Gafcon, Inc. v. Ponsor & Associates, D037229.

• Citation: 120 Cal.Rptr.2d 392,98 Cal.App.4th 1388
• Decision Date: 05 June 2002
• Docket Number: No. D037229.,D037229.
• Court: California Court of Appeals Court of Appeals
• Parties: GAFCON, INC., Plaintiff and Appellant, v. PONSOR & ASSOCIATES et al., Defendants and Respondents.

120 Cal.Rptr.2d 392

98 Cal.App.4th 1388

GAFCON, INC., Plaintiff and Appellant, v. PONSOR & ASSOCIATES et al., Defendants and Respondents.

No. D037229.

Court of Appeal, Fourth District, Division 1.

June 5, 2002.

Rehearing Denied June 26, 2002.

Review Denied September 11, 2002.

Eppsteiner & Associates, Stuart M. Eppsteiner, San Diego, and Neal A. Markowitz for Plaintiff and Appellant.

Wingert, Grebing, Brubaker & Ryan, Charles R. Grebing and Brian P. Worthington, San Diego, for Defendants and Respondents Ponsor & Associates and Roger von Kaesborg.

Gibson, Dunn & Crutcher, Theodore J. Boutrous, Jr., Los Angeles, Meryl L. Young, Nicola T. Hanna, Irvine, and Deborah L. Shirley for Defendant and Respondent Travelers Property Casualty Corporation.

O'ROURKE, J.

Gafcon, Inc. (Gafcon) sued its liability insurer Travelers Property Casualty Corporation (Travelers), Travelers' in-house law firm Ponsor & Associates, and Ponsor lawyer Roger von Kaesborg (collectively Ponsor) seeking, among other relief, a judicial declaration that (1) Travelers' use of employee attorneys to defend its insureds constitutes the unauthorized practice of law; (2) insurance companies in general improperly exercise control over their employee attorneys so as to interfere with their independence and professional judgment in representing insureds; (3) Travelers in the present case operated under a conflict requiring it to pay for independent Cumis¹ counsel; and (4) insurance companies derive an illegal profit from use of in-house counsel in representing insureds. Travelers and Ponsor moved for summary judgment; the court granted the motions.

On appeal, Gafcon asks us to broadly decide as a matter of law that insurance companies engage in the unauthorized practice of law when they use employee attorneys to defend their insureds. Gafcon additionally challenges the court's summary judgment ruling on grounds (1) disputed issues of fact exist as to whether Ponsor illegally split fees with Travelers and operated under a conflict of interest in representing Gafcon in the underlying negligent construction litigation; and (2) Travelers did not address Gafcon's unfair business practices cause of action in its motion. Gafcon finally contends the court erred in refusing to grant its requests for additional discovery in the case.

With respect to Ponsor, we conclude it demonstrated the absence of a present and actual controversy appropriate for declaratory relief, and therefore the court correctly granted summary judgment in its favor. With respect to Travelers, we conclude under the undisputed facts of this case, Travelers' use of Ponsor to represent Gafcon did not amount to the practice of law. In reaching this conclusion, we necessarily hold an insurance company does not engage in the practice of law due to the mere employment relationship between the insurer and the attorneys defending its insured against third party claims. Our holding is in part based on the recognition that in these instances, and absent conflicts of interest giving rise to independent counsel, the attorney represents both insurer and insured. We also conclude Gafcon failed to raise disputed issues of fact preventing summary adjudication of its request for declaratory relief as to Ponsor's fee splitting and as to its cause of action for unfair competition. Because Travelers failed to meet its threshold summary judgment burden to establish the absence of a conflict of interest arising from Ponsor's defense of the underlying lawsuit, however, the court could not properly deny declaratory relief as to that cause of action. Accordingly, we affirm the judgment as to Ponsor, but reverse the judgment as to Travelers with directions set forth below.

FACTUAL AND PROCEDURAL BACKGROUND

The Underlying Collection/Negligent Construction Litigation

In 1995, the Palm Desert Resorter Homeowners Association (the Association) retained Gafcon, a construction management firm, to manage reconstruction work at the Palm Desert Resorter planned community. After a dispute arose over fees, Gafcon retained Stuart Eppsteiner and his then-law firm Gibbs & Eppsteiner and sued the Association for unpaid fees. The Association cross-complained against Gafcon alleging, among others, causes of action for negligent supervision and advice; breach of contract and express and implied warranties; strict liability; and nuisance.²

Gafcon tendered the Association's action to its general liability insurer, Travelers, which accepted the defense but reserved its rights to allocate any payment of judgments or settlement between covered and noncovered claims and seek reimbursement for such payments and expenses. In particular Travelers pointed out its insurance did not apply to claims falling within an endorsement entitled "Exclusion—Testing or Consulting Errors and Omissions." That provision excluded from coverage any claim for bodily injury, property damage, personal injury, or advertising injury arising out of "[a]ny error, omission, defect or deficiency in any test performed, or evaluation, a consultation [sic ] or advice given by or on behalf of any insured" or "[t]he reporting of or reliance upon any such test, evaluation, consultation or advice." Travelers assigned one of its staff counsel, Ponsor & Associates, to represent Gafcon.

In May 1999, Ponsor lawyer von Kaesborg met with Eppsteiner about the litigation. Among other things, Eppsteiner advised von Kaesborg that he felt Ponsor operated under a conflict of interest in representing both Travelers and Gafcon. In response to these assertions, von Kaesborg advised both Eppsteiner and Gafcon principal Yehudi Gaffen that while his law firm was a unit of Travelers Indemnity Company's staff counsel organization and its lawyers were Travelers employees, it was not retained to represent Travelers or its interests but was retained solely to represent Gafcon. Von Kaesborg advised Gaffen and Eppsteiner that Ponsor & Associates would not put Travelers' interests above Gafcon's and was not involved in making coverage determinations.

Several months later, von Kaesborg learned Ponsor & Associates had a potential conflict of interest representing Gafcon in the Association lawsuit.³ A technical specialist with Travelers called Eppsteiner and left several messages offering to retain his firm at Travelers' standard hourly rate. When Eppsteiner failed to respond to those messages, von Kaesborg advised Gaffen of the potential conflict and notified it he had arranged for one of Travelers' outside panel counsel, Selski, Sturgeon and Wehbe, to represent Gafcon in the Association's case. Although Ponsor thereafter sought to withdraw from the matter with Gaffen's permission, Gaffen never responded to Ponsor's request that it execute a substitution form.

The Present Litigation

In October 1999, less than a month after Ponsor advised Gaffen it had a conflict of interest requiring its withdrawal, Gafcon served Travelers and Ponsor with the complaint in the present action. Approximately a month later, Ponsor obtained a court order relieving it as Gafcon's counsel of record.

In spite of Travelers retention of outside counsel to represent Gafcon's interests, Gafcon proceeded with its action. In April 2000, it filed its second amended complaint naming Travelers, Ponsor and several other insurers, alleging causes of action for breach of contract and breach of the implied covenant of good faith and fair dealing, unfair business practices under Business and Professions Code section 17200, as well as declaratory relief. In addition to damages, injunctive relief and restitution, Gafcon sought three judicial declarations applicable to both Ponsor and Travelers: (1) the practice of insurance companies, and specifically Travelers, in hiring staff counsel to represent their insureds, constitutes the unauthorized practice of law, and that when staff counsel represent the insured they are aiding insurance companies in the unauthorized practice of law; (2) Gafcon had the right to independent counsel of its own choosing to defend the Association's cross-complaint; and (3) "insurance companies derive an illegal profit off the representation of the insured through staff counsel." As to Travelers and the other insurers, Gafcon sought a fourth declaration: that it "had the right to independent counsel who charges for attorney fees at the rate at which the market would dictate, for counsel retained in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended, were it not for insurance companies engaging in the unauthorized practice of law."

Both Ponsor and Travelers moved for summary judgment and alternatively summary adjudication. Travelers argued the trial court could summarily dispose of Gafcon's causes of action under a 1987 ethics opinion of the California State Bar's Standing Committee on Professional Responsibility and Conduct (California State Bar Formal Opinion 1987-91, 1987 WL 109707, hereinafter State Bar Opinion 1987-91). This opinion concluded the employment of attorneys by insurance companies did not constitute the unauthorized practice of law. In addition, Travelers relied upon evidence that Ponsor never advised Travelers on the scope of insurance coverage, split fees with Travelers, or engaged in any unlawful, misleading or unfair business practice or deceptive advertising. Ponsor advanced the same arguments, but further maintained it was entitled to summary judgment because Gafcon had not sought any "direct relief or damages" against it.

In its motion, Travelers sought an adjudication that Gafcon's declaratory relief causes of action had no merit in part because, as a matter of law, it did not "aid and abet in the unauthorized practice of law when it retained attorneys it employed to represent Gafcon in the [underlying] litigation."⁴ It submitted the declarations of von Kaesborg and its senior technical specialist handl...