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LOWSLEY-WILLIAMS and Companies, Petitioners, v. SUPERIOR COURT OF SAN FRANCISCO, Respondent. Raytheon Company, Real Party in Interest.
Insurance Code 1 section 1616 provides that any nonadmitted insurer sued in California must post a bond in the litigation, in an amount sufficient to secure payment of any final judgment in favor of the California plaintiff. In this.case, we uphold the statute against a claim that it violates procedural due process of law.
Petitioners Lowsley-Williams and Companies (hereafter Companies) are certain Lloyd's, London underwriters and London Market insurance companies which issued excess third-party general liability policies to real party in interest, Raytheon Company. Companies are defendants in an action brought by Raytheon, seeking declaratory relief that Raytheon's Lloyd's policies provided coverage for personal injuries and property damage stemming from alleged groundwater contamination at Raytheon's semiconductor plant in Mountain View, California. After Companies appeared in the action, Raytheon filed a motion to require Companies, as insurers not admitted to transact insurance in California, to post a bond under section 1616. Companies responded that the statute did not apply; and if it did, it was unconstitutional for failing to provide for a hearing on the potential merit of Raytheon's action before a bond is imposed. The superior court rejected Companies' arguments and ordered that Companies post a bond in the expected amount of Raytheon's liability, estimated at $30-35 million. Companies seek writ review. We initially denied the petition with a brief statement of reasons. The Supreme Court granted review and retransferred the matter with directions to issue the alternative writ. After supplemental briefing and oral argument we again uphold the statute and deny the petition.
I. PROCEDURAL BACKGROUND AND FACTS 2
Raytheon is a Delaware corporation with its principal place of business in Lexington, Massachusetts. It has been qualified to do business in California since at least 1944. As of 1992, Raytheon's Mountain View, California, semiconductor facility employed 850 people and had over $90 million in sales.
In early 1984, Raytheon sought to renew its existing primary and excess insurance policies on the Mountain View facility. Raytheon, with its principal place of business in Massachusetts, hired an insurance broker, Frank B. Hall & Co. of Massachusetts, Inc. (Hall), to negotiate policy renewals on its behalf. Hall was a licensed by the State of Massachusetts as a surplus line insurance broker.3 Hall obtained renewal of Raytheon's primary and first-level excess policies from Coi'tirnental Casualty Company for the policy period April 1, 1984, to April 1, 1985, with coverage of $10 million. After determining that the additional excess coverage requested by Raytheon was not available from insurers admitted to transact insurance in the State of Massachusetts, Hall, using a London broker, obtained the additional insurance from Companies. Raytheon does not dispute Companies' assertion that the insurance negotiations conducted by Hall occurred either in Massachusetts or in London, and not in California. The trial court found that the Lloyd's policies were “issued outside of the State of California.” The policies were specifically obtained, however, for coverage of Raytheon's Mountain View, California, facility and operations.
It is undisputed that Companies are not admitted by the State of California to transact insurance within this state. (§ 700.) It is also undisputed that Hall was a licensed surplus-line broker in Massachusetts, but not in California.
Because of alleged environmental pollution at the Mountain View facility, Raytheon was sued by various government agencies and private parties. Raytheon estimated its liability at $40 million, $30 million above its primary and first-level excess coverage with Continental Casualty. Raytheon turned to Companies as its excess insurers, but Companies denied coverage. Raytheon then filed the instant complaint seeking a declaration of coverage for the 1984-1985 policy period.
Companies filed a notice of appearance in the action and an answer. Raytheon then moved for an order requiring Companies, as nonadmitted insurers, to post a litigation bond pursuant to section 1616. The trial court granted the motion and imposed a bond in an amount to be set after a further hearing on the amount of Raytheon's estimated liability.4
Companies sought relief from the bond requirement by filing a petition for writ of mandate. We stayed the bond order and obtained opposition from Raytheon. We denied the petition with a statement of reasons, rejecting Companies' contention that the bond statute did not apply to the insurance transaction in this case. Relying on a recent decision of the Court of Appeal, we also rejected Companies' contention that section 1616 violated procedural due process for failing to provide for a hearing on the potential merit of Raytheon's lawsuit. (See Trihedron Internat. Assurance, Ltd. v. Superior Court (1990) 218 Cal.App.3d 934 (Trihedron ).)
Companies petitioned the Supreme Court for review. Their petition was limited to the procedural due process issue. The Supreme Court granted review and retransferred the matter with directions to issue the alternative writ, but with no specific instructions, designation of issues, or citations to authority. Having issued the alternative writ, ordered supplemental briefing on the due process arguments raised in the Supreme Court, and heard oral argument, we again deny the petition.
A. The Applicable Law
The bond provision of section 1616 arose from a legislative action to protect California residents, and corporations doing business in California, from malfeasance of nonadmitted insurers. To be an “admitted” insurer, i.e., one “entitled to transact insurance business in this State” (§ 24), an insurer must obtain a certificate of authority from the California Insurance Commissioner. A certificate only issues when a number of prerequisites, including sufficient capitalization, are met. (§ 700 et seq.) It is undisputed that Companies are “nonadmitted” to transact insurance in this state because they have failed to obtain a certificate. (§ 25.)
As nonadmitted insurers, Companies are subject to the Unauthorized Insurers Process Act, codified as section 1610 et seq. (hereafter the Act). In uncodified, aspirational language which was part of the Act but does not appear in the Insurance Code proper, the Legislature declared: “The purpose of this act is to subject certain insurers to the jurisdiction of courts in this State in suits by or on behalf of insured or beneficiaries under insurance contracts. The Legislature declares that it is a subject of concern that nonadmitted insurers have issued policies of insurance to residents of this State physically present herein at the time of such issuance, thus presenting to such residents the often insuperable obstacle of resorting to distant forums for the purpose of asserting legal rights under such polices; that this State has an interest in providing to its residents a convenient forum for the purpose of asserting and enforcing legal rights under such policies; that if such residents are left to seek remedy in distant forums they will be, for practical purposes, without remedy. In furtherance of such state interest, the Legislature herein provides a method of substituted service of process upon such insurers and declares that in so doing it exercises its power to protect its residents and to define, for the purpose of this statute, what constitutes doing business in this State․” (Stats.1949, ch. 495, § 1, pp. 851-852.)
The Act's codified provisions provide various protections against nonadmitted insurers, not just to residents of this state but to corporations authorized to do business here. Section 1610 provides that certain acts of a nonadmitted insurer, including issuing a policy “to residents of, or to corporations authorized to do business in, this State,” amounts to appointing the Insurance Commissioner as attorney for service of process. Section 1611 specifically defines these acts to include, as relevant here, “(1) The issuance or delivery to residents of, or to corporations authorized to do business in, this State of contracts of insurance insuring ․ property or operations located in this State.”
Section 1616 provides as follows: “Before any nonadmitted ․ insurer shall file or cause to be filed any pleading in any action, suit or proceeding instituted against it, the insurer shall either (1) procure a certificate of authority to transact insurance in this state; or (2) give a bond in the action, suit or proceeding in an amount to be fixed by the court sufficient to secure the payment of any final.judgment which may be rendered in the action, suit or proceeding.”
Early judicial interpretations of the Act made its purpose clear. “The purpose of the California Insurance Code Sections [1610-1620] is to protect insured residents of California or insured corporations authorized to do business in California.” (Canadian Indemnity Co. v. State Automobile Ins. Ass'n (N.D.Cal.1954) 126 F.Supp. 819, 821-822, fn. omitted (Canadian).) In 1967, our Supreme Court noted that the Act was passed to further state regulation of nonadmitted insurers in the aftermath of the McCarran-Ferguson Act (15 U.S.C. §§ 1011-1015), which provided that the business of insurance could be regulated by the several states. (People v. United National Life Ins. Co. (1967) 66 Cal.2d 577, 583, 597-598.) In this vein, the Supreme Court also noted “ ‘the business of insurance is affected with a public interest’ [citation] and ․ there is a duty upon the Insurance Commissioner of this state ‘to protect the rights of all insurance policyholders.” ’ (Id. at p. 595.)
B. The Nonissues of This Case
Apart from the constitutional challenge to the statute, Companies raised several issues before the trial court and before this court at the initial stages of this writ proceeding. Both the trial court and this court rejected those issues. Companies failed to seek review of these issues in the Supreme Court in their petition for review. Accordingly, we determine that Companies have waived their right to seek further review of these issues, and we interpret the Supreme Court's transfer order as limiting our attention to the sole issue raised in the petition for review: whether section 1616 violates procedural due process.5
We do, however, briefly note the nonissues for purposes of clarity and so the parties understand what issues we regard as already settled.
Companies argued below that section 1616 does not apply to this case because it was only intended to protect California residents, and not foreign corporations doing business in California. The trial court found that there was no residency requirement on the face of the statute. That conclusion was correct, and we upheld it in our initial writ review. As we noted in our previous denial order, section 1616 “was intended to protect not only residents of California but corporations ․ doing business in this state.” (See Canadian, supra, 126 F.Supp. at pp. 821-822.)
2. “California Insurance Transaction”
Companies also argued below that section 1616 does not apply because the issuance of the insurance policies by London insurers to Raytheon in Massachusetts, through a Massachusetts surplus line broker, was not a “California insurance transaction.” The trial court rejected this contention, noting that section 1611 specifically defined transacting insurance in California to include the “issuance or delivery to ․ corporations authorized to do business in[ ] this State of contracts of insurance insuring ․ property or operations located in this State.” The trial court also relied on section 35, which broadly defines transacting insurance to include the “(d) Transaction of matters subsequent to execution of the [insurance] contract and arising out of it.” The trial court concluded: “It is undisputed that Raytheon is authorized to do business in California and that the underlying insurance polices insured property and operations located in this State. The policies insure activities in California and arise out of occurrences in California. The policies relate to a ‘California insurance transaction’ for purposes of section 1616.”
We upheld this conclusion on our initial review. We note that the policies in question were specifically intended to cover a major California cc,.rporate facility and its operations; that Raytheon's complaint alleges agents of Companies investigated Raytheon's claims in California; that Companies' answer affirmatively alleges Raytheon acted within California to impair investigation of those claims; 6 that Companies have not objected to the jurisdiction of the California courts; and that at numerous times in the proceedings below and in this court, Companies have argued the applicability of California substantive insurance law to the Raytheon lawsuit.
3. Unwarranted “Extraterritorial” Jurisdiction
On the premise that this case does not involve a California insurance transaction, Companies argue that applying section 1616 to an insurance transaction in Massachusetts is an unwarranted extension of California jurisdiction. We rejected this contention on initial review. Companies' reliance on State Bd. of Ins. v. Todd Shipyards (1962) 370 U.S. 451 (Todd Shipyards ) is misplaced. That case involved one state's power to tax an insurance transaction occurring entirely outside the state, and where the taxing state's only tie to the insurance transaction was the presence of the insured property within the state. The case now before us does involve a California insurance transaction, with ample California interests involved.7
4. Surplus Line Exemption to Section 1616
Companies also contend that the bond statute does not apply because of section 1620, the Act's last section, which recites that the Act “(a) ․ shall not apply to any action, suit or proceeding against any unauthorized [nonadmitted] insurer arising out of any contract of insurance effected in accordance with Sections 1760.5 and 1763 where such contract contains a provision designating a resident of this state or any firm of which one member is a resident of this state to be its true and lawful attorney upon whom may be served all lawful process in any such action, suit or proceeding.”
Section 1763 applies to California-licensed surplus line brokers, and authorizes them to purchase insurance from nonadmitted insurers. It is conceded that Hall was a surplus line broker licensed in Massachusetts, not California.8 Section 1763 is part of California's surplus line laws, which require a California license for the broker which can only issue if certain requirements are satisfied. The laws require the broker to satisfy California authorities of his or her competence and trustworthiness, to withstand an investigation by the Department of Insurance, to post a bond and maintain a California office, and to be “subject to reporting, recordkeeping, and review requirements aimed at facilitating detection of violations of the restrictions” on the issuance of surplus line insurance. (I Matthew Bender, Cal. Insurance Law & Practice, op cit. supra, § 3.03, p. 3-14; see discussion in 4 Matthew Bender, op cit. supra, §§ 62.08 & 62.09, pp. 62-23 to 62-26.) The laws also provide for California investigations of brokers suspected of impropriety.9 The obvious purpose of these laws is to impose state control over those brokers obtaining insurance for California residents or businesses from foreign insurers who themselves have not accounted themselves to the California Insurance Commissioner. Since Companies failed to comply with California surplus line laws, they cannot claim exemption from section 1616, and their status under California law is that of nonadmitted insurers.
C. The Issue of This Case
Companies argue that section 1616 violates procedural due process because it requires a prejudgment deprivation of property without a hearing or other determination of the merits of a plaintiffs complaint. Companies rely on a long line of decisions generated by Sniadach v. Family Finance Corp. (1969) 395 U.S. 337 (Sniadach ), all of which involve various forms of prejudgment attachment or other creditors' remedies, or else prejudgment litigation bonds in contexts other than state regulation of foreign insurers. The United States Supreme Court has recently restated the rule of Sniadach and its progeny: that prejudgment attachment or other deprivation of property generally violates procedural due process except under exigent circumstances. (Connecticut v. Doehr (1991) 501 U.S. 1, 8, 18.)
The Sniadach-based due process contentions urged by Companies, however, were considered and rejected in Trihedron, which concluded that the bond requirement of section 1616 arose under the exigent circumstance of California's need to regulate foreign, nonadmitted insurers. Trihedron noted that “The right to procedural due process guaranteed by the United States and California Constitutions requires that an individual be afforded notice and an opportunity for hearing before he is deprived of a significant proper, interest. (Randone v. Appellate Department (1971) 5 Cal.3d 536, 541․) ․ A pretrial requirement to post bond normally constitutes a taking of property subject to due process requirements. (See Brooks v. Small Claims Court (1973) 8 Cal.3d 661, 667-668․)” (218 Cal.App.3d at p. 946.)
Exceptions to the notice-and-hearing requirement “can only be justified in extraordinary circumstances. [Citation.]” (Trihedron, supra, 218 Cal.App.3d at p. 946.) “Due process ․ does not prohibit all deprivation of property without notice and hearing. In extraordinary situations in which a governmental interest necessitates such action, summary deprivation of property may pass constitutional muster if a statute is narrowly drawn to further that interest. [Citations.]” (Id. at p. 947.)
Trihedron concluded that section 1616 furthered the necessary governmental interest of regulating nonadmitted insurers. The court distinguished the Sniadach progeny on the ground that those decisions generally involved prejudgment creditors' remedies. “In the creditors' remedies cases the state has no substantial interest to protect in providing plaintiffs with a prejudgment financial advantage over defendants. Here, where a case arises out of a nonadmitted foreign or alien insurer transacting insurance in California, the state has a valid interest in forcing the insurer to comply with the state's certification requirements thereby protecting California insureds and beneficiaries. Section 1616 in the first instance requires compliance with those certification requirements. The statute provides the insurer with the generally less onerous alternative of posting a bond in lieu of meeting the certification requirements. Under these unique circumstances, the bonding requirement can hardly be viewed as a deprivation of a significant property interest subject to due process requirements.” (Trihedron, supra, 218 Cal.App.3d at p. 947.) 10
“California requires an insurer to be certified to transact insurance in the state. (§ 700[, subd.] (a).) An insurer has no right to transact insurance in this state absent compliance with the certification requirements. Section 1616's requirements therefore do not deprive insurers of any substantial interest or existing right. Rather the section encourages compliance with the already existing statutory mandate. Accordingly, we conclude section 1616 does not violate a nonadmitted foreign or alien insurer's due process rights when the insurer is sued in connection with transacting insurance business in California.” (Trihedron, supra, 218 Cal.App.3d at p. 948.)
Companies do not argue that Trihedron was wrongly decided. Neither do Companies take issue with the principle that state regulation of nonadmitted insurers constitutes an extraordinary circumstance justifying exemption from Sniadach. Rather, Companies merely attempt to distinguish Trihedron on its facts. The attempt falls short.11
Companies argue Trihedron's ruling was dependent on “two critical facts”: the fact that the issuance of the foreign insurance policies through the mails to California residents was a transaction subject to California regulation, and the fact that under California law the issuance of the policies was “illegal.” Companies argue these facts are missing from this case. Companies are wrong. As we have established ante, the issuance of the Lloyd's policies was a California insurance transaction subject to state regulation. Furthermore, the issuance of the policies in the present case is just as “illegal” as in Trihedron. By “illegal,” Companies mean the policies were issued to California insureds by a nonadmitted insurer. That is exactly the case herein. Companies maintain that this case is different because they did not issue the policies directly but through a surplus line broker. Companies are correct that in general a nonadmitted insurer may issue insurance to California insureds without certification if it does so through a bona fide, Californialicensed surplus line broker. Companies are incorrect when they argue that by using a foreign broker not licensed in California, it may insure California persons or business operations without being admitted. Companies' position would allow such insurance to be issued with no regulatory oversight by this state, either by means of the admission process or by the licensing regulations of surplus line brokers.12
We agree with Trihedron and hold that section 1616 does not violate procedural due process of law.
D. A Closing Remark
Appellate litigation is an arena for forthright debate, not a parlor game for the demure. When Companies filed their petition seeking extraordinary relief, Trihedron's constitutional holding stood as the controlling law. In order to obtain extraordinary relief, the ultimate burden on Companies was to demonstrate how or why that controlling law was either bad law not to be followed or good law not applicable to the facts of this case. In a 47-page points and authorities, Companies' sole attempt to distinguish the controlling law was a single footnote.
Chief Justice Cardozo once opined that “The timorous may stay at home.” (Murphy v. Steeplechase Amusement Co. (N.Y.Ct.App.1929) 166 N.E. 173, 174.) So too, the timorous should not be rewarded with a grant of Supreme Court review when they have failed vigorously to address at the proper time the unpleasant reality of adverse law.
The alternative writ is discharged. The petition for writ of mandate is denied. Real party in interest shall recover its costs.
FN1. All subsequent statutory references are to the Insurance Code.. FN1. All subsequent statutory references are to the Insurance Code.
2. Because of the procedural posture of the case, certain background facts must be taken from the pleadings and the filings in this court. The essential facts are not in dispute except where indicated in this opinion.
3. Surplus line insurance provides a supplemental market for insureds who require excessive amounts of insurance protection, not available from the market of insurers admitted in the state. Such insurance is typically obtained by surplus line brokers,-ho have a sophisticated understanding of the foreign, i.e., out-of-state, market. (See 4 Matthew Bender, Cal. Insurance Law & Practice (1995) §§ 62.01 & 62.02, pp. 62-3 to 62-4.)
4. The contamination alleged in the suit against Raytheon spans several years. The coverage Raytheon seeks from Companies is limited to one year. Presumably the actual amount of the bond would be set at an appropriate fraction of the total estimated liability of $30 million over the Continental Casualty coverage.
5. California Rules of Court, rule 28(e)(2) provides, in pertinent part, that a petition for review “shall state the issues presented for review”; such statement shall be “short and concise”; and “[o]nly the issues set forth in the petition and answer or fairly included in them need be considered by the court.” The Advisory Committee Comment to this rule states that “The statement of issues is, therefore, far more than a means of persuading the Supreme Court to grant review: the statement also defines the scope of the issues to be considered on the merits if review is granted, unless the Supreme Court determines otherswise. The committee expects the Supreme Court to follow the practice of the United States Supreme Court under its rule 21.1, and decline (in most cases) to consider the merits of questions that were not set out in the petition for review or answer.” (Fifth par., italics added.)The petition for review in this case formally raised two issues: the first is the procedural due process issue and the second is essentially a restatement thereof, and is not separately argued in the petition for review. While the answer discussed the other several issues which were raised below and in this court initially but were excluded from the petition for review, the answer did not raise them as issues for the Supreme Court to decide, but as reasons for denying review. The reply to the answer did not dispute this characterization.Thus, the Supreme Court having failed to specifically instruct us to the contrary, we consider our review limited to the constitutional due process issue raised by the petition for review.
6. It has been suggested that the adjustment of claims within this state constitutes transacting insurance. (Illinois Commercial Men's Assn. v. State Bd. of Equalization (1983) 34 Cal.3d 839, 849; see 4 Matthew Bender, Cal. Insurance Law & Practice, op cit. supra, § 62.02 , p. 62-7.)
7. This issue was not raised below, at least with sufficient particularity; Lloyd's did not cite Todd Shipyards to the trial court.Also not raised below, but examined and rejected on our initial writ review, is Lloyd's curious argument based on Bell v. Burson ( 1971 ) 402 U.S. 53 5, whose applicability to the present case we are unable to divine. In Bell, the United States Supreme Court simply held that Georgia could not require a motorist involved in an accident to post a bond, without regard to fault, or suffer license suspension. The court premised its ruling on the general principle that a state may not infringe upon a significant property interest without some form of adequate procedural due process. Bell has nothing to do with the permissible prejudgment deprivation of property in cases of exigent or unusual circumstances, such as regulation of foreign insurers, which we will discuss post.
8. It is immaterial that Hall is a corporate subsidiary of a parent corporation, and a sibling of another subsidiary which may be a licensed California surplus line broker. It is Hall who procured the policies in this case, and Hall did not have a California surplus line license. The factual dispute over whether Hall procured the insurance in compliance with Massachusetts surplus line law is also immaterial.
9. “The state also relies on self-policing by the surplus line brokers' professional association. See 49 Ops. Cal. Atty. Gen. 55, 57-58 (1967).” (I Matthew Bender, Cal. Insurance Law & Practice, op cit. supra, § 3.03, p. 3-14, fn. 20.)
10. To the extent that some Sniadach-progeny cases involve prejudgment litigation bonds, the interest of the plaintiff or of the state in those cases was much less significant than the state's interest in regulating nonadmitted insurance companies. (See, e.g., Beaudreau v. Superior Court (1975) 14 Cal.3d 448.)
11. Companies have failed to address Trihedron's analysis of the facial constitutionality of section 1616. We assume that by attempting to distinguish Trihedron on its facts Companies argue, in essence, the statute is unconstitutional as applied to the facts of this case.
12. Companies complain that a surplus line broker's licensing in any state should be sufficient, lest major national surplus line brokers be required to comply with the insurance regulations of each of the 50 states, depending on the location of the insured. Such regulatory Balkanization, however inconvenient, is often a necessary evil of federalism.
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