Kirk C. Chamberlin, Esq.
Chamberlin & Keaster LLP
15821 Ventura Blvd. Suite 165, Encino, CA 91436
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ANOTHER CALIFORNIA APPELLATE COURT HOLDS A GENERAL RESERVATION OF RIGHTS DOES NOT TRIGGER RIGHT TO INDEPENDENT COUNSEL
Attached please find a copy of the decision in Centex Homes v. St. Paul Fire and Marine. In this case Division Two of the Fourth Appellate District followed the ruling in Federal v. MBL Inc., 219 Cal.App.4th 29 in which we represented Federal. In that case, we prevailed in the California Court of Appeal and obtained a published decision changing the law in California that a general reservation of right does not create a conflict necessitating the appointment of independent (Cumis) counsel. This was a big win for the insurance industry in that it dramatically reduces the obligation to provide independent counsel while at the same time preserving the insurer’s rights. The attached Centex decision follows the MBL decision for the proposition that “Nor is a general reservation of rights sufficient to trigger the right to independent counsel.” Again, this provides a valuable means by which insurers may reduce defense costs by avoiding the appointment of independent counsel and, at the same time, reserving their rights. The following is a brief primer on the issue. Please contact me with any other questions, comments or analysis.
I. “Independent” Counsel Issue
An insured’s right to independent counsel arises when an insurance carrier’s reservation of rights creates a conflict of interest for carrier-provided counsel. An overly broad reservation of rights may trigger the “right” to independent counsel based on an issue that is irrelevant to the case. On the other hand, a narrowly tailored reservation of rights letter may avoid the unnecessary appointment of independent counsel.
A. What Constitutes a “Conflict of Interest”
The jurisprudence addressing what constitutes a “conflict of interest” requiring the appointment of independent counsel has evolved significantly over the last thirty years. At first, there was a great deal of uncertainty regarding what circumstances trigger the right to independent counsel. Some jurisdictions have attempted to clarify the doctrine by enacting statutes specifically identifying the type of situations in which an insured is entitled to independent counsel. Courts have also addressed the doctrine of an insured’s right to independent counsel.
Any Reservation of Rights
Early on in the evolution of the law regarding this topic, a conflict of interest was broadly defined as arising once the insurer takes the position that a coverage issue is present. In some jurisdictions, this still holds true and any reservation of rights by an insurer will trigger the appointment of independent counsel. Under this view, a problem arises when policyholders’ attorneys begin demanding that insurers hire them as independent counsel any time the insurer issues a reservation of rights, even in the absence of an actual conflict of interest. The insurer is faced with the dilemma of either hiring the policyholder’s attorney as independent counsel and foregoing much of the control of the litigation that they would otherwise have with appointed panel counsel or withdrawing their reservation of rights and waiving coverage defenses in order to avoid a conflict of interest.
A Reservation of Rights Where Defense Counsel Can Control Facts
In order to narrow the scope of conflicts triggering independent counsel, some jurisdictions have limited the requirement to those situations when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by defense counsel retained by the insurer. A reservation of rights standing alone does not trigger the insurer’s requirement to provide independent counsel. Rather, independent counsel will be required when some issue in the lawsuit between the insured and the third party will bear directly on the coverage dispute between the insurer and the insured and that issue can be controlled by defense counsel. The key consideration is whether the manner in which the case is defended can affect the outcome of any subsequent coverage determination. For instance, a complaint may contain allegations of “intentional” conduct which, if proven, may exclude coverage. The concern is that the insurer-appointed defense counsel may be tempted to steer the facts to show that the insured acted intentionally while the insured would desire to establish just the opposite. In such cases a conflict of interest exists necessitating the appointment of independent counsel.
An Actual (Not Merely Potential or Theoretical) Conflict
As the doctrine continued to develop, some jurisdictions required an actual conflict, not merely a potential or theoretical conflict, before requiring the insurer to provide independent counsel. Not every conflict of interest would require independent counsel under this view. For instance, the insurer’s reservation of the right to seek reimbursement of defense costs allocable to non-covered claims, standing alone, would not involve an issue that would be litigated in the underlying action. As such, it does not create an actual conflict and the reservation of rights by itself would not trigger the requirement to provide independent counsel.
General Reservation of Rights Does Not Create Conflict
At least one jurisdiction (California) has just held that a general reservation of rights does not create a conflict of interest, further narrowing the situations in which an insured is entitled to independent counsel. At most, a general reservation of rights creates only a potential, theoretical conflict rather than an actual conflict. As such, it is not enough to create a conflict requiring the insurer to provide independent counsel. Under this rubric, courts will look for specific evidence of an actual conflict of interest before determining that independent counsel is required.
No Right to Independent Counsel
At least on jurisdiction (Hawaii) holds that there is no right to independent counsel but rather that the insurer appointed attorney is governed by it professional obligations to its one and only client, the insured.
B. How to Avoid Conflicts
There are several important ways in which an insurer may be able to avoid conflicts of interest altogether and thereby avoid the requirement to provide independent counsel. Experience shows that some independent counsel may often attempt to “over-litigate” cases and incur defense expenditures that are not commensurate with the actual value of the case. Even forthright independent counsel (and thereby the insurers) are faced with the issue of “protecting” and “managing” a client where the client has no stake in the defense costs incurred. Insurers can avoid the unnecessary burdens and expense of independent counsel by taking steps to avoid conflicts of interest.
No Reservation of Rights
Given the concerns often associated with the hiring of independent counsel, insurers must consider the benefits of issuing a reservation of rights. Moreover, since over 95(+)% of all civil litigation cases settle and insurers, when implicated, typically participate in the settlement, insurers need to evaluate whether it makes economic sense to issue a reservation of rights in every case. This consideration is especially pertinent in jurisdictions where any reservation of rights triggers independent counsel. In some jurisdictions, a defense without a reservation of rights may preclude the insurer from later asserting policy defenses where it was aware of grounds to deny coverage but failed to do so. After a careful evaluation, insurers may prefer to forego a reservation of rights and waive coverage defenses that are not likely to be relevant anyway in order to maintain control of the defense and avoid triggering a requirement to provide independent counsel.
A Limited Reservation of Rights
A limited, narrowly tailored reservation of rights may avoid triggering independent counsel where the facts at issue in the underlying action cannot be controlled by defense counsel to determine the outcome of a coverage issue. In latent injury/property damage matters for example, a reservation based upon “owned property,” “no harm during the policy period” and/or “punitive damages” are issues that are commonly raised but do not involve facts that can be controlled by defense counsel. However, a reservation based on an “accidental” based exclusion or an “expected or intended” injury exclusion may raise factual issues regarding the insured’s “intent” which may be controlled by defense counsel triggering independent counsel. Careful consideration must be given as to the necessity of a reservation of rights that triggers independent counsel and whether the issue is of sufficient importance to forego control of the defense. In California, however, that problem can be addressed by use of a general reservation of rights.
May 2015 Monthly Review
“Thought” of the Month: “If you can’t explain it simply, you don’t understand it well enough.” Albert Einstein
GEORGIA – Pollution Exclusion Does Not Bar Coverage For Lead Claims, Panel Majority Says
Amy Smith v. Georgia Farm Bureau Mutual Insurance Co. No. A14A1824 and Bobby Chupp v. Georgia Farm Bureau Mutual Insurance Co., No. A14A1825, Ga. App., 1st Div.; 2015 Ga. App. LEXIS 247
NEVADA – Release of Carbon Monoxide Was The Only Cause Of Death, Federal Judge Determines
Century Surety Company v. Casino West, Inc., No. 07-636, D. Nev.; 2015 U.S. Dist. LEXIS 39482
MINNESOTA – Judge: 2 “Occurrences” For Coverage Under CGL Insurance Policies
National Union Fire Insurance Company of Pittsburgh, PA and American Home Assurance Co. v. Donaldson Company Inc. and Federal Insurance Co., No. 10-4948, D. Minn.; 2015 U.S. Dist. LEXIS 35499
NEW YORK – New York Federal Judge Enters Judgment In Favor Of Insurance For Environmental Costs
Olin Corp. v. Insurance Company of North America, et al., No. 84-1968, S.D. N.Y.
VERMONT – Vermont High Court Majority Says Policy’s Pollution Exclusion Is Not Ambiguous
Cincinnati Specialty Underwriters Insurance Co. v. Energy Wise Homes Inc., et al., No. 14-165, Vt. Sup.; 2015 Vt. LEXIS 33
NEVADA – Insurer Has Duty To Defend Construction Defects Case, Judge Says
Gemini Insurance Co. v. North American Capacity Insurance Co., No. 14-00121, D. Nev.; 2015 U.S. Dist. LEXIS 44234
ILLINOIS – Insurer Did Not Breach Duty To Defend Insured For Bodily Injury Claims, Panel Says
Sinclair Oil Corp. v. Allianz Underwriters Insurance Co. f/k/a Allianz Underwriters Inc., No. 5-14-0069, Ill. App. 5th Dist.; 2015 Ill. App. LEXIS 250
CALIFORNIA – Parties’ Motions To Compel Mostly Denied In Dispute Over Hazardous Waste Fire
Carolina Casualty Insurance Co. v. Oahu Air Conditioning Service Inc., et al., No. 2:13-cv-01378, E.D. Calif.; 2015 U.S. Dist. LEXIS 40786
ILLINOIS – Judge: Insurer Has No Duty to Defend, Indemnify Costs From Faulty Work
AMCO Insurance Co. v. Northern Heritage Builders LLC and American Family Insurance Co., No. 12-09071, N.D. Ill.; 2015 U.S. Dist. LEXIS 41341
NEW YORK – Federal Judge Orders Insurer To Pay Almost $9M In Attorney Fees
Danaher Corp. v. Travelers Indemnity Co., et al., No. 10-0121, S.D. N.Y.; 2015 U.S. Dist. LEXIS 48769
CALIFORNIA – Judgement Does Not Trigger Excess Insurer’s Duty to Defend, Judge Concludes
Nordby Construction Inc. v. American Safety Indemnity Co., et al., No. 14-04074, N.D. Calif.; 2015 U.S. Dist. LEXIS 49048
April 2015 Monthly Review
“Thought” of the Month: “There can’t be a crisis next week….My schedule is already full!” Henry Kissinger
OREGON CLEANUP STATUTE BENEFITS DEFENDING INSURER
In Century Indemnity Co. v. The Marine Group LLC, et al., No. 08-1375, D. Ore., Federal Magistrate rules that the defending insurer may rely upon OR. REV. STAT. [Oregon Revised Statutes] 465.480(7)(a) that once the defending insurer establishes the existence and amount of defense costs, the non-defending insurers must prove the requested costs are unreasonable or unnecessary. Practice Pointer – Given the difficulty in proving that incurred defense costs were unreasonable, the better course of action may be to participate in the defense as soon as possible allowing for control of the defense costs.
CALIFORNIA COURT UPHOLDS REQUIREMENT THAT INSURER DEFEND CROSS-CLAIMS
In Richard E. Haskins, et al. v. Employers Insurance of Wausau, et al., No 14-1671, N.D. Calif.; 2015 U.S. Dist. LEXIS 21480, a Federal Court Judge rules consistent with California law that the Insurer must defend a cross-claim. Insurer’s argument that a cross-claim is not a “suit” was rejected. Practice Pointer – Be careful when arguing Foster-Gardner…which was a very close decision that we won before the California Supreme Court. Here, the fact that the cross-claim was not itself a separate suit but a cross action in a current suit did not preclude the insurer from defending. Foster-Gardner does not require a separate suit for each affirmative action within a suit.
TEXAS FEDERAL JUDGE PRECLUDES COVERAGE UNDER THE POLLUTION EXCLUSION IN A CONSTRUCTION CASE
In Evanston Ins. Co. v. Lapolla Industries Inc., No. 13-3157, S.D. Texas; 2015 U.S. Dist. LEXIS 21381 a Federal Judge held that the insurer properly denied coverage under an APE for a 3rd-party fume claim arising out of spray insulation. The insured’s argument that there was no property damage under the policy thereby precluding application of the pollution exclusion was rejected by the Court.
NEW ORLEANS 5TH CIR. COURT OF APPEALS AFFIRMS NO BAD FAITH FOR DENIAL OF WHERE INSURED WAS DEFENDED BY OTHER INSURERS
In Anco Insulations Inc. v. AIG Premier Insurance Co., et al., No. 13-31313, 5th Cir.; 2015 U.S. App. LEXIS 2973, the 5th Cir. affirmed a ruling that the insured had no duty to defend cases that were being defended by other insurers, and therefore no bad faith, up until the time the defending insurers exhausted. Further, the Court held that the insurer was not obligated to defend or reimburse the defending insurer for pre-tender costs.
PENNSYLVANIA FEDERAL JUDGE FINDS INSURER’S ASBESTOS EXCLUSION IS AMBIGUOUS
In General Refractories Company v. First State Insurance Co., et al., No. 2:04-cv-3509, E.D. Pa., A Federal Judge finds the Asbestos Exclusion ambiguous holding that the insurer must not only prove that its interpretation is reasonable but that the insured’s interpretation is unreasonable. Faced with two “reasonable” interpretations, the Court held that the insured’s interpretation must prevail.
WISCONSIN / MISSOURI BOTH FIND THE TOTAL POLLUTION EXCLUSION UNAMBIGUOUS
In Advanced Waste Services, Inc. v. United Milwaukee Scrap LLC, No. 2014AP1169, Wis. App., Dist. I, The Wisconsin Court of Appeals precludes coverage for damages arising out of the transport and disposal of the insured’s contaminated waste water based upon the total pollution exclusion find the exclusion “Unambiguous.”
In Barbara Williams v. Employers Mutual Casualty Co., No. 13-2393, E.D. Mo., a Federal Judge precludes coverage for an $82 million judgment based upon the pollution exclusion.
NEW YORK FEDERAL JUDGE ORDER PRODUCTION OF DRAFT COVERAGE LETTERS
In Broadrock Gas Services LLC, et al. v. AIG Specialty Insurance Co., No. 14-3927, S.D. N.Y., the Court ruled that while communications concerning coverage and draft response letters drafted by the counsel were protected from disclosure, subsequent changes and drafts within the insurance company were not so protected and ordered produced. Practice Pointer – Keep your counsel involved in the edit process to protect attorney-client and attorney work product content.
NEW YORK FIND THAT FLORIDA LAW HAS CONSISTENTLY PRECLUDED COVERAGE FOR CHINESE DRYWALL CLAIMS
In Bayswater Development LLC, et al. v. Admiral Insurance Co., et al., No. 105001/10, N.Y. Sup., App. Div., 1st Dept., a New York Supreme Court of Appeals precludes coverage under Florida law for damages caused by defective Chinese drywall.
VIRGINIA 4TH CIR. HOLDS THAT NEGLIGENCE ACTS SUFFICIENT TO TRIGGER DEFENSE
In Liberty Mutual Fire Insurance Co. v. JM Smith Corp., et al., No. 13-2451, 4th Cir., the 4th Cir affirmed lower court’s ruling that negligence acts alleged in the complaint were sufficient to trigger a defense notwithstanding the pleading of intentional violations. Practice Pointer – Artful and/or in-artful pleadings in a complaint are often not held to be a basis for a coverage determination. Where allowed, defend subject to reimbursement of uncovered defense amounts.
WISCONSIN SUPREME COURT FINDS COVERAGE FOR AN EXPLOSION UNDER A POLLUTION POLICY
In Acuity, A Mutual Insurance Co. v. Chartis Specialty Insurance Co., No. 2013AP1303, Wis. Sup., the Wisconsin Supreme Court found a duty to defend and indemnify existed for damages caused by an explosion that resulted from the escape of natural gas. Specifically, in reversing the Appellate Court, the Supreme Court found the natural gas leak to be a “pollution condition” and the natural gas to be a “contaminant” under the policy. Practice Pointer – this ruling resulted in the context of an insurer contribution action and in my opinion may have made bad law. While a natural gas leak may be a “pollution condition” due to “contamination,” however, the intervening explosion and fire caused the damage rather than a typically contemplated pollution damage due to a “pollution condition.” This may be an instance where a case involving the destruction of homes and injury of people may have been better resolved out-of-court.
MAINE COURT FINDS CLAIMS HANDLING MANUAL, UNDERWRITING GUIDELINES AND REINSURANCE COMMUNICATIONS DISCOVERABLE
In, Irving Oil Limited v. ACE INA Insurance, No. 09-35, Maine Bus., Cumberland Co., a Maine Justice determining the phrase “underlying insurance” to be ambiguous in an MTBE claim, allows discovery of the insurer’s claims manuals, underwriting guidelines and reinsurer communications. Query… if any of those documents discuss the meaning of “underlying insurance” …. (i.e., are they even “responsive” documents?)
CALIFORNIA FEDERAL COURT UPHOLDS NO ASSIGNMENT CLAUSE
In Nordby Construction Inc. v. American Safety Indemnity Co., et al., No. 14-04074, N.D. Calif., a Federal Judge follows controlling California law upholding the validity of “No Assignment” clauses. This case was handled by our office and additional comment can be provided upon request.
March 2015 Monthly Review
“Thought” of the Month: Seen—Sign in store window: “Any faulty merchandise will be cheerfully replaced with merchandise of equal quality.”
TEXAS GETS IT RIGHT
In Re Deepwater Horizon, No. 13-0670, Texas Sup. The Texas Supreme Court finds BP Exploration and Production covered as an additional insured. In doing so, the Texas Supreme Court applies reason to the “8-Corners” Rule allowing the Court to consider the related underlying contract. Further, the Court upholds the idea that a party named as an additional insured in connection with performance of a contract is insured only to liability arising out of the insured contract. We believe this is an important decision because in “8-Corners” jurisdiction, insureds often argue that no other information may be considered. The counter to that argument is that the Court (and we believe the insurer) can consider “what” is being insured. Further, the insurer should not be hamstrung by “artful” and/or “over-inclusive” drafting.
TENNESSEE COMPLAINT SEEKS TO APPLY ABSOLUTE POLLUTION EXCLUSION
Great Lakes Reinsurance the MP & T Hotels, LLC, et al., Case No. 3-14-cv-2018. This is a case to watch and may fall under the adage, “be careful what you wish for . . .” In its Complaint, Great Lakes apparently seeks to exclude coverage for injury arising out of a hotel patron that was allegedly injured to noxious fumes in connection with pest extermination. While at first blush the verbiage in the exclusion “release or escape of soot of smoke, vapors, soot, fumes . . .” may seem to apply, many Courts have refused to apply the absolute pollution exclusion when those “fumes” are in connection with the spraying of pesticides finding that the vapors do not constitute a pollutant but are integral with pesticides. See MacKinnon v. Truck Ins. Exchange, 31 Cal. 4th 635.
RHODE ISLAND CASE TO WATCH
Seaton Insurance Company v. Yosemite Insurance Company, No. 15-cv-00040, D. R.I. In this case Seaton Insurance Company is suing Yosemite Insurance Company for failure to pay under a reinsurance agreement. As most everyone in the industry knows, reinsurance recoveries can be difficult. Our experience shows that the best “practice pointer” is to involve the reinsurance company as early as possible in the claims, billing, settlement and/or resolution process.
MICHIGAN LAW “INITIAL DISCHARGE” RULE NOT APPLY TO LANDFILLS
Decker Manufacturing Corp. v. The Travelers Indemnity Company, Case No. 1:13-cv-820. In finding coverage not precluded by the Sudden &Accidental Pollution Exclusion, the Federal Judge provides good explanation of Michigan law which holds that the “initial discharge” rule does not apply to landfills. Rather, in Michigan, the focus is on the discharge from the landfill (which, in our view , has nothing to do with the insured). We feel Michigan law on this subject appears to be result driven and has not been followed by many other jurisdictions.
NEW MEXICO FEDERAL COURT SAYS NO TO STACKING
Mid-Continent Casualty Company v. I & W, et al., No. CIV-11-0329. With no clear applicable law in New Mexica, the Federal Court, looking to other jurisdictions, found property damage occurring from 2000-2009 to be a single occurrence. Further, occurrence is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” precludes stacking of occurrence limits.