A general liability insurer’s reservation of rights to assert a “contractor’s special condition” created a conflict of interest which gave the insured the right to select independent counsel at the insurer’s expense. ( Schaefer v. Elder (2013) 217 Cal.App.4th 1)
Facts
Steve Schaefer hired Kelly Elder dba Elder Construction to design and build a residence for Schaefer. Later, Schaefer filed a construction defect action against Elder, alleging causes of action for breach of contract, negligence, breach of implied warranty and strict liability.
Elder tendered the defense of the action to his general liability insurer, CastlePoint National Insurance Company. In response, CastlePoint appointed the law firm of Koeller, Nebeker, Carlson & Haluck to represent Elder, subject to a reservation of rights. Among other things, CastlePoint reserved its right to deny coverage based on the policy’s “contractor’s special condition.” That condition provided that the policy would not cover Elder for work performed by independent contractors unless Elder first obtained indemnity agreements and additional insured endorsements from the independent contractors.
CastlePoint filed a declaratory relief action against Elder to determine whether the insurance policy covered Elder’s alleged liability to Schaefer in the underlying action. Among other things, CastlePoint asserted that the “contractor’s special condition” barred coverage for Elder’s alleged liability to Schaefer.
Elder hired a different law firm to represent Elder in the underlying action. Elder then moved for an order (1) determining that Elder was entitled to independent counsel and (2) disqualifying the Koeller firm from being involved in the underlying action. CastlePoint intervened in the underlying action for purposes of opposing Elder’s motion. The trial court granted Elder’s motion, and CastlePoint appealed.
Holding
The Court of Appeal affirmed the order that Elder was entitled to independent counsel, and that the Koeller firm should be disqualified from any involvement in the underlying action.
With respect to the issue of independent counsel, the appellate court held there was an actual conflict of interest between Elder and CastlePoint, and that Elder was therefore entitled to independent counsel at CastlePoint’s expense. The appellate court acknowledged that a conflict of interest does not arise unless the outcome of the coverage issue can be controlled by panel counsel appointed by the insurer. However, CastlePoint’s reservation of rights as to the contractor’s special condition raised the question of whether the workers who allegedly performed defective work on Schaefer’s residence were Elder’s employees or independent contractors. If they were employees, the contractor’s special condition would not apply, but if they were independent contractors, the contractor’s special condition would apply. The appellate court concluded this was a coverage issue whose outcome could be controlled by appointed defense counsel, i.e., the Koeller firm. As such, Elder was entitled to independent counsel.
With respect to disqualification of the Koeller firm, CastlePoint asserted that even if Elder was entitled to have independent counsel in the underlying action, the Koeller firm should not have been disqualified from representing CastlePoint’s interests in that action. In support, CastlePoint relied on Civil Code section 2860(f), which states that “[w]here the insured selects independent counsel pursuant to the provisions of this section, both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation.” The appellate court rejected this argument, reasoning that the Koeller firm had simultaneously represented both Elder and CastlePoint in the underlying action. Thus, it was proper to assume that the Koeller firm had received confidential information from Elder which would be detrimental to Elder and beneficial to CastlePoint. As a result, the trial court had properly disqualified the Koeller firm from any further involvement in the underlying action.
Comment
The appellate court in this case held that panel defense counsel, the Koeller firm, had an actual conflict of interest in simultaneously representing the insured, Elder, and the insurer, CastlePoint. According to the appellate court, “[t]he Koeller firm had an ethical duty to Elder to try to establish that the workers were employees and, at the same time, had an ethical duty to CastlePoint to try to establish that the workers were independent contractors.” The court concluded that the conflict supported a finding that Elder was entitled to independent counsel in this case.