Assurance Co. of America v. Haven

• Decision Date: 06 February 1995
• Docket Number: No. C017023,C017023
• Court: California Court of Appeals Court of Appeals
• Parties: ASSURANCE COMPANY OF AMERICA, Plaintiff and Appellant, v. Ronald R. HAVEN, et al., Defendants and Respondents.

Page 25

38 Cal.Rptr.2d 25

32 Cal.App.4th 78

ASSURANCE COMPANY OF AMERICA, Plaintiff and Appellant, v. Ronald R. HAVEN, et al., Defendants and Respondents.

No. C017023.

Court of Appeal, Third District, California.

Feb. 6, 1995.

Review Denied May 25, 1995.

James C. Nielsen, Charles H. Horn, and Wright, Robinson, McCammon, Osthimer & Tatum, San Francisco, for plaintiff and appellant.

David O. Larson, James L. Wraith, Michael K. Johnson and Larson & Burnham, Oakland, for defendants and respondents.

DAVIS, Associate Justice.

In this case, a liability insurer defended its insured under a reservation of rights that created a conflict of interest between the two of them. The issue on appeal is whether a liability insurer can sue its insured's Cumis counsel ¹ for negligence based on a breach of statutory duty for failing--in contravention of Civil Code section 2860--to inform and consult with the insurer in a timely manner, to disclose to the insurer all nonprivileged information, and to cooperate in exchanging information with insurer-provided counsel. (Civ.Code, § 2860, subds. (d), (f).) We conclude the answer is yes where these failures encompassed nonprivileged information known to Cumis counsel and precluded the insurer, as alleged here, from timely asserting a complete defense to an entire action or to a cause of action that had been brought against its insured. ²

We also conclude that Cumis counsel cannot be held negligently or statutorily liable to the insurer for failing to investigate, prepare, assert, establish, or perform similar functions regarding that complete defense. In line with Civil Code section 2860 (which codified and clarified the Cumis decision) and the recognized independence of Cumis counsel, the Cumis counsel's duties to the insurer, in this situation, are limited to the duties of providing known information, as mandated by subdivisions (d) and (f) of section 2860. Because there is a reasonable possibility that the insurer here can amend its complaint to allege this negligent liability against Cumis counsel based on the duties to disclose, inform, consult and cooperate set forth in Civil Code section 2860, we reverse the trial court's judgment of dismissal which was based on a demurrer sustained without leave to amend.

BACKGROUND

The insurer here, Assurance Company of America (ACA), filed a complaint for negligence against its insured's Cumis counsel, Ronald Haven and Shepard & Haven (Haven). ³ Haven demurred. The trial court A demurrer challenges only the legal sufficiency of the complaint, not the truth or the accuracy of its factual allegations or the plaintiff's ability to prove those allegations. (Amarel v. Connell (1988) 202 Cal.App.3d 137, 140, 248 Cal.Rptr. 276.) "We therefore treat as true all of the complaint's material factual allegations, including facts that may be implied or inferred from those expressly alleged." (Id. at p. 141, 248 Cal.Rptr. 276.) When a demurrer has been sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, we reverse; if not, we affirm. (Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)

sustained the demurrer without leave to amend and dismissed ACA's complaint.

ACA's complaint alleges the following facts. Greg Hill--not a party here--was injured in a construction accident. Hill sued Bremco Construction, Inc. (Bremco), for negligence and peculiar risk. Bremco was a contractor that had subcontracted with Hill's employer, Frank Ferreira Paving & Grading (Ferreira). Bremco's insurer hired Haven to defend Bremco. ⁴

Haven filed an answer for Bremco and tendered Bremco's defense to Ferreira under Ferreira's ACA insurance policy. ACA accepted Bremco's defense, subject to a reservation of rights that the parties concede on appeal created a conflict of interest between ACA and Bremco.

ACA advised Haven that it had selected attorney Robert Barker to serve as Bremco's defense counsel. Haven refused to allow Barker to substitute in as Bremco's defense counsel, and advised ACA that he (Haven) would " 'stay in the case as Cumis counsel.' "

According to ACA's complaint, Haven failed to assert a statute of limitation defense for Bremco through a demurrer or an answer. After Haven was notified of this failing, he filed on November 10, 1992, an amended answer attempting to plead the statute of limitation as an affirmative defense. This amended answer was procedurally and substantively defective.

Trial in the Hill v. Bremco matter was set for March 25, 1993. On January 14, 1993, Hill made a Code of Civil Procedure section 998 (section 998) offer to settle with Bremco for the policy limits ($1 million).

Haven failed to raise the statute of limitation issue again until January 26, 1993, when he filed a motion for summary judgment. The section 998 settlement offer was set to expire, however, before the summary judgment motion was set to be heard.

In addition, Haven failed to demur to or move for summary judgment regarding Hill's cause of action for peculiar risk.

Finally, ACA alleges that Haven failed to keep ACA properly informed of the Hill v. Bremco facts, theories, status, procedural developments, and evaluations; that Haven failed to disclose to ACA all nonprivileged information concerning Hill v. Bremco; and that Haven failed timely to inform and consult with ACA on all matters relating to Hill v. Bremco.

According to ACA's complaint, Haven's failure timely to assert the defenses involving the statute of limitations and peculiar risk, and his other failures and breaches of duty, forced ACA to accept Hill's section 998 settlement offer without a judicial determination of these defenses; ACA could not do otherwise because if the settlement offer lapsed and these defenses proved unsuccessful, Bremco might face a verdict substantially greater than the policy limits. Because of Haven's negligence, as described above, ACA alleged it was damaged in the amount of $1 million, the ACA policy limit for Bremco.

DISCUSSION

In this appeal, we conclude that a liability insurer can sue its insured's Cumis counsel for negligence based on a breach of statutory duty for failing--in contravention of Civil Code section 2860--to inform and consult with the insurer in a timely manner, to disclose to the insurer all known, nonprivileged information, and to cooperate in exchanging information with insurer-provided counsel, when those failures preclude the insurer, as alleged here, from timely asserting a complete defense to an entire action or to a cause of action that has been brought against its insured. ⁵ We also conclude that Cumis counsel cannot be held negligently or statutorily liable to the insurer for failing to investigate, prepare, assert, establish, or perform similar functions regarding that complete defense. This distinction is drawn in recognition of the duties specified in section 2860 and in recognition of the independence of Cumis counsel who represents the insured, not the insurer. ⁶

We begin by briefly reviewing the reason for Cumis counsel. An insurer is obligated to provide its insured with a defense to a third party's lawsuit when there exists a potential for liability under the policy. (Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 275, 54 Cal.Rptr. 104, 419 P.2d 168.) In this way, an insurer's duty to defend is broader than its duty to indemnify. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 1153.) Under these circumstances, an insurer may provide a defense under a reservation of rights, agreeing to defend, but promising to indemnify only for conduct covered by the policy. (San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (Cumis), supra, 162 Cal.App.3d at p. 364, 208 Cal.Rptr. 494.)

An insurer usually provides a defense to its insured by hiring competent defense counsel, who represents the interests of both the insurer and the insured. (Cumis, supra, 162 Cal.App.3d at p. 364, 208 Cal.Rptr. 494; Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 191, 231 Cal.Rptr. 791.) In some cases, such as this one, there is a conflict of interest or a potential conflict of interest between the insurer and the insured. (Cumis, supra, at pp. 364, 375, 208 Cal.Rptr. 494.) Usually, these conflicts involve the insured trying to obtain coverage and the insurer trying to avoid it. (Id. at pp. 364-365, 208 Cal.Rptr. 494.) When this happens, defense counsel may not be permitted to represent both the insurer and the insured. (Id. at p. 375, 208 Cal.Rptr. 494.) The insurer may be required to provide the insured, at the insurer's expense, with independent counsel (i.e., Cumis counsel), who then controls the litigation. (Ibid.; § 2860.)

That brings us to section 2860. Section 2860 was enacted as part of the "Willie L. Brown, Jr.--Bill Lockyer Civil Liability Reform Act of 1987." (Stats.1987, c. 1498, §§ 1, 4; pp. 5777, 5779.) The section codifies and clarifies the Cumis doctrine (see Employers Ins. of Wausau v. Albert D. Seeno Const. (Seeno) (N.D.Cal.1988) 692 F.Supp. 1150, 1155), and provides in its entirety:

"(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 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. An insurance contract may contain a provision which sets forth the method of selecting that counsel consistent with this section.

"(b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its...