Choice of Counsel

Policyholder’s Request To Select Counsel Not A Breach of Duty To Cooperate

Two California federal courts, applying California law, dismissed virtually identical claims brought by certain insurers against Centex Homes and Centex Real Estate Corp. (“Centex”).  The Central District Court held that the insurers failed to show Centex had breached its duty to cooperate based on asserting its choice of counsel and the Northern District Court ruled that the claims alleging breach of cooperation were not ripe.

In the both cases, in response to Centex’s request for a defense for construction defect suits, the insurers sent Centex reservation of rights letters, which asserted their right to retain David Lee as counsel. In both cases, Centex responded, under a reservation of rights, that it believed it was entitled to independent counsel, that it had significant concerns about the insurers’ appointment of counsel, and that it was willing to try and work out an allocation of the defense fees between insurers that agree to defend Centex if the insurers were willing to share in the defense provided by Centex’s preferred independent counsel. Centex also stated that it would allow the insurers to appoint Lee as co-counsel, but that then the insurers must pay all expert and vendor bills, as well as all of the fees generated by Lee. Centex explained that it had a conflict of interest with Lee which required independent counsel. The insurers argued that Centex breached the policy by failing to cooperate, because Centex refused to accept appointed counsel and allegedly improperly conditioned the acceptance of counsel.

The courts held that the insurers failed to allege any facts that support their contention that Centex breached the cooperation clauses in the applicable policies. The courts relied on nearly identical cases in making their decision; both cited one judge who held “[t]he mere request for independent counsel did not constitute breach of [Centex’] duty to cooperate.” The courts also relied on the California Civil Code which allows for an insured to inform an insurer of a possible conflict of interest and request independent counsel. The courts found that because Centex had a statutory right to make such request, the request for independent counsel did not constitute a breach of the duty to cooperate. The Northern District Court additionally held that the claims based on Centex’s alleged breach of its duty to cooperate were unripe because Centex had not yet refused to allow the insurers to appoint counsel.

The courts further disagreed with the insurers that Centex improperly conditioned its acceptance of appointed counsel. Certain insurers argued that because other insurers are also involved in Centex’s defense, Centex was obligated to divide the fees and costs among all of its insurers. Both courts, however, found that neither California law nor the cooperation clauses at issue required Centex to tender a defense to other insurers and, therefore, Centex’s request did not constitute a refusal to allow the insurers to control the defense; nor was it a breach of the duty to cooperate.

The Insurers also filed a claim for equitable reimbursement which was dismissed by both courts. The Northern District Court dismissed the claim as unripe. The Central District Court had previously held that an insurer’s right to equitable reimbursement does not begin until insurer’s duty to defend is discharged. The insurers argued that their duty to defend terminated due to Centex’s breach of the insurance policy. The Central District Court disagreed holding that the insurers failed to allege a breach of cooperation clause that would terminate its duty to defend.  St. Paul Fire and Marine Ins. Co. v. Centex Homes, ED CV14-01216AB (JCx) (C.D. Cal. Dec. 19, 2014); Travelers Indem. Co. of Connecticut v. Centex Homes, 14-cv-02378 (N.D. Cal. Jan. 5, 2015).

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