PRACTICAL POLICYHOLDER ADVICE
Liability insurers sometimes delay in assuming their duty to defend a policyholder sued for a potentially- covered claim. Insurers may explain such delays by taking the position that they cannot acknowledge their duty to defend until finishing an “investigation” of whether the underlying claim is covered. Such delays can put policyholders in a position to argue that the insurer has forfeited its right to control the defense in the underlying litigation. If the insurer has forfeited that right, the policyholder should be able to control its own defense and select its own counsel paid for by the insurer.
Many jurisdictions do not have an exact deadline set out by statute or regulation specifying how much time a liability insurer has to acknowledge its duty to defend a policyholder. The absence of an explicit deadline can be problematic even when an insurer fails to assume the defense for only a short period of time. This problem was recently faced by the United States District Court for the Northern District of California in Travelers Indemnity Co. of Connecticut v. Centex Homes, where the court ultimately held that the insurer breached its duty to defend by failing to assume the defense prior to the deadline for filing a responsive pleading in the underlying litigation. Case No. 11-CV-03638, 2015 WL 5836947, at *3–5 (N.D. Cal. Oct. 7, 2015). The court also held that the breach was not excused even though the insurer’s delay was due to its “investigation” of whether the underlying claim was covered, and even though the insurer reimbursed the policyholder for its out-of-pocket defense costs. Id. In reaching this holding, the court applied California law. But the decision was based on general principles of insurance law, and thus may be persuasive precedent outside of California.
The policyholder in the case was Centex Homes, a general contractor for residential developments in California. Its subcontractors purchased commercial general liability insurance and then added Centex as an “additional insured.” A number of suits relating to different development projects were brought against Centex in California state court, and Centex tendered each of these actions to Travelers pursuant to the terms of its “additional insured” coverage. While waiting for Travelers to acknowledge its duty to defend, Centex hired its own defense counsel. Eventually, Travelers agreed to provide a defense in each of these actions, but insisted on firing the counsel selected by Centex and appointing its own preferred defense counsel. Centex disagreed, arguing that Travelers’ delay in acknowledging its duty to defend resulted in a forfeiture of Travelers’ right to control the defense. In response, Travelers filed a suit for declaratory judgment, arguing that it still had a right to control the defense in the underlying actions despite its own delay.
Centex was initially successful against Travelers’ suit. The court granted partial summary judgment in favor of Centex with regards to two of the underlying actions, referred to as the Garvey and Adkins actions. However, the court later changed course, granting partial summary judgment in favor of Travelers with regard to two other underlying actions, referred to as the Acupan and Conner actions, and reversing its earlier decision with regard to Garvey and Adkins. In doing so, the court held that “an 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, none of which have been proven by Centex.” Id. at 2–3 (quoting Travelers Prop. Cas. Co. of Am. v. Centex Homes, No. 3:11-cv-03638, Dkt. 170 (N.D. Cal. Apr. 8, 2013)).
After this defeat, Centex moved for reconsideration with regard to the Garvey and Adkins actions based on a recently-decided case from a California appellate court, J.R. Marketing, L.L.C. v. Hartford Casualty Insurance Co., 158 Cal. Rptr. 3d 41 (Cal. Ct. App. 2013), aff’d in part, rev’d in part, 190 Cal. Rptr. 3d 599 (Cal. 2015). Upon reconsideration, the court changed course again, granting summary judgment in favor of Centex with regards to the Garvey and Adkins actions. Travelers Prop. Cas. Co. of Am. v. Centex Homes, No. 3:11-cv- 03638, 2013 WL 4528937, at *7 (N.D. Cal. Aug. 26, 2013). At the same time, the court granted Centex leave to file a motion for reconsideration as to the Acupan and Conner actions. Id. After Centex moved for reconsideration, the court issued a stay pending the outcome of an appeal of the J.R. Marketing case to the California Supreme Court. See Travelers Prop. Cas. Co. of Am. v. Centex Homes, No. 11-3638, Dkt. 224 (N.D. Cal. Dec. 13, 2013). The stay was lifted after the California Supreme Court’s decision, see Hartford Cas. Ins. Co. v. J.R. Mktg., L.L.C., 353 P.3d 319, 322 (Cal. 2015), which reaffirmed “the proposition that an insurer loses its right to control the insured’s defense upon breach of its duty to defend.” Centex, 2015 WL 5836947, at *4.
Applying that proposition, the Centex court reconsidered its earlier decision, holding that Travelers had breached its duty to defend, such that Travelers forfeited its right to control the defense. Id. at 5. In reaching this decision, the court was faced with the issue of determining exactly how long the insurer needed to delay before it breached the duty to defend; for one underlying case, Acupan, Travelers had accepted the defense only 13 days after the due date for filing a responsive pleading. On this timing issue, the court noted a dearth of caselaw: “Neither the parties nor the Court were able to find a case clearly delineating the point at which an insurer’s delay amounts to a breach of its duty to defend.” Id. at *4.
The court was also faced with the issue of whether Travelers cured its breach by reimbursing the policyholder for its out-of-pocket defense costs during the period when Travelers delayed in acknowledging its duty to defend. Travelers argued that such a delay did not forfeit its right to control the defense, so long as delay was due to the insurer’s reasonable investigation into whether the underlying claims were potentially covered, and Travelers reimbursed the policyholder for any defense costs it incurred during the investigation. Id. at *5.
Rejecting Travelers’ argument, the court reasoned that liability insurance is, in part, litigation insurance: “[t]he insured’s desire to secure the right to call on the insurer’s superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability.” Id. (quoting Montrose Chem. Corp. v. Superior Court, 861 P.2d 1153, 1157 (Cal. 1993)). The court also noted previous caselaw holding that an insurer breached its duty to defend if it did not “provide counsel or . . . guarantee the payment of legal fees immediately after an insurer’s duty to defend has been triggered.” Id. (citing Montrose, 861 P.2d at 1160) (emphasis added). Though an insurer has the right to investigate whether underlying claims are covered, the court concluded that this right did not negate the policyholder’s own right for “immediate” assistance in defending against those claims. Id.
Based on the policyholder’s right to “immediate” assistance, the court held that an insurer needed to begin defending its insured within the time period for responding to the underlying complaint, which in California was 30 days. Id. at *4–5. The court did not explain why it selected this particular deadline, but presumably it reasoned that the filing of a responsive pleading was the first major task of an insurer purporting to retain “control” the underlying litigation.
Applying that 30-day rule, the court noted that the complaint in the Acupan action was filed on April 19, 2011, so that the deadline was May 19, 2011; however, Travelers did not accept its duty to defend until June 1, 2011. Id. at *5. Likewise, the Conner action was filed on October 15, 2010, so that the deadline was November 15, 2010; however, Travelers did not accept its duty to defend until January 21, 2011. Because of these delays, the court held that Travelers had breached its duty to defend, and “[u]pon breaching its duty to defend, Travelers also lost its right to control Centex’s defense.” Id.
The Centex case is notable for its strict enforcement of the insurer’s duty to defend, an approach that is well- grounded in insurance law. Nothing in the court’s opinion suggests that insurers can delay even a day after the deadline for filing a pleading in response to the underlying complaint. Likewise, the Centex court makes clear that an insurer’s delay cannot be excused as a result of its “investigation” into whether a claim is covered or its later reimbursement of the policyholder’s out-of-pocket defense costs. Because the Centex court relied on general insurance law principles, the case could be persuasive precedent in other jurisdictions. Though Centex is generally favorable to policyholders, it should not be read as foreclosing the possibility that an insurer might breach its duty to defend even before a responsive pleading is due, such as (depending on the scope of the defense duty in the policy language) when the underlying claim is merely a demand letter and a lawsuit has not yet been filed. Likewise, policyholders should check the applicable state law to determine whether it specifies a deadline for acknowledging the duty defend that is even shorter than the deadline established in Centex.