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.


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.