Where a liability insurer issues a preliminary “reservation of rights” letter, but never actually agrees to defend its insured and never actually pays any defense fees during the underlying litigation, the insurer is precluded from invoking Civil Code section 2860’s arbitration remedy in a subsequent dispute over attorneys’ fees. ( The Housing Group v. PMA Capital Ins. Co. (2011) 193 Cal.App.4th 1150)
Facts
The Housing Group (“THG”) was sued in three separate lawsuits. THG tendered the defense of those lawsuits to its insurer, Caliber One Indemnity Company (“Caliber One”).
In response to one of the three tenders, Caliber One sent two letters to THG indicating that Caliber One would investigate the action under a reservation of rights, and explaining that if coverage were confirmed, Caliber One would pay partner rates of $165 per hour and associate rates of $125 per hour. Caliber One never responded to the tenders of the other two actions, never expressly agreed to defend THG against any of the three underlying actions, and never retained defense counsel for THG or contributed to THG’s defense costs during the course of the three underlying actions.
On the eve of trial in one of the three underlying actions, Caliber One apparently admitted coverage for that particular action. Accordingly, Caliber One funded a settlement for THG in the amount of $193,000 in that action and also contributed $35,287.45 toward past-incurred defense fees and costs. Caliber One did not make any defense or indemnity payments in connection with the other two underlying actions.
THG later sued Caliber One for breach of contract and bad faith, seeking to recover the full hourly billable rate of THG’s personal counsel. Caliber One, in turn, petitioned to compel arbitration of the purported fee dispute pursuant to Civil Code section 2860(c). That statute provides that when an insurer is defending an insured under a reservation of rights that triggers a conflict of interest requiring independent counsel (i.e., Cumis counsel), any dispute regarding attorneys’ fees owed to such counsel shall be resolved by binding arbitration.
The trial court denied Caliber One’s petition to compel arbitration, noting that Caliber One’s failure to provide a defense left THG in the same position as if Caliber One had denied THG’s tenders altogether. The trial court thus held that because Caliber One had not defended THG in the underlying actions, Caliber One could not avail itself of the protections of section 2860.
Holding
The Court of Appeal affirmed, holding that because Caliber One had failed to provide a defense, it was precluded from invoking section 2860’s arbitration remedy.
The Court first explained that the duty to defend arises when the tender is made. The defense obligation is immediate so as to relieve the insured from the burden of financing its own defense and then having to sue for reimbursement.
The Court rejected Caliber One’s arguments that its reservation of rights letters reflected an agreement to defend. Although the letters did not disclaim or deny coverage, the letters also did not accept the tender. Instead, they merely expressed Caliber One’s future intent to comply with its duty to defend.
The Court further noted that Caliber One did not participate in THG’s defense during the course of the underlying actions. Caliber One paid no defense fees or costs during the course of those actions, and its post-settlement payment of defense costs was in the Court’s eyes “the equivalent of a defense denial.”
Therefore, because Caliber One did not defend THG, Caliber One could not take advantage of section 2860. The Court noted that to hold otherwise would encourage insurers to reject their Cumis obligations for as long as possible, knowing they could invoke section 2860’s remedies at any time.
Comment
This holding is consistent with at least one earlier federal court decision in which the court held that to take advantage of the provisions of section 2860, an insurer must actually defend the insured subject to a reservation of rights. (See Atmel Corp. v. St. Paul Fire & Marine (N.D. Cal. 2005) 426 F.Supp.2d 1039, 1047.) The holdings in these cases will likely give insurers an added incentive to respond to tenders quickly, especially in cases where the insured’s personal counsel charges high hourly rates.