Insurance Law Alert: Defense Without Reservation Precludes Employee Indemnification

In Carter v. Entercom Sacramento (No. C066751, filed 9/3/13), a California appeals court held that an employee has no right of indemnification from his or her employer for attorney’s fees incurred defending an action where the employer’s insurer agrees to defend the employee without reservation.

In Carter, the employee was involved in a radio station stunt that was fatal to a contestant. The contestant’s family sued the radio station for wrongful death and named the employee, who tendered the action to the radio station’s insurer. The insurer agreed to defend the employee without reservation, and appointed defense counsel.

However, the employee rejected the appointed counsel and cross-complained for indemnity from the employer under Labor Code section 2802, including for defense costs. He then proceeded to incur in excess of $500,000 in attorney’s fees, ending with the insurer electing to settle the claims against the employee.

Labor Code section 2802 provides that “[a]n employer shall indemnify his or her employee for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful.”

The employee claimed that he was entitled to independent counsel under the statute, but the court disagreed. Noting first that the statute carries no prospective duty to defend, but only a duty to indemnify the employee’s defense costs, the court nonetheless held that nothing in the statute gives the employee a right to select counsel where the employer’s insurer agrees to defend without reservation.

The court pointed out that under the general law of indemnification, “absent some contractual privilege so to do or some showing of sufficient justification or need therefore, an indemnitee ordinarily may not refuse to join in or cooperate with the indemnitor’s proffered defense and still recover his separate and redundant attorneys’ fees and costs.” In other words, “an indemnitee does not have an absolute right to conduct his own defense at the expense of the indemnitor.”

The Carter court also found support in Labor Code section 2802’s limitation to indemnification of “necessary expenditures.” The court said that determination of necessity is a fact question in every case, but found that retention of separate counsel was not necessary in this case because no conflict of interest existed.

Drawing from insurance law, the Carter court held that the mere allegation of punitive damages would not trigger a conflict because the insurer, having agreed to defend without reservation, was liable for any damages awarded against the employee. It therefore shared the same interest in avoiding liability, and punitive damages could only follow upon a finding of liability.

The court also found that a criminal investigation created no conflict, because there was no evidence that the employee ever needed representation in the criminal matter, which was ultimately dropped by authorities.

Thus, the radio station, and indirectly its insurer, had no duty to indemnify the employee for the $500,000-plus in attorney’s fees incurred in using separate counsel to defend the wrongful death lawsuit.

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September 9, 2013