Insurer’s Unreasonable Delay in Accepting Defense Results in Loss of Control

A California federal court, applying California law, held that Travelers Indemnity Company of Connecticut (“Travelers”) breached its duty to defend its insured by delaying to provide a defense and, as a result, the Court found that Travelers forfeited its right to select counsel and control the defense.

The insured, Centex Homes (“Centex”), develops residential communities throughout California.  The underlying action stemmed from a number of underlying construction defect lawsuits filed against Centex in California state court.  Centex tendered each of the actions to Travelers.  It is undisputed that, in each of the actions, some time elapsed between Centex’s tender and Travelers’ decision to provide a defense under a reservation of rights.  In the interim, Centex retained Newmeyer and Dillion LLP (“Newmeyer”) to defend it in the underlying actions.  When Travelers finally agreed to provide a defense, it insisted on appointing its own counsel.  Centex argued that Travelers lost the right to control the defense and therefore insisted that Newmeyer continue the defense of the underlying actions.  Travelers filed a declaratory action asserting that based on the policies it had the right to control Centex’s defense.

The court first issued an order in May 2012 holding that, because the duty to defend is immediate, Travelers lost its right to control the defense when it declined to participate in Centex’s defense immediately.  In April 2013, the court reconsidered and vacated its decision and held that: “[A]n insurer cannot lose its right to control the defense of its insured through delay alone.  Rather, it may only lose that right through waiver, forfeiture, or estoppel.”

Centex filed a motion to reconsider the April 2013 ruling. The court granted the motion, finding that the April 2013 order was inconsistent with the decision in the California appellate court case J.R. Marketing v. Hartford.  According to the court, J.R. Marketing stands for the proposition that an insurer forfeits its right to control the defense of an action when the insurer breaches its duty to defend.   The court then found that Travelers breached its duty to defend:  in two of the four underlying actions, Travelers breached its duty by wrongfully denying coverage; in  the other two underlying actions, Travelers breached its duty through its delay in accepting the defense.  With respect to the underlying actions in which Travelers agreed to defend Centex, the court held that Travelers’ delay of just 13 days in one of those cases – which caused Centex to hire its own counsel – constituted a breach of Travelers’ duty to defend.

Travelers argued that it did not breach its duty to defend because:  (1) Travelers had the right to conduct a reasonable investigation before accepting Centex’s tender; and, (2) Travelers reimbursed Centex for legal costs incurred prior to its acceptance.  The court was not persuaded by these arguments and held: “A failure to provide counsel or to guarantee the payment of legal fees immediately after an insurer’s duty to defend has been triggered constituted a breach of that duty to defend.”   Having determined that Travelers breached its duty to defend, the court held that, under J.R. Marketing, Travelers also lost its right to control Centex’s defense.   Travelers Indem.  Co. of Connecticut v. Centex Homes, No. 11-CV-03638 – SC (N.D. Cal. Oct. 7, 2015).