Insurance Law Client Alert: Court Rejects Claims for Independent Counsel in Pollution Case

In Federal Ins. v. MBL, Inc. (No. H036296, filed 8/26/13), a California appeals court rejected a dry cleaning product supplier’s contention that disputed claims for indemnity or contribution for groundwater cleanup costs created a conflict of interest for defense counsel requiring the appointment of independent counsel.

After being named defendants in a federal CERCLA action for groundwater pollution, the owners and operators of a dry cleaning facility sued MBL, Inc., a supplier of dry cleaning products, including perchloroethylene (PCE), seeking indemnity, contribution and declaratory relief for the cleanup costs. MBL tendered the action to its numerous insurers, which agreed to defend under reservations of rights. However, a dispute arose whether conflicts existed requiring the appointment of independent “Cumis” counsel, and the insurers sought declaratory relief.

The insurers had reserved rights to deny coverage on a variety of grounds, but the court found no conflicts, noting that under Civil Code section 2860, “not every conflict of interest entitles an insured to insurer-paid independent counsel. Nor does every reservation of rights entitle an insured to select Cumis counsel. There is no such entitlement, for example, where the coverage issue is independent of, or extrinsic to, the issues in the underlying action [] or where the damages are only partially covered by the policy…. However, independent counsel is required where there is a reservation of rights ‘and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.’ “

MBL had argued that one insurer’s absolute pollution exclusion for liability arising out of “governmental directives or requests” gave rise to a conflict on a theory that operation of the exclusion would require the insurer to establish that MBL was, in fact, liable because of governmental actions. The court disagreed, stating that “[defense] counsel cannot influence the outcome of this coverage issue, which is strictly a matter of contract interpretation. Either the loss arose out of a government claim to remediate pollution or it did not, and there is nothing which counsel, whether retained or independent, could do to change the answer to that question.”

The MBL court also rejected an argument that an insurer’s coverage of multiple defendants, each receiving a defense from a common insurer in the same action, creates a conflict. The court noted that none of the insureds were actually direct adversaries, and the insurers involved had retained separate counsel for each insured. The MBL court distinguished a case where an insurer might have an incentive to attach liability to one insured versus another, stating that “[i]n this case, the Insurers could only avoid liability by establishing that a particular insured had no responsibility for the pollution at issue, not that each of its insureds was partially responsible for the loss. Ultimately, the Insurers would potentially have to indemnify all of their respective insureds against any judgment that might be entered and thus would have no incentive to shift liability among them.”

Finally, the MBL court found that a disclaimer of coverage for damage outside the policy period would not create a Cumis conflict: “Here, as in Blanchard [v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345], it is in the interest of both the Insurers and MBL to defeat liability. MBL provided no evidence to establish how defense counsel could have controlled the issue of when certain damages occurred. Defense counsel could not control the facts at issue below, such as when MBL delivered solvents to the dry cleaning facility, or when the seepages and resulting environmental contamination occurred. Furthermore, the point in time the alleged damages occurred would not be relevant to defense counsel jointly retained by multiple insurers, who together issued policies providing coverage to MBL over a period of approximately 20 years.”

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August 27, 2013