Even when carriers agree to defend an insured, policyholders and carriers can still get locked into disputes about who will provide such a defense.  Policyholders often want to choose their own counsel while a carrier has its own idea about who should defend the case.  The dispute in Travelers Property v. Centex Homes, C10-02757 (N.D. Cal. April 1, 2011) illustrates this problem and shows how a dispute over defense counsel can potentially lead the carrier to argue that the policyholder has breached its duty to cooperate and that such a breach relieves the carrier of both its duty to defend and indemnify under the policy.   

In Travelers Property v. Centex, the dispute arose after Centex tendered the defense of two construction defect actions to Travelers.  Travelers acknowledged receipt of the tenders within a week but requested additional information from Centex regarding the underlying claim, defense counsel rates, and the litigation budget.  Centex eventually responded and Travelers accepted the two tenders of defense subject a reservation of rights several months later and agreed to Centex’s choice of counsel. 

Six months later, Travelers told Centex it would retain separate defense counsel of its choosing for each of the two actions going forward.  Centex refused to accept Travelers’ choices of counsel and asserted its right to independent counsel under Cal Civil Code §2860 unless Travelers could show that there was no conflict of interest.  Centex refused to allow the counsel selected by Travelers to associate as defense counsel and never received any response from Travelers regarding the conflict issue.  Instead, Travelers filed suit shortly thereafter in the Northern District of California for declaratory and injunctive relief regarding its role and ability to control Centex’s defense.

The Court first found that Travelers had provided an immediate, complete, and full defense to Centex and that any delay in Travelers’ response was, in part, the result of Centex’s failure to respond to Travelers’ information requests more quickly.  The Court found that Travelers had conducted a reasonable investigation of its duty to defend the matters.

Second, the Court determined that Centex had breached its duty to cooperate under the policy by refusing to accept Travelers’ appointed counsel.  The Court found that Centex could not improperly foreclose Travelers’ right to select defense counsel by: 1) informing Travelers that until all outstanding issue were resolved, Centex would maintain control of its defense; 2) objecting to Travelers appointing new defense counsel; and 3) not authorizing Travelers’ appointed counsel to take any action on its behalf.   The Court further rejected Centex’s argument that it was entitled to independent counsel under §2860 because Travelers’ reservation of rights letter did not create an actual conflict of interest.

Third, after finding that the insured had breached its duty to cooperate, the Court went on to find that this breach resulted in substantial prejudice to the carrier since Centex refused to turn over the defense of the actions and prevented both firms from associating into either action.   As a result of the insured’s breach of the duty to cooperate, the Court concluded that Travelers was relieved of its duties to defend and indemnify Centex in both actions.

Policyholders should keep in mind that they do have many rights under Civil Code §2860 and may entitled to independent counsel in many situations.  However, the opinion issued in Travelers Property should remind policyholders to carefully manage those disputes over defense counsel and to always be mindful of their duty to cooperate under the policy or risk losing coverage entirely.