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.)

San Francisco Partner Paul Killion Receives National Legal Writing Award

Duane Morris is pleased to announce that partner Paul J. Killion of the firm’s San Francisco office will receive a Burton Award for Legal Achievement at a gala ceremony to be held on June 9, 2014, at the Library of Congress in Washington, D.C. This honor is given to only 30 authors selected from entries from the nation’s 1,000 largest law firms.

Killion was selected as a 2014 Distinguished Legal Writing Award winner for an article he wrote about how to use Internet sources in legal writing. “Warning: The Internet May Contain Traces of Nuts (Or, When and How to Cite to Internet Sources)” appeared in California Litigation: The Journal of the Litigation Section, State Bar of California, last spring.

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The California Supreme Court Clarifies How To Give Up Causes of Action To Preserve Appealability

The California Supreme Court issued an important decision last week that potentially impacts all California litigation, including insurance coverage litigation. In Kurwa v. Kislinger, __Cal.4th __ (October 3, 2013) (Supreme Court No. S201619), the Supreme Court held it is not possible to create an appealable final judgment by dismissing remaining causes of action without prejudice and tolling the applicable statute of limitations. This resolves an important split in California appellate courts on the one final judgment rule. The issue commonly arises when parties attempt to move a case into the appellate court after the trial court has resolved the key issues, but some causes of action remain.

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San Francisco Trial Court Is First California Court To Adopt The Wallace & Gale Approach To Asbestos Operations Claims

In what is the first trial court ruling in California on the issue, to our knowledge, the San Francisco Superior Court on January 31, 2013 issued a ruling adopting the Wallace & Gale approach to the completed operations issue for asbestos claims. The decision was issued by San Francisco Superior Court Judge John E. Munter in Phase III of Plant Insulation Co. v. Fireman’s Fund Insurance Co., et al., a multi-phase declaratory relief action pending in San Francisco.

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The California Supreme Court Will Take Another Look At Henkel

On December 12, 2012, the California Supreme Court granted review in Fluor Corporation v. Superior Court (2012) 208 Cal.App.4th 1506, previously commented upon in this blog. The issue on review, as stated on the Supreme Court’s website, is: “Are the limitations on assignment of third party liability insurance policy benefits recognized in Henkel Corp. v. Hartford Accident & Indemnity Co. (2003) 29 Cal.4th 934 inconsistent with the provisions of Insurance Code section 520?”

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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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Do Asbestos Rip-Out Claims And The “Abandoned Materials” Policy Exception Neutralize The Impact of the Completed Operations Aggregate?

In an effort to avoid the impact of the completed operations aggregate limit, policyholder counsel sometimes attempt to characterize claims as (1) rip-out exposures, or (2) as relating to “abandoned or unused materials,” so as to come within a common insurance policy carve-out from the Completed Operations Hazard. Both arguments are a stretch.

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Are All Liability Insurance Policies Exposed To Unlimited Operations Coverage From Asbestos Claims?

All policies are not exposed to unlimited operations coverage from asbestos claims. First, not all asbestos claims present operations coverage issues. The “operations issue” arises from the fact that many CGL policies provide aggregate limits only for claims arising from certain types of hazards—typically Products and Completed Operations. Injuries arising from an insured’s ongoing operations are arguably not subject to an aggregate limit. Therefore, to the extent an asbestos claimant’s injury is the result of exposure during the insured’s operations, the claim arguably is not subject to an aggregate cap. But not all insureds that are subject to asbestos claims conducted operations. Continue reading “Are All Liability Insurance Policies Exposed To Unlimited Operations Coverage From Asbestos Claims?”

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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