Various insurers’ reservation of rights letters in an environmental cleanup action did not trigger a conflict of interest that would give the insured the right to select independent counsel at the insurers’ expense. ( Federal Ins. Co. v. MBL, Inc. (2013) 219 Cal.App.4th 29)
Facts
The federal government brought an environmental cleanup action against Halford’s Cleaners (Halford’s), which operated a dry cleaning facility. Halford’s in turn filed a third-party indemnity action against MBL, Inc. (MBL), a supplier of dry cleaning products.
MBL tendered the defense of the third-party action to MBL’s general liability insurers. The insurers agreed to defend MBL, but reserved rights to disclaim coverage on various grounds, including (1) the policies’ “absolute” pollution exclusion and (2) lack of any bodily injury or property damage “during the policy period.” The insurers appointed panel counsel to defend MBL.
MBL asserted that the insurers’ reservation of rights created a conflict of interest which gave MBL the right to select independent counsel at the insurers’ expense, and MBL therefore refused to accept panel counsel appointed by the insurers. Moreover, MBL argued that the insurers’ representation of other insureds in the same action gave rise to a conflict of interest requiring independent counsel. The insurers denied there was any conflict of interest requiring independent counsel and filed declaratory relief actions in order to resolve the issue. The trial court granted summary judgment in favor of the insurers. MBL appealed.
Holding
The Court of Appeal affirmed.
The appellate court rejected MBL’s argument that the insurers’ reservation of rights as to the absolute pollution exclusion created a conflict of interest. The court found that the pollution exclusion, which barred coverage for property damage arising out of any government request to remediate a discharge of pollutants, did not give rise to a conflict of interest because appointed defense counsel could not control the legal issue of whether the exclusion applied.
Likewise, as to the insurers’ reservation of rights to deny coverage for damages occurring outside the respective policy periods, the appellate court found no conflict of interest sufficient to create a right to independent counsel. According to the court, “where the coverage issue … relates only to the timing of damages, there is no conflict under section 2860.” The court emphasized that appointed defense counsel had no ability to control the issue of when damages occurred. Because appointed counsel could not control the issue, there was no conflict requiring independent counsel.
Last, MBL contended that it was entitled to independent counsel because the insurers defended various other insureds in the underlying action who were adverse to MBL. The appellate court rejected MBL’s argument, finding that MBL had failed to present evidence to show that the insurers’ representation of the other parties gave rise to a “significant, not merely theoretical, actual, not merely potential” conflict of interest. Merely because the insurers may have defended other insureds in the same action did not per se mean that there was a conflict of interest which entitled MBL to independent counsel.
Comment
This case is consistent with the longstanding legal principle that not every conflict of interest triggers an obligation by the insurer to provide the insured with independent counsel. Namely, courts will not find that an insured is entitled to independent counsel unless the reservation of rights creates a situation where appointed defense counsel is able to control the outcome of the coverage issue. Moreover, courts will not find that a conflict of interest triggers the right to independent counsel if the reservation of rights is based on coverage issues that have nothing to do with the issues being litigated in the underlying action.