Insured Has Right to Select Independent Counsel

In Schaefer v. Elder, 2013 DJDAR 7434 (2013), the California Court of Appeal for the Third Appellate District decided an interesting case under the Cumis doctrine contained in California Civil Code Section 2860. The court of appeal confirmed that under the facts presented, conflicting positions on a “question of proof” create a conflict of interest between insurer appointed counsel and the insured. The existence of the conflict required the appointment of independent counsel for the insured under Civil Code Section 2860.

An individual (the “plaintiff”) contracted with Elder Construction (“Elder”) to build a home. The plaintiff thereafter sued the construction company, alleging causes of action for defects in construction as well as other claims. Elder tendered the defense of the action to its insurer, CastlePoint National Insurance Co. (“CastlePoint”), which appointed panel counsel to represent Elder, subject to a comprehensive reservation of rights.

The carrier also filed a declaratory relief (“DJ”) action against the construction company. The DJ sought a ruling from the trial court on whether its insurance policy covered the claims asserted by plaintiff. The construction company took the position that the reservation of rights and the DJ action created a conflict of interest between its interests and the lawyers selected by the carrier to defend the case. On that basis, Elder hired independent counsel and moved to disqualify the panel firm. The trial court granted the motion to disqualify.

The court of appeal affirmed the decision of the trial court. The court noted that under the applicable policy language, an insurer has the right to appoint counsel for the insured and control the defense. However, where the carrier’s reservation of rights results in “divergent interests,” the insured is entitled to independent counsel. The court concluded that the applicable insurance language did not cover “work” performed by independent contractors unless the construction company satisfied certain requirements. Thus, it was in the insured’s interest to argue that employees performed those tasks.

However, the carrier had an interest to argue that work was done by independent contractors. This could have resulted in a finding of no insurance coverage under the policy. The court of appeal concluded that there was a conflict of interest, which supported the trial court’s determination that Elder had a right to independent counsel.


When Does an Insurer Forfeit Its Right to Claim Fees Were Unreasonable or Unnecessary?

J.R. Marketing LLC v. The Hartford Cas. Ins. Co., A133750 (May 17, 2013)(unpublished), was just recently decided by the California Court of Appeal for the First District. This is a fascinating case from an insurance perspective, with Cumis counsel issues, attorneys' fees claims, Buss allocation of fees between matters and waivers of Civil Code Section 2860 protections. This case has it all.   

A carrier issued two CGL policies, and when the insured tendered their defense of a lawsuit under the policies the carrier initially denied a duty to defend, claiming the occurrences took place prior to the policy periods.  After the insureds filed a lawsuit against their insurer, the carrier agreed to defend under a reservation of rights, but declined to provide and pay for independent counsel, or Cumis counsel, pursuant to the California Supreme Court decision in San Diego Fed. Credit Union v. Cumis Ins. Society Inc. (1984) 162 Cal.App.3d 358.

When the court granted the insureds’ motion for summary adjudication, it held that the carrier not only had a duty to defend, but also had a duty to retain independent Cumis counsel.  The carrier then paid over $15 million in fees and costs incurred by Cumis counsel, but in an effort to seek reimbursement of certain fees, the carrier then filed a cross-complaint against the Cumis firm for reimbursement of fees incurred in unrelated, uncovered matters, fees incurred for uninsured entities, pre-tender fees and any unnecessary and unreasonable fees. 

The Court of Appeal first recognized that certain protections were normally available to the carrier under Civil Code Section 2860, including a provision limiting the hourly rates paid to independent counsel, and the right to arbitrate the fee issues.  But the carrier was deemed to have forfeited those 2860 protections due to its refusal to accept tender of the defense.

Secondly, the Court recognized that an insurer may very well have a right of reimbursement under Buss v. Superior Court, (1997)16 Cal.4 35, but the novel question before the Court was, “from whom?”  

Reasoning that due to the important policies created by 2860, the court held that the breach of 2860 meant that the carrier lost all right to control the defense, and that consequently the carrier should not be able to obtain the same result by seeking reimbursement from the firm after the fact.  The insured was left to negotiate the fee arrangement with the firm on its own, and otherwise control the defense of the action, so the carrier was not allowed to seek reimbursement in a direct action against the firm. 

But the Court also limited its holding to the facts of the case, explicitly stating that the decision did not apply to carriers seeking reimbursement from the insureds directly, and did not apply to those situations where the carrier may be claiming that independent counsel utilized fraudulent billing practices.


Tripartite Attorney-Client Relationship Arises when Insurer Hires Law Firm to Prosecute Action on Behalf of its Insured

By Travis Wall

It is well settled that a tripartite attorney-client relationship arises when an insurer retains counsel to defend an action against its insured. As a consequence, confidential communications between counsel and the insurer or the insured are protected, and both the insurer and the insured are holders of the privilege.  

The California Court of Appeal for the Fourth Appellate District clarified that a tripartite attorney-client relationship also can exist where the insurer hires a law firm to prosecute an action on behalf of its insured. See Bank of America v. Superior Court of Orange County (Pacific City Bank), 2013 DJDAR 654 (2013). 

In Pacific City Bank, Fidelity National Financial (Fidelity) was the insurer and Bank of America was the insured under a lender's title policy insuring a deed of trust. Pacific City Bank (PCB) had recorded a deed of trust on the same property and sent a notice of trustee sale. Bank of America tendered the claim to Fidelity, which hired a law firm to institute an action on behalf of its insured, Bank of America, to protect its security interest. In the ensuring litigation, PCB served subpoenas on Fidelity seeking communications between the law firm and Fidelity. Bank of America moved to quash the subpoenas to exclude communications between the law firm and Fidelity on the grounds of privilege. The trial court held that the tripartite attorney-client doctrine did not apply because the law firm was retained to prosecute the underlying action rather than defending litigation. According to the trial court, Fidelity did not have a "favored position" or "sacred role" in the litigation.

The Court of Appeal reversed, holding that the trial court erred as a matter of law in making this artificial distinction. The court's holding turned on an analysis of the title insurer's duties to its insured. The court reasoned that a title insurer's obligation to defend a lawsuit and to take other appropriate action, such as prosecuting an action to protect the integrity of an insured's title, are "kindred duties" addressing the "same fundamental concern" and that there is no logical reason why a tripartite relationship should exist in one situation but not the other. 

The court rejected PCB's arguments that no tripartite relationship arose because there was no formal retainer agreement between the insurer and counsel hired to protect its insured's interest. The mere retention of the law firm was sufficient to establish the tripartite relationship. It also did not matter that Fidelity had reserved rights. The law firm was not acting as Cumis counsel, and, even if it were, the privilege would still apply to all confidential communications among the insurer, insured and law firm except those pertaining to coverage.

PCB maintained that Fidelity waived any right to object to the production because it did not bring its own motion to quash the subpoena. The court rejected this argument as well, noting that Bank of America was a holder of the privilege and thus had standing to assert the privilege itself.

2860 Fee Arbitration is Denied Where Insurer is Not Currently Defending

In The Housing Group v. PMA Capital Insurance Co., 2011 DJDAR 4441 (2011), the California First District, Court of Appeal decided a case arising under California Civil Code § 2860

This section of the civil code provides for arbitration of disputes under California’s so called Cumis doctrine. That statute sets forth the rules for selection of “independent counsel” when the carrier reserves its rights creating a potential conflict between the carrier, its selected counsel and the insured.

The Housing Group (Plaintiffs) filed suit against their insurer, PMA Capital Insurance Co. (the “insurer”). The Plaintiffs sued the insurer for breach of contract and alleged “bad faith” arising out of liability in third‑party actions relating to construction projects.

The insurer petitioned to compel arbitration of an alleged fee dispute pursuant to Civil Code Section 2860(c), contending the action involved disputes regarding the applicable fee to be paid to the Plaintiffs’ independent counsel by the insurer incurred in the underlying litigation.

The Plaintiffs opposed the petition. Plaintiffs argued that the insurer had no standing to invoke the provisions of Section 2860(c) because it failed to prove that it had agreed to defend the case or make any payments to the defense costs incurred. The trial court denied the petition to compel arbitration.

The insurer appealed and the court of appeal affirmed the decision of the trial court. The court noted that where an insurer defends a case under a reservation of rights and has agreed to utilize independent counsel, an insurer may compel arbitration to resolve a dispute regarding the payment of defense fees pursuant to Section  2860(c).

The court noted that there was no evidence in the record that the insurer defended the case. The insurer did send two reservation of rights letters.  However, the letters only expressed a future intent to defend, rather than an actual agreement to provide a defense or to pay defense costs.

The court of appeal concluded that an agreement to the payment of defense fees at the end of the litigation was not sufficient to trigger the provisions of Section 2860.

Insurer's Duty of Good Faith Extends to All Insureds in Multiparty Litigation

An insurer's duties become complicated when litigation is pending against more than one of its insureds. In general, an insurer may have a duty to accept a settlement offer made within policy limits, but in the case where more than one of the insureds is sued, how is that duty affected when a CCP Section 998 settlement offer is made to only one of the insureds? 

The question was answered by the First Appellate District in Kauffman v. California State Automobile Association (2009) No. A123494 (unpublished). The son and his parents were all insured under an automobile policy, so when he caused an accident, the plaintiffs sued not only the son, but the parents for "negligent entrustment of the car" to their son.

Plaintiffs then made a policy limits demand to the son alone, using an offer of compromise under CCP Section 998. The offer was rejected. Plaintiffs eventually entered into a complex settlement agreement where the son assigned any rights he may have had against the carrier to the Plaintiffs. In Plaintiffs' subsequent suit against the insurer, the appellate court decided, first, that the 998 Offer did not create the requisite conflict of interest triggering the carrier's duty to appoint separate counsel, or Cumis counsel, under Civil Code section 2860. 

More importantly, the court rejected the argument that the carrier acted in bad faith by refusing to accept the 998 Offer. In fact, the carriers' acceptance of the 998 Offer for the full policy limits would have been bad faith to the remaining insureds; i.e., the parents. The insurer's duties extend to all of its insureds, and the carrier cannot favor one insured over another. Because the 998 Offer was for the full policy limits, agreeing to settle on the son's behalf would have left the parents completely exposed. Consequently, the court found no bad faith under these facts. 

Level of Success a Key Factor in Civil Rights Fee Award Cases.

The 9th Circuit has recently overturned an attorneys' fee award of $200,000 by the District Court in a civil rights case, holding that the District Court failed to consider the level of success obtained by the plaintiff in that matter.  See Ian McCowan v. City of Fontana 550 F3d 918 (2008)

In that case McCowan had been arrested and "tased" by officers of the Fontana police department who had mistakenly believed that he was in possession of illegal drugs.  After his release, he sued the officers and the City of Fontana for civil rights violations in the U.S. District Court for the Central District of California alleging the use of excessive force, the making of an arrest without probable cause and deliberate indifference on the part of the city of Fontana.

McCowan prevailed on only one of his nine claims and recovered only $20,000 in damages after seeking damages in excess of $75,000.  The District Court's award of $200,000 in legal fees and costs was appealed to the 9th Circuit and was overturned.

The 9th Circuit, applying the LODESTAR method of analysis, held that the reasonableness of a civil rights attorney fee award in a 42 USCA 1988 case is determined primarily by reference to the "level of success" achieved by the plaintiff.  It further held that civil rights attorney fees must be "adjusted downward" where the plaintiff has obtained limited success on his pleaded claims and the redult does not confer a meaningful public benefit.  The 9th circuit reversed after finding that McCowan's lawsuit did not confer a benefit to the public since the claims were brought against two officers and not the entire police department and settlement did not result in a change in any policy of the police department.

The 9th Circuit remanded the case to the District Court for reconsideration of the fee issue consistent with the 9th Circuit's opinion.  

New Case Law Regarding Right to Cumis Fee Arbitration

Compulink v. St. Paul Fire Insurance Company: California Court of Appeal Holds Parties Required to Arbitrate Disputes Involving Cumis Counsel Fees

A California Appellate Court has recently clarified the issue as to whether parties are required to arbitrate disputes involving attorney fees owed to an insured for defense by independent counsel. Compulink Management Center, Inc. v. St. Paul Fire and Marine Ins. Co., 2008 DJDAR 18431 (pdf). Specifically, the Compulink court determined that California Civil Code section 2860’s mandatory arbitration provision applies even where issues exist in an action apart from attorney’s fees. Id. The case required the court to interpret a section of California’s insurance related statutes, California Civil Code section 2860. That section governs the right of an insured’s use of independent, Cumis, counsel where a conflict of interest exists between the insurer and insured as to the defense provided. Cal. Civ. Code § 2860.

The Compulink defendant was an insurance company, St. Paul, that according to the complaint, failed to comply with its duty to defend plaintiff, Compulink, in a third party suit. The complaint stemmed from an underlying suit that arose against Compulink during the policy period, which St. Paul agreed to defend subject to a reservation of rights. Because the insurer believed the reservation of rights created a conflict of interest, it agreed to allow Compulink to select independent counsel to defend it in the third party suit. After the case settled, Compulink filed suit against St. Paul asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. In total, it sought economic damages in excess of $1,000,000 as well as a declaration that St. Paul had a duty to pay all outstanding legal fees incurred by Compulink in defending against the cross-complaints.

In response, St. Paul filed a petition to compel arbitration pursuant to section 2860(c). It argued that because the central issue in the case was the amount of Cumis fees allegedly owed, the action was subject to mandatory arbitration under section 2860(c). Compulink argued and the trial court agreed that Compulink’s allegations of bad faith took the action beyond the scope of section 2860’s arbitration provision.

In reaching this conclusion, the court declined to follow the California Appellate Court’s decision in Fireman’s Fund Ins. Companies v. Younesi (Younesi), 48 Cal. App. 4th 451 (1996). In Younesi, an insurer filed a state court action against its insured’s Cumis counsel asserting claims for fraud, malpractice, and conversion in its billing practices. 455. The trial court denied arbitration under section 2860(c) and the Division Four of the Second Appellate District affirmed. 459. While recognizing that attorney’s fees were a central issue in the case, it held that because the complaint also included allegations of malpractice and fraud, that section 2860’s arbitration provision did not apply to the action at all. Id.

The Compulink court disagreed with the Younsesi court’s interpretation and use of the Supreme Court’s findings in Caiafa Prof. Law Corp. v. State Farm Fire & Cas. Co., 15 Cal. App. 4th 800, 804 (1993), as to the scope of section 2860(c). 2008 DJDAR at 18433. In Caiafa, the Supreme Court held that federal actions involving Cumis fee issues are not subject to section 2860’s arbitration procedure. Caiafa, 15 Cal. App. 4that 804-05. While the Younsesi court interpreted this to mean, regardless of whether held in state or federal court, a trial court is a better forum for deciding Cumis fee disputes that are pursued in an action that also asserts fraud claims, the Compulink court disagreed. 2008 DJDAR at 18434. It found that Caiafa made no exception for Cumis fee disputes that were intertwined with other non-arbitrable issues. Id.

The Compulink court, in declining to follow Younsesi, held that the plain language of section 2860 determines that Cumis fees questions must be arbitrated and that all other issues falling outside the scope of section 2860’s arbitration provision are to be adjudicated in the trial court. 2008 DJDAR at 18434. It held that the trial court erred in denying St. Paul’s petition to compel arbitration in its entirety. 2008 DJDAR at 18435.