When a liability insurer withdraws a reservation of rights that had previously triggered a right to independent counsel, the insurer no longer has an obligation to allow the insured to control the litigation, and no longer has an obligation to pay the attorneys’ fees charged by the insured’s independent counsel. ( Swanson v. State Farm General Ins. Co. (2013) 219 Cal.App.4th 1153)
Facts
Mark and Patricia Bitetti (the Bitettis) filed suit against Terry Ann Swanson (Swanson) for premises liability and negligence after an incident at Swanson’s home. Swanson tendered defense of the lawsuit to her homeowners insurer, State Farm General Insurance Company (State Farm). The State Farm policy contained standard language stating that, with respect to any suit seeking damages covered by the policy, State Farm had the right to “provide a defense at our expense by counsel of our choice.”
State Farm accepted Swanson’s defense under a reservation of rights, including the right to assert that Swanson’s alleged liability to the Bitettis did not arise from an “occurrence,” or “accident.” State Farm’s reservation of rights letter concededly gave Swanson the right to have independent (” Cumis” ) counsel, and Swanson thus hired Attorney Richard Blasco (Blasco) to act as her independent counsel.
During the course of the litigation, State Farm amended its original reservation of rights and waived the coverage defenses that had triggered Swanson’s right to independent counsel. After State Farm waived those coverage defenses, State Farm appointed the law firm of Procter, McCarthy & Slaughter (Procter) as defense counsel to represent Swanson against the Bitettis’ claim. State Farm informed Swanson that under the circumstances, State Farm would no longer pay Blasco to act as independent counsel for Swanson.
Swanson subsequently agreed to add Proctor as co-counsel without removing Blasco as her defense counsel. Proctor and Blasco then worked together as co-counsel in defending Swanson against the Bitettis’ lawsuit. Blasco continued billing State Farm, but State Farm did not make any further payments to Blasco.
After resolution of the Bitettis’ lawsuit against the Swanson, Swanson filed suit against State Farm for breach of contract and bad faith. Swanson basically sought to recover from State Farm the legal fees that Blasco had charged following State Farm’s withdrawal of its reservation of rights. The trial court granted summary judgment to State Farm, finding that as soon as State Farm withdrew the “conflict-producing” coverage defenses, State Farm had a right to re-take control of the defense, and State Farm had no further obligation to provide independent counsel to Swanson. Swanson appealed.
Holding
The Court of Appeal affirmed. The appellate court reiterated that, in California, an insurer must provide independent counsel whenever the insurer reserves its rights on a coverage issue that can be controlled by appointed defense counsel. In that situation, the insurer’s reservation of rights creates a conflict of interest between the insurer and the insured, thus giving the insured the right to select independent counsel at the insurer’s expense.
However, the appellate court held the insured’s right to independent counsel lasts only as long as the insurer continues to assert the conflict-producing coverage defenses. Thus, where the insurer withdraws the conflict-producing coverage defenses, the insurer can re-take control of the defense and appoint defense counsel of its choice. In short, “when State Farm withdrew its Cumis -triggering reservation of rights, [State Farm] no longer had an obligation to allow Swanson to control the litigation or an obligation to pay the attorneys’ fees of Swanson’s Cumis counsel.” As such, Swanson was not entitled to recover from State Farm the legal fees that Blasco had charged following State Farm’s withdrawal of its reservation of rights.
Comment
The Swanson case confirms that an insurer that has issued a reservation of rights triggering a right to independent counsel has the option of later withdrawing the reservation and re-taking control of the defense. This of course is not surprising, since once the conflict of interest disappears, the need for independent counsel disappears.
The appellate court did state that “an insurer’s decisions to withdraw the reservation of rights that gives rise to the need for Cumiscounsel, to take control of the litigation, and to cease paying Cumiscounsel, as well as the timing of those decisions, are, like all of the insurer’s decisions, subject to the insurer’s duty of good faith and fair dealing to its insured.” Presumably, the appellate court is suggesting that in certain circumstances (e.g., the eve of trial), an insurer might be prevented from re-taking control of the defense and ceasing to pay independent counsel if doing so would prejudice the insured.