Pacific Pioneer Ins. Co. v. Superior Court (January 30, 2020) 44 Cal.App.5th 890: The Fourth District Court Of Appeal Rules That Insurers Have The Right To Appeal Small Claims Default Judgments Entered Against Their Insureds
Fraudulent claims are often adjudicated in small claims court in California where the jurisdictional limit is up to $10,000 for individuals and parties may not be represented by a lawyer. (See California Code of Civil Procedure section 116.540 – “… no individual other than the plaintiff and the defendant may take part in the conduct or defense of a small claims action”). Carriers are, therefore, at a disadvantage and dependent on responsible insureds to conduct the defense of the action, which may involve setting forth complex factual and legal issues related to claimed damages. In many instances, fraudulent claims become default judgments against insureds when the insured simply fails to appear to defend the action. Unmotivated insureds may not understand or possess the ability to address issues related to damages, such as causation, reasonableness, and necessity. To claim fraud on the part of the plaintiffs or their health care providers may be too tall an order for most insureds. And then there is the issue of collusion between the plaintiff and the insured: Certainly, in the instance of collusion between an insured and the claimants, such as in a staged accident scenario, the insured has no incentive to defend the action in any meaningful way and quite often simply fails to appear.
In Pacific Pioneer, a claimant sued the insurer’s insured in small claims court after an auto accident. The insured did not show up for the small claims hearing and the court entered a default judgment for $10,000 plus costs. The insurer filed a notice of appeal, but the trial court struck the notice of appeal. The Court of Appeal issued a writ of mandate directing the trial court to vacate its order striking the insurer’s notice of appeal, and to reinstate the appeal from the small claims judgment. The court concluded that insurers have the right to appeal a small claims default judgment entered against their insureds. Code of Civil Procedure section 116.710(c) gives the insurer of the defendant the right to appeal any small claims judgment over $2,500 entered against their insureds. Yet, section 116.710(d) precludes a defendant who did not appear at the hearing from appealing the judgment, which creates an apparent inconsistency. The Court of Appeal held that insured’s failure to appear at the hearing did not annul the appeal right conferred upon the insurer. As the Court stated, “We note that subdivisions (c) and (d) are easily reconciled if we do not equate ‘the insurer’ with ‘the defendant.’” Thus, the insurer holds a right that is distinctly different than the right of the insured who failed to appear.
The Court analyzed the rationale behind allowing the insurer to appeal the default judgment, which clearly relates to reducing the likelihood of fraudulent claims: “The first of these is deterrence of inflation of damages.” “It is a truism that plaintiffs have no incentive to minimize their damage claims when the defendant defaults.” “But in the small claims context, it is also true that defendant insureds may not have much of an incentive to fight inflated damage claims, knowing an insurer will pick up everything over their deductible, if any. The dangers of a situation in which neither side has an interest in carefully delimiting the damage claim requires little discussion. Allowing an appeal protects the insurer from the unmotivated insured’s lack of initiative and assures that someone will be scrutinizing the damage claim.” “Similarly, allowing insurers to appeal curbs any temptation to collude. Giving the insurer an appellate remedy for such conduct diminishes the likelihood the plaintiff and defendant will agree to split an inflated award.”
Pacific Pioneer is important to insurers in general and to SIUs that are faced with the situation in which the plaintiff sues in small claims court and the insured fails to appear at the small claims hearing, which usually results in an inflated money judgment for the plaintiff. Many small claims advisors, including advice posted on court websites, state that there is no appeal in the event of a default judgment. After Pacific Pioneer, that advice is wrong. Notwithstanding the failure to appear by the insured at the small claims hearing, the insurer has a right to appeal the default judgment to the superior court where it can defend the action in a competent manner. Remember, a small claims appeal is a “trial de novo” in which the insurer may be represented by counsel. It is a completely new hearing and any prejudice that may have been suffered by the insurer due to an “unmotivated” or non-appearing insured at the small claims level is gone. The days of paying default small claims judgments are over.
Thomas E. Fraysse is a partner with Knox Ricksen LLP in Walnut Creek and Los Angeles.