Financially beleaguered Mission Insurance Co. must continue to insure more than 6,000 licensed day-care homes throughout California despite its protests that enforcement of the coverage is "potentially devastating financially," the 2nd District Court of Appeal ruled Thursday.
Mission, taken over by the state insurance commissioner Oct. 31 because of insolvency, had earlier canceled the liability policies on 4,691 homes in midterm and refused without notice to renew 1,500 others. The California Federation of Family Day Care Assns. estimates that 20% to 40% of the state's day-care homes had been forced to close after their insurance was canceled.
The homes, under the umbrella of the association, sued, arguing that Mission had acted in bad faith, violating their contracts and state law.
Los Angeles Superior Court Judge Norman R. Dowds refused to enjoin Mission's actions Sept. 19, noting that the day-care homes probably could not win the case in a future trial and that the court should not require Mission "to continue to carry risks that it no longer desires to carry."
But the Court of Appeal, in a 50-page opinion written by Justice Leon Thompson with the concurrence of Justices Mildred L. Lillie and Earl Johnson, reinstated insurance for all day-care homes whose policies were canceled by Mission on Sept. 1 or that received less than 60 days' notice that policies would not be renewed.
State law requires day-care homes to maintain liability insurance or bonds of $300,000 for each child or statements from parents acknowledging that they know of the lack of such protection. Owners have said that they cannot afford higher rates with new insurers if former ones cancel policies and that operating without insurance is unsafe.
Mission decided earlier this year to quit the day-care liability business, according to court records, because it could not obtain adequate reinsurance coverage from other companies.
Mission argued before Dowds that paying only four of the $300,000 potential claims would cause "financial collapse." For example, attorneys said, the average $235 premium for 4,691 policies would total less than the $1.2-million pay-out.
The insurer has been considered awash in red ink for the past two years, and ridding itself of day-care clients did not improve its financial situation.
On Oct. 31, the Department of Insurance declared the company insolvent--$169 million short of meeting its insurance obligations. The company had reported a $15.4-million loss in 1983 and a $198-million loss in 1984.
The appellate justices specified that the state insurance commissioner, on behalf of Mission, must now take responsibility for insuring the covered day-care homes.
The Department of Insurance said Monday that chances for payment of worker compensation claims, Mission's main business, remain good despite the company's problems.
If the company cannot be rehabilitated under the state's conservatorship and is ultimately liquidated, any unpaid insurance claims would by handled by an industry-financed "safety net," the California Insurance Guarantee Assn.
Overruling Dowds, the justices concluded that the day-care homes did have a "reasonable probability" of winning the case at the time of trial and that the homes and families they serve would face greater harm if policies were canceled than Mission would if policies were maintained. Therefore, they said, Dowds must issue the requested preliminary injunction maintaining the insurance coverage pending trial, which they requested to be held soon.