An Insurer’s Reservation of Rights Does Not Always Create Right to Independent Counsel, Court Explains

Publish Date:Sep 03, 2013
Summary:
The California Court of Appeal’s (Sixth Appellate District) August 26, 2013, decision in Federal Insurance Company et al. v. MBL, Inc. relies on the well-established principle that not every reservation of rights entitles an insured to independent counsel.

The California Court of Appeal’s (Sixth Appellate District) August 26, 2013, decision in Federal Insurance Company et al. v. MBL, Inc. relies on the well-established principle that not every reservation of rights entitles an insured to independent counsel. The federal government brought an environmental liability action against a Modesto dry cleaner.  The dry cleaner filed a third-party action against MBL, Inc., a supplier of dry cleaning products.

MBL asked its insurers to defend the third-party action. The insurers accepted the defense, subject to various reservations of rights, and retained counsel to provide MBL with a defense.  MBL refused to accept the retained counsel, arguing that the insurers’ reservations of rights resulted in conflicts of interest which created a right to independent counsel. The insurers denied that there was any conflict of interest and sought a declaratory judgment. The trial court ruled in favor of the insurers, finding there was no actual conflict of interest. The Court of Appeal affirmed the trial court’s ruling.

The Court of Appeal noted that an insured’s right to independent counsel is set forth in Civil Code Section 2860, which provides that when an insurance policy imposes a duty to defend on an insurer and a conflict of interest arises, the insurer must provide independent counsel to represent the insured.  Court decisions interpreting Section 2860 have established that not every reservation of rights entitles an insured to independent counsel. The Court of Appeal’s opinion quotes from an appellate decision handed down the year after Section 2860 was enacted.  That decision held “where the reservation of rights is based on coverage issues which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel.”

MBL contended that there were conflicts of interest because litigation on pollution exclusions, policy limits for each accident or occurrence, and policy periods was related to coverage issues.

The Court of Appeal concluded, “To the extent MBL contends the Insurers’ general reservations of rights gave rise to a conflict of interest, we reject that argument. … MBL failed to present evidence demonstrating a triable issue of material fact on the question of whether there exists a conflict of interest under Section 2860.”

Great American was one of MBL’s insurers.  Unlike the other insurers, Great American paid MBL’s independent counsel, subject to a reservation of the right to seek reimbursement from MBL. Great American sought contribution from the other insurers to reimburse Great American for the cost of the independent counsel.

The Court of Appeal denied Great American’s claim, ruling that “MBL was not entitled to independent counsel, thus none of the Insurers (including Great American) were ever obligated to reimburse MBL for the fees generated by that counsel.  Great American, as it happens, did reimburse MBL for those fees, but because there was no obligation to pay, Great American can only seek reimbursement for those fees from MBL, not from the other Insurers.”

A copy of the Court of Appeal’s opinion is available at www.courts.ca.gov          
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