"This case arises out of a dispute between an insured, L & S Roofing Supply Company, Inc. (hereinafter 'L & S Roofing'), and its insurer, St. Paul Fire & Marine Insurance Company (hereinafter 'St. Paul'), involving a suit filed against L & S Roofing in Alabama state court by Beaver Construction Company on August 13, 1985. (Beaver Construction Company v. Tamko Asphalt Products, Inc.; L & S Roofing Supply Company, Inc., et al., CV-85-4998) (hereinafter 'The Beaver Construction litigation' or 'the underlying action').
L & S Roofing is insured by St. Paul under certain insurance policies which purport to insure L & S Roofing against claims resulting from bodily injury to others and from damage to the property of others. It also appears that L & S Roofing was insured under umbrella liability policies with First State Insurance Company from February 1, 1983, to February 1, 1984, and with Safety Mutual Casualty Company from February 1, 1984, to February 1, 1985. Both of these umbrella policies provide essentially the same coverage as is provided under the St. Paul policy, and are excess insurance policies in the amount of $500,000.
"The policies of insurance issued by St. Paul to L & S Roofing contain the customary provisions imposing upon St. Paul a duty to defend its insured. Policy number 601NB1187 (in effect from February 15, 1983, through February 15, 1984), under the heading 'Additional benefits,' states that:
" 'We'll defend any suit brought against you for damages covered under this agreement, even if the suit is groundless or fraudulent. We have the right to investigate, negotiate and settle any suit or claim if that seems proper and wise.
" 'We'll pay all costs of defending the suit, including interest on any judgment. But we won't defend a suit or pay any claim after the limits shown on page 1 of this agreement have been used up paying judgments or settlements.'
"(Insuring Agreement 36, 'Comprehensive General Liability Protection,' at page 2 of 4.) Policy number 601NB2965 (in effect from May 1, 1984, through March 1, 1985), and policy number 601NB3190 (in effect from March 1, 1985, through March 1, 1986), contain similar provisions. (A true and correct copy of the indemnification provisions of the applicable policy is attached hereto as Exhibit 'A,' for the Court's convenience.)
"Each St. Paul policy provides $500,000 maximum single limit coverage for property damage and personal injury or any combination thereof.
"The complaint in the underlying action states claims against L & S Roofing and Tamko Asphalt Products, Inc. (hereinafter 'Tamko'), the manufacturer of the roofing materials which were purchased by the plaintiff and installed at Riverchase Garden Apartments. The roofing materials were sold to the plaintiff by L & S Roofing and were not altered or modified prior to the sale.
"The complaint in the underlying action alleges that L & S Roofing breached certain express and implied warranties and was guilty of fraudulent concealment in regard to the sale of the roofing materials. The complaint alleges that the roofing materials had a purchase price of approximately $27,000. Counts one through three of the complaint each demand $75,000 in compensatory damages for breach of warranty, while count four demands $500,000 in compensatory and punitive damages for the alleged fraudulent concealment.
"On October 1, 1985, the firm of Sirote, Permutt, Friend, Friedman, Held & Apolinsky, P.C. (hereinafter 'Sirote, Permutt') filed a Motion to Dismiss in the underlying action on behalf of L & S Roofing. Sirote, Permutt continued to be attorneys of record for L & S Roofing since the filing of this Motion to Dismiss. On October 24, 1985, an Answer was filed on behalf of L & S Roofing by Alan T. Rogers of the firm of Balch & Bingham, the firm retained by St. Paul to defend L & S Roofing. L & S Roofing's Answer raised the defense of the running of the statute of limitations as to the warranty and fraudulent concealment claims. The Answer further denies that express or implied warranties were made as alleged by the plaintiff. In addition, L & S Roofing's Answer denies that notice was given to L & S Roofing by the plaintiff as required by law and, in general, the Answer denies responsibility of L & S Roofing for any damages sustained by the plaintiff in the underlying action.
"On October 24, 1985, Balch & Bingham, on behalf of L & S Roofing, propounded Interrogatories to the plaintiff and filed a Request for Production of Documents relating to the transaction made the basis of the Beaver Construction litigation, as well as for documents relating to damages
costs, and expenditures allegedly incurred by the plaintiff and made the subject of the underlying action.
"On March 18, 1986, Balch & Bingham, on behalf of L & S Roofing, gave appropriate notice for the taking of the deposition of a representative of the plaintiff. A motion to permit inspection of the roofing material and the structures to which it was applied was filed by Balch & Bingham, on behalf of L & S [Roofing], on May 12, 1986.
"L & S Roofing contends, with respect to the underlying action, that the roofing material was not defective and was of good and merchantable quality. L & S Roofing further contends that it made no misrepresentation by concealment or otherwise with respect to the roofing material sold to the plaintiff and further contends that any injury and damage sustained by the plaintiff was caused by improper and negligent application of the roofing materials.
"Tamko Asphalt Products, the manufacturer of the roofing materials in question, contends that the materials were not defective and were of good and workmanlike quality and fit for the purposes for which they were manufactured. Tamko further contends that tests have been made of the roofing material which show that it was not defective and was of good and workmanlike quality.
"On October 7, 1985, St. Paul sent L & S Roofing a letter in which St. Paul stated that it was reserving its rights to disclaim coverage with respect to certain of the claims in the underlying action under the policy issued to L & S Roofing. In this 'reservation of rights' letter, St. Paul stated that the amount sued for by Beaver Construction exceeded the limits of liability under the St. Paul policies issued to L & S Roofing. In addition, St. Paul's letter stated that the claims of fraudulent concealment would not be covered by said policies. The reservation of rights letter also stated that St. Paul was referring the defense of the underlying action to Alan Rogers of the law firm of Balch & Bingham, 'who will protect your interests pursuant to the terms and conditions' of the insurance policy issued to L & S Roofing by St. Paul. The letter of October 7, 1985, stated in part as follows:
" 'It is also our understanding that you have obtained your own personal counsel to represent you in this matter. We ask that you make your attorneys aware that the amount the plaintiff is suing for is in excess of your policy limits.'
"Upon notice of St. Paul's reservation of rights letter, L & S Roofing, through its own attorneys, made demand on the attorneys hired by St. Paul to allow L & S Roofing to retain, at St. Paul's expense, 'independent counsel' (Sirote, Permutt) and to allow said 'independent counsel' to control the underlying action.
"In response to the demand made by L & S roofing through its personal attorneys, the firm of Balch & Bingham advised Sirote, Permutt of St. Paul's position by a letter from Alan Rogers on November 19, 1985:
" 'St. Paul will continue to retain this firm to provide a full defense for its insured in this lawsuit. As indicated before, we are quite willing to keep you informed of the progress of this litigation. If your firm wishes to take an active role in the litigation, your fees should be submitted to that person or company retaining your services. If you should have any questions, please do not hesitate to call. Meanwhile, I will continue to keep you advised.'
"Although St. Paul has not refused to permit the participation of counsel retained by L & S Roofing, there is no dispute that St. Paul is demanding that the attorneys engaged by St. Paul on behalf of its insured retain control of the underlying litigation.
"Balch & Bingham follows a general practice but has a continuing relationship with St. Paul and regularly represents St. Paul's insureds and, from time to time, represents St. Paul's interests in...
