An insurer’s agreement to defend an additional insured developer under a reservation of rights did not trigger a conflict of interest sufficient to give the developer the right to have independent counsel. (Centex Homes v. St. Paul Fire and Marine Insurance Co.(2018) 19 Cal.App.5th 789)
Facts
Centex Homes (Centex) was the developer of two residential housing projects. Centex did not directly perform any of the construction on the homes. Rather, Centex hired various subcontractors, including Ad Land Venture LP (Ad Land), to perform the construction.
After the projects were completed, some of those who purchased homes sued Centex for construction defects. Centex in turn sought coverage as an additional insured on a general liability policy which Ad Land had obtained through St. Paul Fire & Marine Insurance Company (St. Paul). In response to Centex’s tender, St. Paul appointed Attorney David Lee to defend Centex under a reservation of rights. Among other things, St. Paul reserved its right to deny coverage to Centex for (1) property damage to Ad Land’s own work and (2) property damage arising from work of other subcontractors not insured by St. Paul. St. Paul did not place any limits on appointed defense counsel Lee’s representation of Centex.
Centex filed a cross–complaint against all the subcontractors and St. Paul. With respect to St. Paul, Centex sought a declaration that Centex was entitled to independent counsel under Civil Code section 2860 because St. Paul’s reservation of rights created significant conflicts of interest. Appointed defense counsel, Lee, did not have any involvement in either the prosecution or defense of Centex’s cross–complaint.
St. Paul moved for summary adjudication on Centex’s claim for declaratory relief. The trial court granted St. Paul’s motion, holding that St. Paul was not obligated to provide independent counsel to Centex. Centex appealed.
Holding
The Court of Appeal affirmed.
The appellate court rejected Centex’s argument that any “possible” or “potential” conflict was legally sufficient to require St. Paul to provide Centex with independent counsel. California Civil Code section 2860 requires independent counsel only when conflicts are “actual,” not merely “possible.” Further, while California Rule of Professional Conduct 3–310(C)(1) limits an attorney’s ability to represent “more than one client in a matter in which the interests of the clients potentially conflict,” the appellate court declined to apply that rule to the insured–insurer relationship in which the insured is the true “client” and the insurer is merely the “indemnity provider.”
The appellate court also rejected Centex’s argument that appointed defense counsel, Lee, could “influence the outcome of the coverage dispute” between Centex and St. Paul, and that Centex was thus entitled to independent counsel. Here, Centex had failed to show how Lee could have controlled the outcome of any coverage issue to the detriment of Centex and to the benefit of St. Paul. The appellate court emphasized that Centex was strictly liable for any construction defects, and thus the issue of causation would not necessarily have been litigated in the construction defect litigation. Further, St. Paul had not placed any restrictions on Lee’s representation of Centex.
Last, the appellate court rejected Centex’s argument that St. Paul “controlled both sides of the litigation” and that independent counsel was thus required. Although St. Paul did appoint counsel for Centex with respect to the main action, St. Paul did not appoint counsel for Centex with respect to the cross–complaint. Thus, St. Paul did not control both sides of the litigation.
Comment
The litigants in this case – Centex and St. Paul – have a history of insurance coverage disputes. In a prior reported case, Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, another California appellate court held that Centex had failed to state a cause of action for declaratory relief against St. Paul arising from St. Paul’s refusal to provide independent counsel to Centex in construction defect litigation. The appellate court in that case held that Centex’s allegations amounted to mere speculation about how appointed defense counsel might control the outcome of coverage issues, “without describing how this is occurring in the underlying construction defect litigation. Centex is alleging conclusions without substance, not facts.” (Id. at 31–32.) Likewise, in the present case, the appellate court held that Centex had not produced any evidence as to how appointed defense counsel could or would control the outcome of any coverage issues. As such, Centex had not made any showing that it was entitled to independent counsel.