INSURER IS LIABLE FOR DEFAULT JUDGMENT ENTERED AGAINST INSURED ABSENT PROOF OF ACTUAL PREJUDICE.

In Belz v. Clarendon Am. Ins. Co. (Dec. 28, 2007, B193314) __ Cal.App.4th __, the Court of Appeal held that an insurance company is liable for a default judgment entered against its insured unless it proves actual prejudice from lack of notice of the lawsuit, i.e., a substantial likelihood that it would have achieved a more favorable result if given an opportunity to defend its insured.

In Belz, a homeowner sued a contractor for defective construction. The contractor did not answer or defend, and did not notify his liability insurer about the lawsuit. The insurer learned of the lawsuit after a default was entered, and unsuccessfully moved to set aside the default. The homeowner then brought a direct action against the insurer to recover the amount awarded by the ensuing default judgment. The insurer claimed there was no coverage pursuant to a policy provision excluding liability for any default judgment unless the insurer had notice and a reasonable opportunity to defend the insured. The trial court granted the insurer's motion for summary judgment.

The Court of Appeal reversed, holding that "where a default judgment results from a lack of notice by the insured, (1) the insurer is liable on the judgment unless it suffered actual, substantial prejudice, and (2) the mere inability to investigate the claim thoroughly or to present a defense in the underlying suit does not satisfy the prejudice requirement."

For more information about the case, contact Tom Watson at (818) 995-0800, or htwatson@horvitzlevy.com.

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