California Court Confirms Limitations On Right To Independent Counsel

On August 26, 2013, the California Court of Appeal, in Federal Insurance Co. v. MBL, Inc., H036296, H036578, 2013 WL 4506149 (Cal. Ct. App. Aug. 26, 2013) (MBL), upheld the trial court's decision that the insurers did not have to pay for defense counsel of the policyholder's choosing, in the absence of an actual conflict of interest.

In MBL, the policyholder tendered to its insurers the defense of third-party actions alleging groundwater contamination that was traced to a dry cleaning facility to which the policyholder supplied dry cleaning products. Id. at *1. The insurers accepted the tender of defense, subject to reservations of various rights and retained counsel to represent the policyholder. Id.

MBL refused to accept retained counsel, arguing that the insurers' reservation of rights created a conflict of interest, and it demanded that the insurers instead pay for counsel of its choosing. Id. at *1-*2. The insurers denied that there was a conflict of interest and filed an action, seeking a declaration that they were not obligated to provide independent counsel to MBL. Id. at *4. The trial court granted summary judgment in favor of the insurers. Id. at *5. It held that neither the specific reservations of right, nor the general reservation of rights to deny coverage, presented a conflict of interest which would require the appointment of independent counsel. Id.

On appeal, the court began its analysis by noting the general rule established in San Diego Navy Federal Credit Union v. Cumis Insurance Society, 162 Cal. App. 3d 358 (4th Dist. 1984), that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer's expense. MBL, 2013 WL 4506149, at *6. The court also discussed California Civil Code Section 2860, whichclarifies and limits the rights and responsibilities of insurer and insured set forth in Cumis. Id. (citations omitted). The court noted that both statutory and case law make clear that not every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer's expense. Id. at *7. For example, the mere fact that the insurer disputes coverage does not entitle the insured to Cumis counsel, nor does the fact that the complaint seeks punitive damages or damages in excess of policy limits. Id. Rather, the insured's right to...