In Centex Homes v. St. Paul Fire & Marine Ins. Co. (No. E060057, filed 5/22/15), a California Court of Appeal held that a developer’s declaratory relief lawsuit seeking a declaration of the right to independent counsel was premature because there were no actual facts alleged to suggest an existing conflict requiring the appointment of independent counsel.
Centex was a developer of single-family residences in Corona, California. Centex was sued by the homeowners for construction defects and tendered the defense to Travelers as an additional insured under a policy issued to one of Centex’s subcontractors, Oakleaf. Travelers accepted the defense under a reservation of rights, including the right to choose defense counsel. Centex then sued its subcontractors and their insurers for breach of contract to indemnify, defend, and obtain insurance, for equitable indemnity, and for contribution and reimbursement.
Centex alleged that it was incurring defense costs, alleged that it was an additional insured under policies issued by Travelers to subcontractors, and in particular alleged two claims for declaratory relief: (1) that an allocation was required as between the insurers, Centex and the subcontractors for Centex’s defense costs; and (2) that Travelers breached its duty to provide Centex “with a full, complete, immediate, and conflict free defense,” causing Centex to incur defense costs and that, by defending Centex under a reservation of rights and appointing its own “panel defense counsel,” Travelers had created a conflict of interest with Centex, triggering the right to independent counsel.
Centex contended that Travelers was improperly trying to limit the scope of its coverage to the work of its named insured; improperly denying any covered “occurrence” or “property damage” under the policy; and improperly competing with Centex by seeking recovery or reimbursement from other subcontractors and forcing Centex to share counsel with the subcontractors, while “disadvantageously controlling and manipulating” Centex’s defense, particularly the use of experts. For those reasons, Centex alleged that it had an immediate need for independent counsel.
Travelers demurred to the complaint, arguing that no actual facts had been pled to demonstrate manipulation of the defense, and any allocation was premature because the underlying case was ongoing. The trial court agreed, and found “no actual present conflict of interest requiring independent counsel.” Accordingly, the court sustained Travelers’ demurrer.
The appeals court affirmed. As to the request for declaratory relief on allocation the court stated: “Quite simply, there are not enough facts about liability, damages, or the cost of defense for the trial court to offer any declaration as to the rights and obligations of the parties. [] Therefore, the trial court correctly determined the seventh cause of action is not ‘ripe’—although Centex may certainly be able to renew its claims at a later date.”
The same result followed for the claim that conflicts required appointment of independent counsel. Centex alleged potential conflicts of interests with Travelers including Travelers instructing the defense counsel: (1) to sue Oak Leaf, the subcontractor insured by Travelers; (2) to retain and direct the work of experts; (3) to evaluate the contracts between Centex and Oak Leaf to determine what Oak Leaf should contribute towards any settlement with the Corona homeowners; (4) to allocate Centex’s defense fees and costs among the subcontractors; (5) to negotiate settlements between Centex and the subcontractors; and (6) to ascertain whether the work performed by Oak Leaf caused property damage.
The court stated: “In other words, Centex asserted that, to the extent panel counsel could challenge the liability of Oak Leaf, it creates a direct conflict of interest by enhancing Travelers’ reimbursement claims against Centex. However, these anticipated circumstances have not occurred yet in the underlying litigation.” The appeals court went on:
“An insurer has the right to control a defense. [] Centex argues Travelers will manipulate experts to its advantage without giving any explanation about how that will be accomplished. Similarly, Centex offers a host of allegations about how Travelers will control the litigation without describing how this is occurring in the underlying construction defect litigation. Centex is alleging conclusions without substance, not facts.”
The court cited Blanchard v. State Farm & Casualty Co. (1991) 2 Cal.App.4th 345, for the proposition that no conflict exists where the insurer and the insured share the same interest in minimizing liability. The Centex court rejected the argument that Travelers’ reservation of the right to reimbursement of defense costs from Centex for defense of uncovered claims as part of a mixed action gave panel counsel an incentive to control the defense adverse to Centex, in order to increase the reimbursement claim. The court said that regardless of how liability was apportioned in the end, Centex would be covered by either Travelers or other insurers, and since Travelers’ liability was derivative of the named insured’s liability, Travelers had the same interest in defending the underlying claim for both insureds. Thus, “[t]hese circumstances do not cause a conflict requiring independent counsel.”
While the court acknowledged that facts could develop to give rise to such conflicts, “[t]he demurrer to the eighth cause of action was properly sustained—although these claims may also be renewed if they become actual and present.”
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