Navigating the complex landscape of California’s insurance regulations, particularly when dealing with non-admitted insurers, is a challenge many policyholders face. At the heart of the non-admitted insurer challenge lies a powerful but underutilized tool: The Unauthorized Insurers Process Act, codified at California Insurance Code Section 1610, et seq. Section 1616, is a key component of the Act and yet is often overlooked by policyholders faced with a coverage dispute involving a non-admitted insurer.  

Admitted versus non-admitted insurers in California

An “admitted” or “licensed” insurer is an insurance company that must file its rates with the Department of Insurance (“DOI”) and is required to participate in the California Insurance Guarantee Association (“CIGA”). In the event that an admitted insurer becomes insolvent, CIGA is supposed to step in and pay covered claims, subject to various statutory limitations. 

Conversely, a “non-admitted” or “surplus lines” insurer is allowed to conduct business in California but is not required to file its rates with the DOI and is not a member of CIGA. By not filing rates with the DOI, non-admitted insurers sometimes have more flexibility in the coverage offered and the prices charged.  The DOI maintains a List of Approved Surplus Lines Insurers (“LASLI”) that has met certain capitalization requirements, but the DOI also permits non-U.S. domiciled alien insurers to issue coverage in California that has not met those standards. Thus, the financial strength and stability of a non-admitted insurer can sometimes be significant issues.

Section 1616 protects policyholders from non-admitted insurers with questionable finances

To ensure that policyholders have an adequate remedy against a non-admitted insurer in the event of a coverage dispute, the California Legislature enacted certain statutes designed to level the playing field. Under Insurance Code Section 1616, a non-admitted insurer is not permitted to file a pleading in response to a complaint unless the insurer either posts a bond in an amount sufficient to secure a possible final judgment against the insurer or obtains a certificate of authority to transact business in California. The statutory language of Section 1616 is mandatory, meaning that a non-admitted insurer cannot file “any pleading,” and the Code of Civil Procedure defines “pleadings” as “complaints, demurrers, answers and cross-complaints.”  Cal. Code Civ. Proc. § 422.10. 

Section 1616 is not limited to court actions; by its terms, it applies to “any action, suit or proceeding” and the breadth of that language should include arbitration proceedings. Section 1616 achieves the salutary purpose of ensuring that any judgment awarded against a non-admitted insurer can be secured without forcing the policyholder to enforce the judgment in a foreign location. Indeed, the very prospect of having to post a bond, let alone a significant bond, often pushes non-admitted insurers towards an early settlement. 

While the statute permits a non-admitted insurer to comply with Section 1616 by obtaining a certificate of authority from the DOI, that process can take far longer than the time needed to post a bond, leaving the bond as the only realistic option for a non-admitted insurer faced with a policyholder complaint.

The rationale behind Section 1616 is reflected in the legislative history. In enacting Section 1610, et seq., the legislature declared:

“The purpose of this [A]ct is to subject certain insurers to the jurisdiction of courts in this State in suits by or on behalf of insured[s] or beneficiaries under insurance contracts.  The Legislature declares that is a subject of concern that non-admitted insurers have issued policies of insurance to residents of this State . . . thus presenting to such residents the often insuperable obstacle of resorting to distant forums for the purpose of asserting legal rights under such policies; 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.”

Trihedron International Assurance, Ltd. v. Sup Ct. of San Diego County, 218 Cal. App. 3d 934, 943-44 (1990) (quoting Stats. 1949, ch. 495, § 1, pp. 851-52).

The bond must be sufficient to cover a final judgment

Section 1616 also requires that the amount of a bond be “sufficient to secure the payment of any final judgment which may be rendered in the action, suit, or proceeding.” California courts have enforced wide-ranging bond requirements due to the breadth of this “any final judgment” language. See Pacific Fisheries Corp. v. HIH Cas. & Gen. Ins. Ltd., No. C97-4174, 1998 U.S. Dist. LEXIS 24095, at *3-4 (N.D. Cal. June 29, 1998) (directing defendants to post a $100,000 within 10 days of service of the order); Lorenz v. Commercial Acceptance Ins. Co., 40 Cal. App. 4th 981 (1995) (agreeing to reinstate the insurer’s answer after posting a $2.5 million security bond). Whether the bond amount includes attorneys’ fees and/or punitive damages seems to depend on whether that amount is ascertainable at the time of the court’s decision. Pacific Fisheries, 1998 U.S. Dist. LEXIS 24095, at *3-4 (finding punitive damages to be “unduly speculative and, thus, inappropriate” but including half of the plaintiff’s requested attorneys’ fees in the bond amount). 

The Section 1616 bond requirement is, however, subject to a few narrow exemptions set forth in Section 1620 (relating to broker qualifications, the types of insurance covered, and specific contractual provisions). But even if a non-admitted insurer satisfies its burden of meeting these criteria, the bond requirement is not eliminated; instead, the posting of a bond becomes discretionary with the court rather than mandatory. See Bank of San Pedro v. Forbes Westar, Inc., 53 F.3d 273, 276 (9th Cir. 1995) (non-admitted insurer did not meet any of the statutory exemptions and was not permitted to file an answer because it did not post a bond).

The strategic advantages of Section 1616 should not be overlooked

The broader impact of Section 1616 extends beyond individual cases. The legislature decided that plaintiffs suing non-admitted or alien insurers, who could possibly be forced to bring suit in distant forums, deserved greater protection than plaintiffs suing domestic insurers already subject to California law. As such, the bonding requirement “does nothing more than provide the insurer with an alternate method of providing protection to the insured or beneficiary.” See Trihedron, 218 Cal. App. 3d at 943-44 (upholding the bond requirement as a proper exercise of the state’s police power).

Section 1616 of the California Insurance Code is a potent and often underutilized tool in the policyholder’s arsenal. The bond requirement serves as a financial safeguard for policyholders doing business with non-admitted insurers and offers a strategic advantage in disputes with non-admitted insurers that should not be overlooked.