Employers Ins. of Wausau v. Albert D. Seeno Const. Co.

• Decision Date: 20 September 1991
• Docket Number: No. 88-15657,88-15657
• Citation: 945 F.2d 284
• Parties: EMPLOYERS INSURANCE OF WAUSAU, a mutual company, formerly known as Employers Mutual Liability Insurance Company of Wisconsin, a Wisconsin corporation, Plaintiff-Appellee, v. ALBERT D. SEENO CONSTRUCTION CO., a California limited partnership; Diablo Construction Company, a California corporation, et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 284

945 F.2d 284

EMPLOYERS INSURANCE OF WAUSAU, a mutual company, formerly known as Employers Mutual Liability Insurance Company of Wisconsin, a Wisconsin corporation, Plaintiff-Appellee, v. ALBERT D. SEENO CONSTRUCTION CO., a California limited partnership; Diablo Construction Company, a California corporation, et al Defendants-Appellants.

No. 88-15657.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 18, 1991.

Decided Sept. 20, 1991.

Robert L. Sallander, Jr. and H. Paul Breslin, Archer, McComas & Lageson, Walnut Creek, Cal., for defendants-appellants.

Dale I. Larson and Robert M. Wattson, Zelle & Larson, Minneapolis, Minn., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of California.

Before GOODWIN and SNEED, Circuit Judges, and TAYLOR ^*, District Judge.

TAYLOR, District Judge:

Albert D. Seeno Construction Company ("Seeno") appeals from an order denying its request for a preliminary injunction requiring its insurance carrier to segregate liability claims handling from coverage investigation in a reservation of rights situation. While this issue may have been unsettled at the time of the hearing below, more recent cases show appellant's position is without merit, and we affirm.

I. BACKGROUND

Seeno is a real estate developer and general contractor which built residential tract housing in and around Contra Costa County, California. From 1975 to 1985 Seeno built several thousand homes in the area, and over 400 homeowners have made claims against Seeno for construction defects and soil movement. Lawsuits have been filed involving some of the homes ("litigated claims"), but the majority of the claims have not reached litigation ("unlitigated claims").

Seeno had comprehensive general liability insurance coverage with Employers Insurance of Wausau, for bodily injury and property damage, that could potentially cover the homeowners' claims. Seeno submitted the claims to Wausau, but a dispute arose over whether the claims were covered by Seeno's policies and over the proper method to handle the claims. Wausau reserved its right to deny coverage.

Seeno exercised its right to engage independent Cumis counsel, ¹ and brought in the firm of Archer, McComas & Lageson to handle the litigated claims. However, Seeno declined to employ Cumis counsel for the unlitigated claims and requested that Wausau handle them.

Wausau retained the law firm of Robins, Zelle, Larson & Kaplan to represent Wausau's interest in all liability and coverage litigation stemming from the homeowner claims. This firm and the insurance company's internal investigators handled both the unlitigated claims involving the homeowners and the coverage dispute involving Seeno. Seeno contends that Wausau has used the investigation and settlement of these unlitigated claims to gather information for the coverage dispute against Seeno.

Wausau brought this action for declaratory relief to determine that there is no coverage for the claims. Seeno counterclaimed, including a request for injunctive relief requiring Wausau to segregate its liability claims handling from its coverage investigation.

During what the trial judge described as an "acrimonious litigation," the parties filed cross-motions to disqualify each other's counsel for claimed breaches of duty to the other side. After a lengthy and careful analysis of some of the same contentions asserted on this appeal, the trial judge denied the motions. Employers Insurance of Wausau v. Albert D. Seeno Const., 692 F.Supp. 1150 (N.D.Cal.1988).

Thereafter, Seeno moved for a preliminary injunction to require Wausau to separate its handling of liability claims from its coverage investigation. At the hearing, the trial judge observed there was no legal authority to support Seeno's contentions and denied the motion.

The order is appealable to this court under 28 U.S.C. § 1292(a)(1) (1982). The grant or denial of a motion for a preliminary injunction is within the discretion of the district court, and the order of the district court will be reversed only if the court relied on an erroneous legal premise or otherwise abused its discretion. Chalk v. United States, 840 F.2d 701, 704 (9th Cir.1988). Questions of law underlying a preliminary injunction motion are reviewed de novo. Guam Fresh v. Ada, 849 F.2d 436, 437 (9th Cir.1988).

II. DISCUSSION

Seeno argued in the trial court, and again on this appeal, that California law and insurance industry practice require insurance carriers to segregate their coverage investigations from their liability claims handling. This duty, Seeno argues, arises from a fiduciary duty between an insurer and insured like that between an attorney and client, whereby the insurer must preserve and promote the insured's interests above its own and avoid even the appearance of impropriety. Thus, Seeno asserts, where the carrier reserves its right to assert a coverage defense, it must use different people on the liability side and the coverage side, without exchange of information between them. This court concludes that California law is to the contrary.

The cases relied on by Seeno as mandating file segregation do mention insurers' segregating files. See Executive Aviation, Inc. v. National Ins. Underwriters, 16 Cal.App.3d 799, 810, 94 Cal.Rptr. 347, 354 (1971) (practice of segregation unusual); Travelers Insurance Co. v. Lesher, 187 Cal.App.3d 169, 183, 231 Cal.Rptr. 791 (1986) (insurance company tried and failed to keep declaratory judgment separate from underlying action), Betts v. Allstate Ins. Co., 154 Cal.App.3d 688, 709, 201 Cal.Rptr. 528 (1984) (both parties involved in accident were insured by the same carrier, commingling of information not permitted). However, as the court below correctly observed, none of these cases, or any other California cases, requires the separation of files.

The ethical conflict that arises when an insurance attorney represents an insured, but coverage is denied, was dealt with in the landmark case of San Diego Navy Federal Credit Union v. Cumis Insurance Society, 162 Cal.App.3d 358, 208 Cal.Rptr. 494 (1984). In 1987, the California legislature codified Cumis in Cal.Civ.Code § 2860 (West 1988), providing for appointment of separate counsel to represent the insured, at the expense of the insurance carrier, in a conflict situation. Seeno's position here is contrary to the statute, which does not impose a duty to segregate and affirmatively requires disclosure to the insurance carrier of all unprivileged information relevant to the coverage dispute. Cal.Civ.Code § 2860(d).

Although there was no California case authority specifically against Seeno's position at the time of the hearing below, it has come down in the meantime. In late 1989, a California appellate court commented under similar circumstances that the fiduciary-like relation between insured and insurer does not mandate segregation of files. State Farm Fire & Casualty Co. v. Superior Court (Durant), 216 Cal.App.3d 1222, 265 Cal.Rptr. 372 (1989). In State Farm, plaintiffs sued for "bad faith" torts and contract breaches for their insurer's failure to adequately defend after accepting the insured's defense under a reservation of rights. The insurer provided Cumis counsel and retained other counsel for the declaratory relief action contesting coverage. The insurer also assigned an adjustor who dealt with the insured's counsel, although the adjustor continuously advised that he believed no coverage was available under the policy. This adjustor also was the agent who dealt with the coverage counsel, served in a dual capacity, and maintained only one file. Id. at 1225, 265 Cal.Rptr. at 373.

Plaintiffs did not claim specific injury from this dual representation, although they alleged the adjustor did transmit adverse information to coverage counsel. Plaintiffs sought discovery of all information in the adjustor's file for the bad faith action. They argued that the adjuster aiding in the liability defense is the agent of the insured and the insured's Cumis counsel, and thus plaintiffs are privileged to see everything in the file. Id. at 1226, 265 Cal.Rptr. at 374. The superior court granted the discovery request.

On appeal, Seeno appeared as amicus curiae, urging the same contention made in the present appeal. The Court of Appeals rejected Seeno's argument:

The Cumis rule requires complete independence of counsel when an insurance company interposes a reservation of rights, the basis of which creates a conflict of interest. [Insured] requests that we add a layer of separation to this mandate, requiring that not only the counsel involved in the cases but the adjusters assigned to each case (the 'liability' case as distinguished from the 'coverage' case) be separate--that the files on each case be separate and apart--and indeed, as urged by amicus curiae [i.e., Seeno], that a veritable wall be erected between the insurance company's administration of the two cases. We cannot subscribe to this proposition.

Id. at 1226, 265 Cal.Rptr. at 374.

The court found that normally, although the adjustor is the agent of the insurer, he may represent both the insurer and the insured. But, when coverage is an issue, the adjustor's loyalty is divided, and the insured cannot expect him to represent the insured's interest. This is the reason, the court noted, that the insured is provided with Cumis counsel. Id. at 1227, 265 Cal.Rptr....