When Does Appointed Counsel Not Discharge an Insurer’s Duty to Defend?

When Does Appointed Counsel Not Discharge an Insurer’s Duty to Defend?

By David A. Gauntlett[*]

Introduction

Insurers often fall short of properly discharging their duty to defend by not providing the counsel demanded by the law and the terms of the policy. In some instances, insurers will deny coverage but still provide a “courtesy defense.” In other cases, the insurer may agree that a claim triggers the duty to defend but only provide attorneys who are ultimately loyal to the insurance company, despite the conflicts of interest created by that loyalty. In either situation, the insurer is attempting to take advantage of the policyholder’s ignorance and failing to hold up its end of the agreement.

A “Courtesy Defense” Does Not Satisfy the Duty to Defend

As far back as 1978, California courts have expressly denied the adequacy of a so-called “courtesy defense.”[2] Far from acknowledging a “courtesy defense” as satisfying an insurer’s duty to defend, the court recognized that such a situation demands the insured be equipped with independent counsel.[3] There, Davis submitted a claim to his insurer after being sued. [4] The insurer denied coverage, forcing Davis to retain his own counsel.[5] After a nine month delay, the insurer “advise[d] Davis that notwithstanding its continuing denial of coverage it would provide a ‘courtesy defense.’”[6] Davis successfully sued to recover those legal fees despite the insurer’s arguments that the “courtesy defense” satisfied its duty to defend.[7]

Prompt Assertion of Independent Counsel Is Key to Their Protection

Regardless of whether an insurer uses the term “courtesy defense,” “appointed counsel,”[8] “investigatory counsel,”[9] or some other label, courts have consistently and repeatedly rejected all arguments that anything short of independent counsel loyal only to the policyholder will satisfy the insurer’s duty to defend.[10] Following the landmark case of San Diego Federal Credit Union v. Cumis Insurance Society,[11] the California legislature also codified the right to independent counsel in the event of a conflict.[12] The exact parameters of which situations create conflicts demanding independent counsel vary from state to state.[13]

Even when a right to independent counsel exists, recovering fees can be complicated by a policy’s “no voluntary payment” (“NVP”) provision. While an NVP provision typically included in a Commercial General Liability policy may preclude recovery of pre-tender fees, post-tend recovery is not affected by that provision. Communication of the insured’s rights pursuant to its proper selection and retention of independent counsel need to be properly communicated to an insurer to sidestep concerns voiced by conservative judges addressing these issues. [14]

Insurers That Fail to Properly Defend May Improperly Claim Attorneys’ Fees

In some cases, insurers have attempted to claim attorneys’ fees after agreeing to defend but failing to properly acknowledge their obligation to pay fees associated with an affirmative claim “conducted against liability.”[15] In one ongoing case,[16] the prosecution of a cross-complaint was undertaken solely by the insured and her prosecution counsel with the insurer supplying only panel counsel. If the court awards attorneys’ fees under the Davis Stirling Act,[17] is the insurer entitled to a portion of them?

In Truck Insurance Exchange v. Atlantic Mutual Insurance Co.,[18] the court clarified why appointed counsel cannot discharge the insurer’s defense duty where it was obligated to provide the insured independent counsel. As the court explained:

If Truck is correct that it did not have to appoint Cumis counsel, then it fulfilled its obligation by appointing its retained defense counsel. Therefore, Wright retained its counsel at its own expense, and Atlantic may owe Truck for the costs and fees of Truck's retained defense counsel. On the other hand, if Truck did have to appoint Cumis counsel, then it retained its separate defense counsel at its own expense. Truck would owe Atlantic for the fees it has paid to Wright's Cumis counsel, and Atlantic would have fulfilled its obligation by paying for Cumis counsel.[19]

Where insurers insist they have the right to control a defense and are permitted under California law pursuant to California Civil Code § 2860(f) to appoint counsel, that counsel’s legal services may not discharge the defense duty and would not earn it the right to contend that an attorneys’ fee award in the suit pursued would be awardable to the insurer for reimbursement of “appointed counsel” defense fees services.

Conclusion

The exact requirements of what an insurer is obligated to provide for the defense of a particular case can be difficult to discern, especially for a person outside the field. Insurers often fall short of those requirements, either by genuine mistake or through a bad faith effort to reduce their own expenditures, leaving the policyholder without the benefits paid for by their premiums. Because the insurer has every incentive to withhold as much as possible, it is essential to acquire counsel that ensures you receive everything to which you are entitled.

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[*] David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] Home Indem. Co. v. Leo L. Davis, Inc., 79 Cal. App. 3d 863, 872–73 (1978).

[3] Id. at 868 (“Davis' employment of separate counsel ‘was required by reason of the controversy and dispute over coverage and the resulting conflicts arising in said litigation between [Home] and [Davis], and as a proximate result of the failure of [Home] to properly conform to the terms of its insurance contract.’”) (alterations in original).

[4] Id. at 867 (“Following the accident, Davis made application to Home for a defense and coverage. Home refused to acknowledge coverage under the policy for damage to the pugmill, and loss of its use, on the ground that the pugmill at the time of injury was within “‘the care, custody or control of the insured.’”

[5] Id.

[6] Id. at 872.

[7] Id. (Dismissing insurer’s argument that “the [trial] court erred in awarding Davis compensation for the legal fees incurred in retaining counsel to defend him in the action brought by Redding and O'Hair, since Home provided him with counsel in that action.”)

[8] Sovereign Gen. Ins. Servs., Inc. v. Nat'l Cas. Co., No. 2:06-CV-2725-MCE-DAD, 2008 U.S. Dist. LEXIS 11601, *10 (E.D. Cal. Feb. 15, 2008) (holding that the need for independent counsel arose when there was a conflict of interest preventing the appointed defense counsel from fully serving the insured).

[9] Rockwell Internat. Corp. v. Superior Court, 26 Cal. App. 4th 1255, 1264 (1994) (recognizing the need for independent counsel in addition to investigatory counsel provided by insurer).

[10] Assurance Co. of America v. Haven, 32 Cal. App. 4th 78, 87 (1995) (“Since it is almost unavoidable that, in the course of investigating . . . the insured's attorney will come across [relevant] information . . . it is quite difficult for an attorney beholden to the insurer to represent the insured where the insurer is reserving its rights regarding coverage . . . .”). For information related to recognizing when such a conflict may exist, see David A. Gauntlett, Disputes Over Control of Counsel Between Policyholders and Insurers, https://www.gauntlettlaw.com/news/disputes-over-control-of-counsel-between-policyholders-and-insurers (May 12, 2022).

[11] 162 Cal. App. 3d 358 (1984).

[12] Cal. Civ. Code § 2860(a) (“If 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 . . . .”)

[13] For an overview of all 50 states’ stances on this issue, see David B. Applefeld et al., Independent Defense Counsel: When Can The Policyholder Select Its Own Defense Lawyer and How Much Does the Insurer Have to Pay? A 50-State Survey, Insurance Coverage Litigation CLE Seminar (Mar. 5–8, 2014).

[14] Corthera, Inc. v. Scottsdale Ins. Co., No. 14-cv-05014-EMC, 2016 U.S. Dist. LEXIS 8388, *29 (N.D. Cal. Jan. 22, 2016) (Denying recovery of two months of legal fees because “[r]ather than inform Scottsdale then that Wilson Sonsini had been selected as counsel, Corthera simply stated in that letter that it would inform Scottsdale who was representing Mr. Wiggans ‘as soon as it is determined.’ Corthera then failed to inform Scottsdale of Wilson Sonsini's selection until January 23, 2014, over a month later, and provides no explanation for its failure to do so.”)

[15] For a full discussion of the “conducted against liability” issue and why it is included in the duty to defend, see David A. Gauntlett, Delaware Superior Court Rules Pursuit of Affirmative Claims Was Strategically Defensive, https://www.gauntlettlaw.com/news/delaware-superior-court-rules-pursuit-of-affirmative-claims-was-strategically-defensive (Feb. 10, 2022).

[16] Danielle Razo v. Melissa Andersson, Case No. 30-2020-01158055-CU-OR-NJC (filed Aug. 31, 2020 in Orange County Superior Court).

[17] Cal. Civ. Code § 5975.

[18] No. C 06-04573 CRB, 2007 U.S. Dist. LEXIS 55116 (N.D. Cal. July 20, 2007).

[19] Id. at *7.