or denying a petition to compel arbitration is appealable, the general rule in both state and federal court is that an order compelling arbitration is not appealable (Johnson v Consumerinfo.com, Inc, 745 F3d 1019 (9th Cir 2014); Bertero v Superior Court, 216 Cal App 2d 213 (1963)), while at least in state court an order denying a petition to compel arbitration is appealable (Smith v Superior Court, 202 Cal App 2d 128 (1962)). In a state court, an appeal from an order denying a petition to compel arbitration will also operate to stay the trial court proceedings without the appellant having to post a bond.

The role of an appellate court is even more limited. Once an arbitration award is confirmed by the superior court, the appellate court’s role is limited to determining whether such confirmation was appropriate. As with the trial court’s own confirmation process, the appellate court does not engage in an evaluation of the merits of the controversy when it is asked to review the appropriateness of the trial court’s action in confirming or vacating the award.

Enforcement

What procedures exist for enforcement of foreign and domestic awards?

Once the hearing has been completed, the arbitration culminates in the arbitrator’s issuance of an award in favour of one of the contracting parties.

If the loser pays the award, no further proceedings will presumably be necessary. However, in the event that the winner needs to enforce the award, it will have to file a court action to confirm the award; that is, convert it into an enforceable judgment. If the arbitration provision is governed by the Federal Arbitration Act, that provision should expressly provide that parties agree that any arbitration award shall be judicially confirmed.

At this stage of the proceedings, the loser has few options. As noted above, the grounds for challenging or setting aside an arbitration award are limited and extremely narrow. A court that is asked to confirm the award will not ordinarily review the merits or overturn the award even where there have been errors of law or fact.

Nor can the merits of the arbitration award be appealed, except where the arbitration agreement provides that the arbitrator’s decision can be reviewed for errors of fact or law (Harshad & Nasir, supra, 4 Cal App 5th 523). Thus, ordinarily once a judgment on the award has been entered, any appeal therefrom will normally be limited to the appropriateness of confirmation, not the underlying merits of the dispute itself.

The recent change in the political landscape in the US has not affected the enforcement procedures for foreign or domestic awards. Inasmuch as there is a separation of powers as between the executive and judicial branches of government, the enforcement of foreign and domestic awards is governed by the pertinent statutes and the judicial interpretations of those statutes.

Costs

Can a successful party recover its costs?

As a general rule, under CCP section 1284.2, each party to the arbitration is required to pay his or her pro rata share of the expenses and fees of the neutral arbitrator unless the parties’ agreement otherwise provides.

Noted in response to question 16 are some recent statutory enactments that allow for the costs incident to the production or management of ESI.

There are no California statutes or judicial decisions that allow for the recovery of the costs incident to third-party litigation funding.

Alternative dispute resolution

Types of ADR

What types of ADR process are commonly used? Is a particular ADR process popular?

The main types of ADR besides arbitration are detailed below.

Mandatory pre-arbitration or pre-litigation mediation

The parties can provide that before either can commence arbitration or litigation, they must participate in a mediation process. That process can be entirely informal or supervised by a third-party neutral. If the mediation takes place under the auspices of an arbitral organisation, such as the AAA or the ICC, the arbitration rules of the pertinent organisation may come into play. In general, having a mediation supervised by a third-party neutral is ordinarily more productive that leaving the parties, who may already be locked into their respective positions, to their own devices.

Reference

Trial by reference is an authorised form of ADR under California law and is described in California Code of Civil Procedure (CCP) sections 638 et seq.

Several cases hold that a valid reference to a retired judge or other referee necessarily entails an enforceable waiver of the parties’ right to a jury trial, even though the particular reference provision may not expressly speak to such waiver. See, for example, O’Donoghue v Superior Court, 219 Cal App 4th 245 (2013); Woodside Homes of California v Superior Court, 142 Cal App 4th 99 (2006). CCP section 645 expressly allows for appellate review of ‘the decision of the referee . . . in like manner as if made by the court’. See also First Family Ltd Partnership v Cheung, 70 Cal App 4th 1334 (1999).

Mini-trial

This process can either be binding or non-binding. The concept is that representatives from the two parties involved in the dispute will each make a streamlined presentation of their respective cases to a small decision-making body, which is often composed of an executive from each of the two companies, together with a third-party neutral. After the conclusion of the presentation, the non-litigant executives attempt to work out a solution with the aid of the third-party neutral.

Requirements for ADR

Is there a requirement for the parties to litigation or arbitration to consider ADR before or during proceedings? Can the court or tribunal compel the parties to participate in an ADR process?

Under Rule 3.1380 of the California Rules of Court, the court, on its own motion or at the request of any party, may set one or more mandatory settlement conferences.

Miscellaneous

Interesting features

Are there any particularly interesting features of the dispute resolution system not addressed in any of the previous questions?

One of the most significant ongoing trends in California is the move toward ADR, and especially arbitration. This move has been given particular impetus over the past few years, as the state has experienced a series of budget crises that have resulted in significant underfunding of the state court system. Put simply, the state court system does not have the financial or human resources to adequately resolve civil disputes.

This development means that sophisticated parties to disputes involving commercial or civil matters now frequently ‘opt out’ of the judicial system by voluntarily electing arbitration or some other form of ADR.

Two other effects of this trend have been seen. First, there has been enormous growth in the number and variety of ADR providers in California. Second, the law in this area has been developing rapidly. Issues frequently addressed by appellate courts in this area include the enforceability of pre-dispute agreements to arbitrate future disputes, especially in the employment context. See, for example, Sanchez v Carmax Auto Superstores California, 224 Cal App 4th 398 (2014). In addition, there have been several recent decisions from both state and federal courts concerning the interplay between the California Arbitration Act (which is found at CCP section 1280 et seq) and the Federal Arbitration Act (which is found at 9 USC section 1 et seq). See, for example, Mastick v TD Ameritrade, 209 Cal App 4th 1258 (2012).

There is another important development arising from this trend. As more and more disputes are resolved via arbitration or other forms of ADR, both the arbitral organisations and the courts have become more receptive to allowing appeals from arbitration awards to be heard on their full merits, as opposed to the more limited grounds set forth in the California Arbitration Act.

Thus, several arbitral organisations have adopted rules (which may be implemented on an optional basis by the parties) that would allow for appeals from arbitration awards to be heard on their full merits. One example is AAA Rule A-10, which allows a party to appeal from an arbitration award where the award is based on an error of law that is material and prejudicial; or determinations of fact were made by the arbitrator that were clearly erroneous. Other arbitral organisations, such as JAMS and CDR, have enacted similar optional rules.

In addition, California law now provides that parties to an arbitration agreement that is governed by the CAA may stipulate to judicial review of their arbitration award. See, for example, Cable Connection, Inc v DirecTV, Inc, 44 Cal 4th 1334 (2008); Harshad & Nasir Corporation v Global Sign Systems, Inc, 14 Cal App 5th 523 (2017). By contrast, parties to an arbitration agreement that is governed by the FAA may not expand the scope of appellate review otherwise available under section 10 of the FAA. See Hall Street Associates, LLC v Mattel, Inc, 552 US 576 (2008).

Subrogation, Insurance Code Section 11580, and the Craziness We Call Insurance Law

Garret Murai | California Construction Law Blog | May 9, 2019


Public domain

If you want to geek out on insurance law the next case is for you. The Insurance Company of the State of Pennsylvania v. American Safety Indemnity Company, 2nd District Court of Appeals, Case No. B283684 (March 1, 2019), is an interesting case involving Insurance Code Section 11580, which in essence provides that if a  judgment is entered against an insured (and there is coverage for that insured) the insured may sue the insurance company to pay for the judgment.

However, in this case, the party doing the suing was the insurer of a general contractor that had a judgment entered against it, and the party being sued was the insurer of subcontractor, on subrogation basis.

Interesting stuff, if you’re into these kinds of things.

The Insurance Company of the State of Pennsylvania Case

Unlike Alexandre Dumas’ The Count of Monte Cristo with requires a flow chart to understand the relationships between its more than 38 characters, we thought it might be helpful to sort out the characters upfront so that you can understand the story that follows:

  • Amir and Brenda Moghadam: Homeowners who bought a home built by New Millennium Homes LLC (NMH) and later sued NMH for construction defects obtaining an award in arbitration against NMH of approximately $1.2 million.
  • New Millennium Homes: Builder of Amir and Brenda Moghadam’s home that sued its subcontractor Camarillo Engineering, Inc. (Camarillo) for the damages sought by the Moghadams in their arbitration and obtained a default judgment against Camarillo of approximately $1.5 million.
  • Camarillo Engineering: The mass grading, compacting and finish grading subcontractor hired by NMH that was supposed to have named NMH as an additional insured under its commercial general liability policy, but didn’t.
  • The Insurance Company of the State of Pennsylvania (ICSP): NMH’s excess liability insurer and the one who ultimately had to pay the Moghadams.
  • American Safety Indemnity Company (ASIC): Camarillo’s commercial general liability insurer who refused to indemnify Camarillo against NMH’s default judgment against Camarillo.

Prologue

The scene takes place in lovely Calabasas, California. Amir and Brenda Moghadam purchase the house of their dreams from NMH. It’s a sprawling estate of more than 15,000 square feet on over an acre of land. A rather largish man could live quite comfortably, and subsist quite nicely I’m sure, in one of the pantries.

They buy furniture. They decorate. They magically transform what was once just a house into a “home.” But happily ever after it wasn’t to be. They begin noticing “drywall and stucco cracks, separation and cracking of interior tiles, and lifting of exterior flagstones.” An ensuing geotechnical investigation reveals that there is “differential fill settlement, as well as expansive soil activity” and that “an inadequate design and construction of the post-tension slab foundation system are exacerbating the distress.” A construction engineer hired to conduct an investigation shakes his head, shrugs his shoulders and tells the Moghadams that their house would be better torn down and rebuilt. The Moghadams sue.

Chapter 1 – NMH Sues Camarillo

Upon being sued by the Moghadams, NMH, pursuant to its subcontract with Camarillo, tenders defense of the Moghadams’ claim to Camarillo’s commercial general liability insurer ASIC. After several unsuccessful attempts, ASIC informs NMH that Camarillo did not name NMH as an additional insured under its policy issued to Camarillo.

Desperate, NMH sues Camarillo for contractual and equitable indemnity, contribution and related causes of action. It is all for naught. Camarillo fails to respond to NMH’s complaint, and a default is entered against Camarillo.

Chapter 2 – The Insurance Company of the State of Pennsylvania (“ICSP”) Sues ASIC

Meanwhile, the Moghadams proceed to arbitration against NMH, winning a judgment of nearly $1.2 million against NMH. In turn, based on the judgment awarded to the Moghadams, NHM obtains a default judgment against Camarillo of more than $1.5 million. But without a defendant able to pay, it’s ICSP that is on the hook to pay the Moghadams.

ICSP later files suit against ASIC, alleging causes of action for declaratory relief, subrogation, breach of contract, and recovery under Insurance Code section 11580, on the ground that it is entitled to recover the amount of the default judgment entered against Camarillo from ASIC.

Both ICSP and ASIC file competing motions for summary judgment. After the dust settles, ICSP rises as the victor. But, as is the case with every story about litigation, the vanquished is always given a second chance to prevail, by way of an appeal.

Chapter 3- The Court of Appeal Decision

On appeal, ASIC made four arguments:

  1. ICSP is barred from recovering under Insurance Code Section 11580 because NMH’s default judgment against Camarillo is void since it didn’t include a specific claim for damages

ASIC’s first argument on appeal was that ICSP’s claim under Insurance Code Section 11580 was barred. Section 11580 provides in pertinent part that “whenever judgment is secured against the insured . . . in an action based upon bodily injury, death or property damage, then an action may be brought against the insurer on the policy and subject to its terms and limitations, by such judgment creditor to recover on the judgment.”

However, Civil Code Section 580 provides that relief granted to a plaintiff in a default judgment “cannot exceed that demanded in the complaint” and any such judgment is void.

ASIC’s argument was that because NMH’s complaint against Camarillo did not specify a dollar amount it was seeking from Camarillo, NMH’s default judgment against Camarillo in the amount of $1.5 million was void. Of course, practically, it could not specify an amount, since NMH did not know if or in what amount a judgment would be entered against it in the arbitration filed by the Moghadams against NMH. Further, ASIC argued, since NMH’s default judgment was void, ICSP as NMH’s insurer did not have a judgment by which it could recover against ASIC under Insurance Code Section 11580.

The Court of Appeals, focusing on whether ASIC had notice of its potential liability, noted that while NMH did not specify a dollar amount it was seeking from Camarillo, NMH did attach a copy of the Moghadams arbitration claim, which sought to recover at least “$2,347,592” in damages. Thus, held the court, the allegations contained in the Moghadam’s arbitration claim “were more than adequate to put Camarillo on ‘formal notice’ of the ‘maximum judgment that may be asserted against [it],’ as required by due process.”

2. ICSP is barred from recovering under Insurance Code Section 11580 because the Moghadam’s judgment against NMH was not based upon property damage, and therefore, was not a covered claim under the insurance policy issued by ASIC

In the arbitration between the Moghadams and NMH the arbitrator awarded the Moghadams $1.2 million measured by the diminution in value of their home as a result of the soil conditions.

ASIC’s second argument was that because the Moghadams were awarded $1.2 million as measured by the diminution in value of their home, the judgment was not “based upon . . .  property damage.” Because Insurance Code Section 11580 limits recovery “subject to [the] terms and limitations” of the defending insurer’s policy, ICSP was not entitled to recovery against ASIC, since only property damage (as well as personal injury) were covered under its policy.

The Court of Appeals disagreed.

First, held the court, “NMH’s action against Camarillo for indemnity was plainly “based upon . . . property damage.”

Second, the court held that “the fact that the arbitrator measured the damages by diminution of value, rather than by the cost of repair, changes nothing. In statutory actions for construction defects, the homeowner’s ‘right to the reasonable value of repairing any nonconformity is limited to the repair costs, or the diminution in current value of the home caused by the nonconformist, whichever is less.”

Third, addressing the difference between the Moghadam’s judgment against NMH ($1.2 million) and NMH’s judgment  against Camarillo ($1.5 million), which reflected NMH’s attorney’s fees in its action against Camarillo, the court explained that “the statute on its face does not require every element of the damages in that judgment to be property damage; it requires the judgment to be ‘in an action based upon . . . property damage.’”

3. ICSP is barred from recovering under Insurance Code Section 11580 because the Moghadam’s failed to show when their property was damaged and ASIC’s policy only covers property damage occurring at the time the policy was in effect

ASIC’s third argument was that the Moghadam’s failed to show when their property was damaged, and because ASIC’s policy only covers property damage occurring at the time the policy was in effect, ICSP was barred from recovering under Insurance Code Section 11580.

ASIC issued several policies to Camarillo. However, the policy at issue contained language stating that, while ASIC was covering property damage “‘Property damage’ . . . which commenced prior to the effective date of this insurance will be deemed to have happened in its entirety prior to, and not during, the term of the insurance.” In other words, the policy would only be triggered if property damage “first occurred” during the policy period.

ASIC’s argument was that the Moghadams had not shown when the property damage first occurred, and therefore, unless the Moghadams showed that property damage first occurred during the policy term, there was no coverage.

The Court of Appeal disagreed, holding that it is a “settled rule” that “an insurer on the risk when continuous or progressively deteriorating damage or injury first manifests itself remains obligated to indemnify the insured for the entirety of the ensuing damage or injury.” In other words, while the Court didn’t expressly say it in so many words, ASIC’s policy was contrary to public policy.

4. ICSP is barred from recovering under Insurance Code Section 11580 because Camarillo didn’t satisfy its self-insured retention

ASIC’s fourth and final argument was that Camarillo didn’t satisfy it’s self-insured retention, which ranged from $15,000 to $50,000, depending on the type of claim, ASIC further stated that because the payment of self-insured retention was a condition precedent of coverage, no coverage existed and no claim could be made by ICSP under Insurance Code Section 11580. I’ve got to hand it to ASIC’s attorneys for creativity.

The Court of Appeals again disagreed, but this time, didn’t need to rely on a public policy argument. The policy language in question specifically stated that no coverage would be provided if ASIC requested that Camarillo pay its self-insured retention and Camillo failed to do so. There was no evidence, explained the Court, that ASIC ever requested that Camillo pay its self-insured retention. Thus, held the Court, ASIC’s reliance on the language as a defense to ICSP’s claim under Insurance Code Section 15580 was moot.

ASIC made other additional arguments as well, but because they weren’t raised during the underlying summary judgment motion,  the Court held that these arguments were “not before the court.”

Epilogue

The Insurance Company of State of Pennsylvania case is an interesting one, involving a statute I wasn’t intimately familiar with, and some creative defenses. When I asked my colleague Gary Barrera, an insurance attorney at the firm, he said, “Well, we could see the foreshadowing of that ending a mile away!” The moral of the story?  I’m glad I’m not an insurance claims attorney.