Why it matters

Facing multiple lawsuits, an insured sought coverage from two insurers. Subject to a reservation of rights and the right to retain counsel, the insurers agreed. But the insured asserted that it was entitled to independent counsel paid by the insurers, albeit with a willingness to accept co-counsel. The insurers then filed for declaratory relief, arguing that the request violated the cooperation clause in the policies, a breach of contract that left the insured without coverage. Nice try, the court said. The mere request for independent counsel does not constitute a breach of the duty to cooperate given an insured’s statutory right in California to make such a request, particularly as the insured had indicated a willingness to accept co-counsel, the court explained.

Detailed Discussion

Centex Homes was sued in a series of construction defect lawsuits and tendered its defense to St. Paul Fire and Marine Insurance Company and Traveler’s Property Casualty Company (together, “Travelers”). Travelers agreed to defend, subject to reservation of rights, and appointed defense counsel for Centex.

Centex notified Travelers that Centex believed the counsel Travelers had appointed lacked independence and that Centex was entitled to counsel of its own selection. Centex further stated that it accepted that Travelers could appoint a co-counsel to participate in the defense at Travelers’ expense.

According to the insurers, Centex’s refusal to accept appointed counsel constituted a breach of the policies’ cooperation clause.

The court disagreed. California Civil Code section 2860 provides that “[i]f the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel.”

The court found that the statute contemplates that an insured may inform an insurer of a possible conflict of interest and request independent counsel, and the “mere request for independent counsel did not constitute a breach of [Centex’s] duty to cooperate’ because Centex had a statutory right to make such a request.”

The court also found that Centex, by demanding independent counsel, had not refused to cooperate with Travelers’ appointed counsel. To the contrary, the court found that Centex expressly agreed to work with Travelers’ appointed counsel as co-counsel.

Finally, the insurers did not “identify any basis to conclude that a demand that Travelers pay all expert and vendor bills constitutes a breach of the duty to cooperate.” “A reservation of rights to possibly seek reimbursement at some unknown future time is not a present demand, and does not amount to a breach of the cooperation clause.”

To read the order in St. Paul Fire and Marine Ins. Co. v. Centex Homes, click here.