The California Court of Appeal has held that if a liability insurer’s reservation of rights creates a conflict of interest that gives the insured the right to have “independent counsel,” any dispute regarding the independent counsel’s fees is subject to mandatory arbitration, even if the insurer does not retain “panel counsel” to assist in the defense. ( Long v. Century Indemnity Company (2008) WL 2426599)
Facts
In 1996 the California Department of Toxic Substance Control (DTSC) filed an environmental cleanup action against G. Harris International (Harris). Harris’ personal attorney, Jay B. Long (Long), tendered Harris’ defense to Harris’ general liability insurer, Insurance Company of North America (INA). INA agreed to defend Harris under a “reservation of rights” (the exact nature of which was not disclosed in the case).
INA asked Long to represent Harris in the cleanup action brought by the DTSC. However, INA was unwilling to pay Long the hourly rate he requested, contending that Long was subject to the “rate cap” established by California Civil Code section 2860(b). When Long and INA were unable to resolve their dispute regarding hourly rates, they agreed that INA would pay Long at the capped hourly rate that INA contended was applicable, with Long reserving his right to seek payment of his normal hourly rate at some later date.
By July 2002 the DTSC had settled its claims as against Harris. In July 2005 Long demanded that INA pay Long the additional attorney fees Long claimed were due for his representation of Harris (i.e., the difference between what INA had paid Long pursuant to section 2860(b) and Long’s normal hourly rate). Without conceding that the “mandatory arbitration” provision of section 2860(c) applied, Long also demanded that INA submit the dispute concerning hourly rates to arbitration. INA refused Long’s demand for payment and declined to submit the matter to arbitration, asserting that Long’s claim for additional attorney fees was barred by the statute of limitations.
Harris then assigned rights to Long, and Long filed a bad faith action against INA. Long essentially sought to recover from INA the difference between what he was paid by INA and what he would have been paid at his normal hourly rate. Notably, however, Long did not allege facts showing that INA’s reservation of rights did not create a conflict of interest that triggered a right to independent counsel.
The trial court dismissed Long’s claim against INA on the ground that Long’s claim against INA involved a fee dispute regarding the rates to be paid to independent counsel, and that the claim and was therefore subject to mandatory arbitration under Civil Code section 2860(c). Long appealed.
Holding
The Court of Appeal affirmed, holding that Long’s fee dispute with INA was subject to arbitration under Civil Code section 2860(c).
The appellate court began by rejecting Long’s argument that because INA had never retained “panel counsel” to represent Harris in the underlying environmental cleanup lawsuit, INA could not compel arbitration of the fee dispute. According to the appellate court, there is nothing in Civil Code section 2860 that requires the insurer to retain “panel counsel” before section 2860 can apply. Rather, if the insured has a right to be represented by independent counsel, then section 2860 applies whether or not the insurer retains panel counsel to join with independent counsel in defending the insured.
The appellate court then observed that Long had not alleged that INA’s reservation of rights did not trigger a right to independent counsel. Since Long had not alleged that INA’s reservation did not trigger a right to independent counsel, the appellate court essentially presumed that INA’s reservation of rights did trigger a right to independent counsel and that section 2860 therefore did apply. Since section 2860 applied, any fee dispute between Long and INA was subject to mandatory arbitration.
Comment
This is an unusual case in that it was the insurer—not the insured—who was arguing that the insurer’s reservation of rights created a conflict of interest sufficient to give the insured a right to “independent counsel.” The insurer obviously took that position so that it could assert that any dispute regarding fees owed to independent counsel was subject to mandatory arbitration under Civil Code section 2860(c).
Unfortunately, in the course of its opinion in this case, the appellate court broadly stated that an insurer has a duty to provide the insured with independent counsel “whenever a conflict or potentialconflict of interest between the insurer and the insured exists or may arisewith respect to third-party litigation.” This sweeping pronouncement appears to be at odds with prior appellate decisions in which courts have stated that an insurer is only obligated to provide independent counsel when the conflict between the insurer and the insured is “ significant, not merely theoretical, actual, not merely potential.” (See, e.g., Dynamic Concepts, Inc. v. Truck Ins. Exchange(1998) 61 Cal.App.4th 999, 1007.) Insurers may hope that the insurer who “won” this case will ask the appellate court to modify its opinion to delete the broad language suggesting that independent counsel is owed when there is a “potential” conflict of interest that “may arise.”