California Legal Brief

The Rule of City of Riverside v. RLI Insurance Company is that an additional insured has standing to sue both the named insured and the insurer in the same action for breach of contract and bad faith claims, under circumstances where the plaintiff is a first-party additional insured with privity of contract rather than a third-party tort claimant.

Appeal from judgment of dismissal after sustaining demurrer without leave to amend in Superior Court of Riverside County.

Defendant Appellant was City of Riverside — the additional insured under RLI's policy who cross-complained seeking defense and indemnity after being sued for wrongful death arising from a traffic fatality.

Plaintiff Respondent was RLI Insurance Company — the liability insurer for Design Services Inc. that refused to defend the City despite allegedly naming the City as an additional insured.

The suit sounded in breach of contract and insurance bad faith. The City also asserted cross-claims for indemnification and apportionment of fault against its contractor DSI.

The key substantive facts leading to the suit were the City contracted with DSI for LED street light consulting services, requiring DSI to obtain liability insurance naming the City as additional insured. After a pedestrian was killed in a traffic accident, the decedent's family sued the City for dangerous condition of public property. The City tendered defense to RLI under the DSI policy, but RLI refused, claiming no coverage. The City then cross-complained against both DSI and RLI.

The procedural result leading to the Appeal: The trial court sustained RLI's demurrer without leave to amend, ruling that RLI was improperly joined under Royal Globe Insurance Co. v. Superior Court, which prohibits suing both insurer and insured in the same lawsuit to avoid violating Evidence Code section 1155's prohibition on evidence of insurance.

The key question(s) on Appeal: Whether the Royal Globe rule against joining an insurer and insured in the same lawsuit applies when the plaintiff is an additional insured with contractual privity asserting first-party contract claims rather than a third-party tort claimant.

The Appellate Court held that an additional insured with contractual privity may sue both the named insured and insurer in the same action because the additional insured is a first-party claimant with independent contractual rights, not a third-party stranger to the insurance contract, and any potential prejudice from jury awareness of insurance can be addressed through severance or bifurcation.

The case is inapplicable when the plaintiff is a third-party tort claimant without contractual privity with the insurer, when the claims are purely tort-based rather than contract-based, or when the underlying liability action has not yet been resolved and bifurcation cannot adequately prevent prejudice to the insured.

The case leaves open whether RLI's alternate grounds for demurrer have merit, as the court remanded for the trial court to address those issues in the first instance, and whether other procedural mechanisms besides bifurcation might adequately address potential prejudice concerns.