A Reservation of Rights Alone Is Not Enough to Trigger Independent Counsel in California

Last month, California’s Third Appellate District added to a growing list of California appellate decisions holding that the mere possibility or potential for a conflict is not legally sufficient to require a defending insurer to provide independent counsel under California’s Cumis statute, Civil Code section 2860. Simply because the insurer sent a reservation of rights letter is not enough.

In Centex Homes v. St. Paul Fire and Marine Ins. Co. (1/22/2018, No. C081266) __Cal.App.5th __, the Third District addressed a dispute between insurer St. Paul and a developer, Centex Homes, regarding whether the insurer was required to provide independent counsel to defend Centex against actions brought by several homeowners alleging construction defects. St. Paul insured one of Centex’s subcontractors—Ad Land Venture—and Centex tendered the lawsuits to St. Paul for defense. St. Paul agreed to defend, subject to certain reservations of rights, including St. Paul’s right to deny indemnity to Centex for any claims by the homeowners not covered by the policy, including claims for damage to Ad Land’s work and damage caused by the work of other subcontractors not insured by St. Paul.
St. Paul appointed a defense attorney to defend Centex in the underlying actions, but Centex claimed St. Paul’s reservation of rights created a conflict requiring St. Paul to pay for independent counsel under California Civil Code section 2860.

Centex essentially argued that a right to independent counsel exists whenever an insurer reserves rights. The Third District disagreed. Quoting Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1421, the court explained, “a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights. There must also be evidence that ‘the outcome of [the] coverage issue can be controlled by counsel first retained by the insurer for the defense of the [underlying] claim.’” The court rejected the contention that defense counsel in a construction defect case could control the outcome of the coverage case. (Centex, supra, at p.13-14.)

A conflict of interest exists “only when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case[.]” (Gafcon, supra, 98 Cal.App.4th at 1421-22.) A “mere possibility of an unspecified conflict does not require independent counsel[;]” rather, the conflict must be “significant, not merely theoretical, actual, not merely potential.” (Dynamic Concepts, supra, 61 Cal.App.4th at 1007.)

The Centex decision follows a long line of California decisions that are “both considered and settled.” (Centex, supra, at p.8.) California courts have repeatedly held that in the absence of an actual conflict of interest giving rise to the insured’s right to independent counsel, the defending insurer controls the defense of the underlying suit, including settlement and trial. “[U]ntil such a conflict arises, the insurer has the right to control defense and settlement of the third party action against its insured, and is generally a direct participant in the litigation.” (Gafcon, supra,  98 Cal.App.4th at 1407, citing James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, fn. 3; see also Federal Ins. Co. v. MBL, Inc. (2013) 219 Cal.App.4th 29, 41 [“[T]he mere fact the insurer disputes coverage does not entitle the insured to Cumis Counsel;…”]; Blanchard v. State Farm Fire and Cas. Co. (1991) 2 Cal.App.4th 345, 350; Dynamic Concepts, Inc. v. Truck Ins. Exch. (1998) 61 Cal.App.4th 999, 1007; Long v. Century Indem. Co. (2008) 163 Cal.App.4th 1460, 1468; Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, 31-32.)

In Its October-2018 Term, the Supreme Court of the United States Will Address Whether the Court or a Panel of Arbitrators Decides Applicability of the Federal Arbitration Act Where the Parties Have Delegated Questions of Arbitrability to the Arbitrators

On February 26, 2018, the Supreme Court of the United States granted certiorari in Oliveira v. New Prime, Inc., 857 F.3d 7 (1st Cir. 2017), cert. granted, 2018 WL 1037577 (U.S. Feb. 26, 2018) (No. 17-340), and added the case to its October-2018 Term. The Court will resolve a circuit split which has developed among the First, Eighth, and Ninth Circuits, in addition to division among lower federal and state courts, regarding gateway questions of arbitrability under the Section 1 definitions and exemptions of the FAA. More specifically, the Court will again address efforts by lower courts to avoid the broad mandate under the FAA in favor of the enforcement of arbitration agreements in the context of an arbitration agreement containing an express class waiver provision.

The FAA applies to “[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration . . . .” 9 U.S.C. §2 (emphasis added). At issue in New Prime (and the circuit split before SCOTUS), is the intersection of the FAA’s definition of commerce which provides for various exceptions including one for “any other class of workers engaged in foreign or interstate commerce”, 9 U.S.C. §1, and the Supreme Court’s directive that “[a]n agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce”. Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 70 (2010). Couched broadly, the question before the Supreme Court is whether a party who wishes to avoid an agreement to arbitrate questions of arbitrability can do so by presenting the dispute as one of statutory interpretation under the FAA. In other words, how broad is the mandate of Rent-A-Center. Such a question may hold similarities to the age old quandary which came first, the chicken or the egg.

Legal questions concerning the enforcement of arbitration agreements and initial questions of arbitrability under the FAA remain points of heated contention. One of the benefits of arbitration is a streamlined process where discovery (and its attendant costs) can be moderated and controlled before a panel of subject matter experts who bring reinsurance, insurance, or other expertise to the dispute at hand. Those efficiencies are much more difficult to realize if courts engage in lengthy proceedings, including discovery and the weighing of evidence, to determine gateway factual questions about arbitrability where the parties contracted to submit questions of arbitrability, i.e. the arbitrator’s jurisdiction among other issues, to the arbitrators.

Prominent Insurance Lawyer Damon Vocke Joining Duane Morris

CHICAGO and NEW YORK, January 2, 2018 – Former General Re Corporation President and General Counsel Damon Vocke is joining the Duane Morris insurance practice, the firm announced today. Vocke had most recently headed his own firm, the Vocke Law Group, with locations in New York, Chicago and Stamford, Connecticut. Along with partner Ronald Lepinskas and special counsel Mark Holton from the Vocke firm, he joins a Duane Morris insurance industry practice group that comprises over 100 lawyers in offices across the firm. Vocke will be working with the group nationally and particularly in New York.

To continue reading, please visit the Duane Morris website.

Former Insurance GC Joins Duane Morris

When Damon Vocke launched an insurance litigation boutique in October 2016, the firm led by the former general counsel of Berkshire Hathaway Inc. reinsurance subsidiary General Re Corp. was marketed as a “nimble and low-cost” alternative to “mega firms.”

A little more than a year later, the Vocke Law Group (VLG) has shut its doors as Vocke and two other lawyers bring their practices to Duane Morris, a firm of more than 650 lawyers. Vocke said in an interview Tuesday that his clients would benefit from the broader geographic reach and legal knowledge offered by Duane Morris.

“We’re really excited to turbocharge what we’re doing and what we think we can continue to do with the broader, highly respected Duane Morris platform, particularly in the Midwest, East Coast and international business,” said Vocke, who held a number of business roles at Gen Re in addition to his title as in-house legal chief.

To continue reading, please visit the Duane Morris website.


2016 Insurance-Related Class Actions Filed In or Removed to Federal Court

This report analyzes 210 insurance-related class actions filed in or removed to federal court in 2016. In many respects, the results are predictable. The greatest percentage of the insurance-related class actions involve coverage or claims handling decisions, although there were a few interesting pockets of recurring class claims, such as inflated drug prices and cost of insurance (‘‘COI’’) increases for life insurance policies. The predominant forum choices were on the American coasts, California and Florida being the preferred locations. One notable result was the frequency of voluntary dismissals by the plaintif fand individual settlements reached with the named plaintif fonly. It can only be surmised that either these cases never were intended to be consummated as class actions or that impediments arose after filing that prevented a cost-effective resolution on a class-wide basis.

To read the rest of this article by Duane Morris partner Charlotte E. Thomas, please visit the Duane Morris website.

The Supreme Court of Pennsylvania Shores Up Nature of Intent Required for Statutory Bad Faith Claims against Insurers

It is hard to believe that Rancosky v. Washington National Ins. Co., No. 28 WAP 2016, 2017 Pa. LEXIS 2286 (Pa. Sept. 28, 2017) is the Pennsylvania Supreme Court’s first foray into the proof required for statutory insurer bad faith claims, particularly since it has been over twenty-five years since the Pennsylvania legislature created the private cause of action.  42 Pa. Cons. Stat. § 8371.  It was the Pennsylvania Superior Court that first articulated the elements of statutory bad faith in Terletsky v. Prudential Property & Cas. Co., 649 A.2d 680 (Pa. Super. 1994), appeal denied, 659 A.2d 560 (Pa. 1995).  Under Terletsky, a plaintiff claiming bad faith must prove by clear and convincing evidence that: 1) the insurer did not have a reasonable basis for denying policy benefits; and 2) that the insurer knew or recklessly disregarded the lack of reasonable basis for denying the benefits.  649 A.2d at 688.   Continue reading The Supreme Court of Pennsylvania Shores Up Nature of Intent Required for Statutory Bad Faith Claims against Insurers

Applying Contractual Principles In Pa. Unfair-Trade Claims

Claims against insurers under Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) occupy a unique place in its jurisprudence. Insurance is highly regulated, and many other recovery avenues exist in Pennsylvania for aggrieved insureds, such as breach of contract and bad faith. Usually, insurance claims are tethered to contract law, since the insured-insurer relationship and duties are governed by the insurance policy. Courts should be reluctant to ignore contractual principles when a UTPCPL claim arises out of a policy.

Generally, deceptive insurance solicitations are actionable under the UTPCPL, while post-inception policy-related claims are not. Toy v. Metropolitan Life Insurance Co.[1] exemplifies this point. Toy involved an insurance salesman’s pre-issuance misrepresentations about the investment qualities of a life insurance policy. The insured asserted both bad faith and UTPCPL claims. The Pennsylvania Supreme Court affirmed dismissal of the statutory bad faith claim, concluding that bad faith did not cover an “insurer engaged in unfair or deceptive practices in soliciting the purchase of a policy.”[2] By contrast, the court allowed the UTPCPL deceptive sales practices claim to proceed. Under Toy, claims that arise out of solicitation-related deception can give rise to a UTPCPL claim, such as misrepresentations during the sale of the policy, while bad faith and breach of contract theories apply following policy inception.

Read the full text of this article by Duane Morris partner Charlotte Thomas.

Excess Insurer’s Obligations Regarding Settlement Offers of Underlying Claims

Does an excess insurer have an absolute right to veto a settlement under a policy’s “no action” and “no voluntary payments” clauses?  The Ninth Circuit has predicted that, under California law, the answer is no.  In a March 21, 2017 decision, the Ninth Circuit affirmed a district court’s $6,080,568 judgment in favor of an insured in a breach of contract and bad faith lawsuit against its excess general liability insurer arising from an underlying patent infringement dispute.   (Teleflex Med. Inc., v. National Union Fire Ins. Co. of Pittsburgh, PA., No 14-563666, 9th Cir., 2017 U.S. App. LEXIS 4996.)

In reaching its decision, the Ninth Circuit confirmed the California rule set forth in Diamond Heights Homeowners Ass’n v. Nat’l Am. Ins. Co. (1991) 227 Cal. App. 3d 563, which provides that an excess insurer has three options when presented with a proposed settlement of a covered claim that has met the approval of the insured and the primary insurer: (1) approve the proposed settlement, (2) reject it and take over the defense, or (3) reject it, decline to take over the defense, and face a potential lawsuit by the insured seeking contribution toward the settlement

Continue reading Excess Insurer’s Obligations Regarding Settlement Offers of Underlying Claims

Talc Litigation and Insurance Implications

Is talc the elusive “next big thing” long sought by the plaintiffs’ bar? Recent verdicts against cosmetic talc defendants, including Johnson & Johnson (“J & J”), suggest that talc litigation, at a minimum, is a material threat to talc defendants and the insurance industry. In 2016, J & J and other defendants suffered three large verdicts for exposure to its baby powder in St. Louis, Mo.: $72M, $70M and $55M. All three verdicts, in a jurisdiction considered favorable to asbestos plaintiffs, included substantial punitive damages. The plaintiffs in each of these cases alleged that exposure to talc contained in J&J’s baby powder caused them to contract ovarian cancer. Also in 2016, a Los Angeles jury awarded $18M to a plaintiff who sued a cosmetic talc defendant alleging exposure to cosmetic talc cause the plaintiff to contract mesothelioma.

Assuming talc litigation is not going away any time soon, several questions are raised. Are all talc claims the same? What is the relationship between talc and asbestos, if any? What defendants are at risk in the talc litigation? What are the insurance implications of talc claims, and are they alike or different from asbestos and other long-tail coverage claims?  Continue reading Talc Litigation and Insurance Implications

Duane Morris Attorneys Will Present at the 2017 ABA Insurance Coverage Litigation Committee CLE Seminar

Duane Morris is pleased to announce that several of the firm’s attorneys will be presenting at the American Bar Association (ABA) Section of Litigation’s Insurance Coverage Litigation Committee CLE Seminar, to be held on March 1-4, 2017, in Tucson, Arizona. Duane Morris is a silver-level sponsor of the program and partners Terrance Evans, Dominica Anderson and Ray Wong will all present at the seminar.

For more information about the seminar, please visit the American Bar Association website.