Tag Archives: california court of appeal

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.)

Parent of Insured Corporation Has No Standing to Seek Declaratory Relief as to Insured’s Coverage

Does the parent and controlling shareholder of an insured corporation have standing to seek declaratory relief as to the insured’s insurance coverage? Under California law, the answer is no. In a March 30, 2016 decision, ordered published April 28, 2016, Division Two of the California Court of Appeal for the First District held that a parent corporation that is not an insured under the insurance contract is not a “person interested under a written instrument” for purposes of California’s declaratory relief statute, Code of Civil Procedure section 1060. (See D. Cummins Corp. v. Untied States Fid. and Guar. Co., __Cal.App.4th__ (Cal. Court of Appeal, First Dist. No. A142985, 4/28/2016).)

The Holding Company in the case was the controlling owner of an insured facing asbestos claims, but the Holding Company was not an additional insured or otherwise in privity with the insurer. Nonetheless, the Holding Company argued it had a “practical interest in the proper interpretation of Cummins Corp.’s insurance policies given its relationship to, and its central role in the pursuit of those insurance assets.” (Slip Opn. p. 7.) The Court of Appeal found the argument “not persuasive.” (Id.) “While Holding Co. may, as it says, have a ‘practical interest’ in the success of Cummins Corp.’s litigation with the insurers by virtue of its relationship with the corporation, it has not shown how that indirect interest—no matter how enthusiastic it may be [citation omitted]—translates into ‘a legally cognizable theory of declaratory relief.’” (Id.) It is only the insured itself that has “a direct interest in the interpretation of the policies in question” for purposes of Section 1060. (Id.)

Protections Against Defended Policyholder Manufacturing Bad Faith Case Via Stipulated Judgment Confirmed By California Court

The California Court of Appeal for the Fourth District, Division Two, in 21st Century Ins. Co. v. Superior Court (Tapia), ___ Cal.App.4th ___  (No. E062244, September 10, 2015), recently confirmed some of the important protections for defending insurers against stipulated judgments that were established in the Hamilton and Safeco decisions and limited the application of other decisions that have been relied on by claimants and policyholders seeking to get around the Hamilton rule against bad faith actions premised on such stipulated judgments. Continue reading Protections Against Defended Policyholder Manufacturing Bad Faith Case Via Stipulated Judgment Confirmed By California Court

Application Exclusion Bars Coverage for Claims Arising from Known, Undisclosed Circumstance

A California Court of Appeal has affirmed a summary judgment in favor of the insurer on defense and indemnity with respect to claims that arose from circumstances known to the policyholder when it applied for professional liability insurance but that were not disclosed to the insurer in the application.  Crown Capital Securities, L.P. v. Endurance American Specialty Ins. Co. (Cal.Ct.App, 2d Dist., Div. 5, 4/10/15).  Because the application stated that a claim is excluded from coverage if arising from any undisclosed circumstance that was required to be disclosed in response to a question asked, and the application requested disclosure of circumstances that may result in a claim, the policyholder was not entitled to coverage for claims arising from the known but undisclosed circumstance.

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California Court of Appeal Issues Ruling Regarding Attorney Fee Awards

A California Court of Appeal has affirmed the concept that a successful defendant who is entitled to an attorney fee award can seek an award which is greater than the fees actually billed by the insurance appointed defense counsel who represented the defendant.

In Syers Properties III, Inc. v. Ann Rankin et. al., 226 Cal.App.4th 69 (2014), defendants successfully obtained a judgment of nonsuit in a legal malpractice action. Defendants were entitled to attorney fees by reason of their fee agreement with the plaintiff which entitled the prevailing party to attorney fees. Defense counsel sought and successfully obtained an award of attorney fees which were not tied to the rates actually charged for the representation by presenting evidence to the trial court that a reasonable rate for the representation was actually higher than the rates charged. The court noted that the benchmark for a fee award is reasonableness and there is no requirement that the reasonable market rate mirror the actual rate billed. In concluding that a reasonable rate could exceed the actual rate billed, the court acknowledged that attorneys who do work for insurance companies often work at what are arguably below market rates (in part because of the volume of work). Thus, because counsel was able to convince the trial court that the skill, expertise and experience necessary to successfully litigate the case would reasonably have been charged at higher rates, the court of appeal concluded that the trial court was within its discretion in concluding that a higher rate was reasonable and justified.

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The California Supreme Court Lets Stand The Federal Ins. v. MBL Cumis Decision

On November 26, 2013, the California Supreme Court denied MBL’s petition for review from the Court of Appeal’s recent decision in Federal Ins. Co. v. MBL (2013) 219 Cal.App.4th 29. In addition, the Supreme Court also denied eight different requests to depublish the decision filed by parties aligned with the insured.

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The California Court of Appeal Says Nice Try To Attempt to Overturn The California Supreme Court’s Henkel Decision Based on an 1872 Statute

On August 30, 2012, Division Three of the California Court of Appeal for the Fourth District put to rest a new argument devised by policyholders to attack the California Supreme Court’s seminal consent-to-assignment ruling in Henkel Corp. v. Hartford Acc. & Indem. Co., 29 Cal.4th 934 (2003). See Fluor Corp. v. Superior Court (Slip Opn. dated Aug. 30, 2012) (Fourth Dist. No. G045579)

The Fluor case involved the same consent-to-assignment clause at issue in Henkel: “Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon.” (See Henkel, supra, 29 Cal.4th at 943.) Continue reading The California Court of Appeal Says Nice Try To Attempt to Overturn The California Supreme Court’s Henkel Decision Based on an 1872 Statute

California Asbestos Defendants Are On A Roll In The Appellate Courts

It’s been a very good few weeks in the California appellate courts for asbestos defendants and perhaps the beginning of a broader trend towards leveling the playing field in the unrelenting asbestos litigation that continues to overwhelm California courts.

On May 21, 2012, the Second District, Division Seven, issued a decision in Campbell v. Ford Motor Company (No. B221322) holding that a premises owner and employer owes no duty to protect family members of employees from secondary exposure to asbestos used during the course of the employer’s business – a new bright line rule that should significantly limit take-home exposure liability in California.

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