Low, Ball & Lynch’s

WEEKLY LAW RESUME

February 16, 2006 Issue  By: Mark Hazelwood

Insurance - Carrier Must Intervene To Protect Own Interests

Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc.

 (January 31, 2026)

Court of Appeal, Third District

It is not unusual for an insurance company to be asked to defend a claim where an insured entity has been suspended for failure to pay its taxes.  In this case,  Kaufman & Broad (Kaufman) was sued by homeowners in a construction defect action.  Kaufman then filed a cross-complaint against sub-contractor Performance Plastering (Performance) for contractual and equitable indemnity and other causes of action.  The Franchise Tax Board had previously suspended Performance  because it failed to pay its taxes.

Performance’s insurance carrier, Cal Farm Insurance Company (Cal Farm), hired a law firm to answer the cross-complaint.  The answer to the cross-complaint was filed on behalf of Performance, by and through its general liability carrier, Cal Farm.  Cal Farm did not move to intervene in the case.

During discovery, counsel for Performance discovered that the subcontract between Performance and Kaufman had been cancelled prior to the work at-issue in the underlying lawsuit.  Performance served a C.C.P. section 998 offer to compromise for $10,000.  Kaufman did not accept the offer, but dismissed its cross-complaint.

Performance then filed a memorandum of costs and brought a motion for attorney fees. Kaufman opposed the motion and argued that Performance, a suspended corporation, was not entitled to recover fees or costs.  Further, Kaufman contended that Cal Farm was not entitled to fees or costs, because it had not intervened in the action.   The trial court denied the motion for attorney fees and granted the motion to strike the memorandum of costs.  The trial court ruled that Cal Farm had no standing, because it had not intervened.   Performance and Cal Farm appealed.  The Third District Court of Appeal dismissed the appeal. 

On appeal, Performance and Cal Farm argued that Performance was entitled to have Cal Farm provide it counsel and defend the action in Performance’s name without Cal Farm intervening.  The Court, interpreting Revenue and Taxation Code sections 19719 and 23301,  held that Performance could not be a party to the lawsuit.  The suspension of corporate powers means a suspended corporation cannot sue or defend a lawsuit while its taxes remain unpaid.   As to Cal Farm, the Court held there was nothing in the language of section 19719 that indicated that Cal Farm could use the name of its suspended insured in the litigation.  Only a party to an action may recover costs or fees.  Because Cal Farm did not intervene in the action, it could not be deemed a prevailing party.  The Court also rejected Cal Farm’s argument that a requirement of intervention would result in a waiver of coverage defenses. The court held that an insurer could adequately protect itself through an express reservation of rights.   The appeal by Performance and Cal Farm was therefore dismissed.

COMMENT

This decision makes clear that in a situation where a company  has been suspended for nonpayment of taxes, an insurance carrier must intervene in a third party action to protect its own interests and the interests of its insured.

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