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Emerging Issues

Monthly Review: Important Case

Kirk C. Chamberlin, Esq.
Chamberlin & Keaster LLP
16000 Ventura Boulevard, Suite 700
Encino, CA 91436-2758
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            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.
Independent Counsel
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.
I look forward to discussing this issue with you.

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