Issues regarding an insurer’s alleged bad faith delay in defending must be resolved in the trial court before the insurer can compel arbitration of independent counsel fees pursuant to Civil Code section 2860(c). ( Janopaul + Block Companies, LLC v. Superior Court (2011) 200 Cal.App.4th 1239)
Facts
Janopaul + Block Companies, LLC (Janopaul) owned a hotel and undertook to restore it. Janopaul hired The Sundt Companies, Inc. (Sundt) to serve as general contractor for the project.
Following completion of the project, various parties filed suit against Janopaul for construction defects at the project. Janopaul initially tendered its defense to Sundt, apparently pursuant to an indemnity agreement in the general contract. Janopaul later tendered its defense to Sundt’s general liability insurer, St. Paul Fire and Marine Insurance Company (St. Paul), apparently on the ground that Janopaul was an additional insured on the St. Paul policy.
Over two years after Janopaul’s original tender to St. Paul, and after Janopaul threatened to sue St. Paul for failure to defend, St. Paul finally agreed to defend Janopaul subject to a reservation of rights. St. Paul further agreed that Janopaul’s personal counsel could serve as Janopaul’s “independent counsel.”
Over the next year, a dispute arose between St. Paul and Janopaul’s independent counsel regarding independent counsel’s billing rates and practices. St. Paul filed a petition to compel arbitration of the fee dispute under California Civil Code section 2860(c), which provides that disputes involving fees charged by independent counsel “shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute.” In response, Janopaul filed a motion to dismiss the petition. Before briefing had been completed on the petition to compel arbitration and the competing motion to dismiss the petition, Janopaul filed a bad faith action against St. Paul. The trial court granted St. Paul’s petition to compel arbitration, denied Janopaul’s motion to dismiss the petition, and stayed the bad faith case. Janopaul then sought relief in the appellate court.
Holding
The Court of Appeal reversed, holding that when an insured files a bad faith action alleging an insurer’s unreasonable delay in defending, that issue must be resolved in the trial court before any arbitration of independent counsel fees under Civil Code section 2860(c). The appellate court reasoned that if Janopaul establishes an unreasonable delay by St. Paul in providing a defense to Janopaul, then St. Paul will have forfeited and/or be estopped from asserting all rights under the policies of insurance, including any rights under section 2860. Since Janopaul’s complaint for bad faith raised claims “substantially broader than merely a dispute over the amount of attorney fees” which is subject to mandatory arbitration, and since those claims had not been resolved before the trial court granted St. Paul’s petition under section 2860, the trial court erred in staying the bad faith case and in ordering the parties to arbitration.
Comment
The appellate court’s decision requires a preliminary determination in the trial court whether the insurer had a duty to defend the insured and if so, whether the insurer breached that duty and engaged in bad faith conduct. If those issues are resolved in favor of the insurer and the dispute between the insurer and the insured ultimately boils down to the amount of attorney fees the owes for the insured’s defense in the underlying action, then at that time the insurer can move to arbitrate that dispute pursuant to Civil Code section 2860(c).