Nede Mgmt., Inc. v. Aspen Am. Ins. Co.
| Decision Date | 20 September 2021 |
| Docket Number | B307470 |
| Parties | NEDE MGMT., INC., et al., Plaintiffs and Appellants, v. ASPEN AMERICAN INSURANCE COMPANY et al., Defendants and Respondents. |
| Court | California Court of Appeals Court of Appeals |
Action Legal Team, Michael N. Sofris, Beverly Hills; Stillman & Associates and Philip H. Stillman, Cardiff, for Plaintiffs and Appellants.
BHC Law Group, David Borovsky ; Greines, Martin, Stein & Richland, Robert A. Olson, Los Angeles, and Eleanor S. Ruth for Defendants and Respondents.
The Darwish family1 controlled a property in Los Angeles where a fire occurred, killing one person and injuring others. The victims sued. The Darwish family's insurer Aspen American Insurance Co. (Aspen) and managing underwriter Deans & Homer (D&H) defended the action, which ultimately settled without any out-of-pocket payment from the Darwish family. They nevertheless sued Aspen and D&H in this action, alleging a single claim for declaratory relief. They sought a declaration that a conflict of interest existed in the underlying case between them and Aspen and D&H, so they were entitled to so-called " Cumis " counsel2 pursuant to Civil Code section 2860 ( section 2860 ).
The trial court sustained a demurrer without leave to amend and entered judgment for Aspen and D&H, holding no conflict existed as a matter of law, so the Darwish family failed to state a claim for declaratory relief. We conclude the demurrer was the incorrect procedural vehicle to resolve the Darwish family's declaratory judgment claim against Aspen and D&H. However, the Darwish family suffered no prejudice because the second amended complaint (SAC) did not allege a conflict of interest entitling them to independent counsel pursuant to section 2860 as a matter of law. We will therefore modify the judgment to declare the rights adverse to the Darwish family and affirm.
The trial court also granted a motion to strike D&H as a defendant. That ruling is moot, so we need not address it.
We take the facts from the operative SAC, which we assume are true. ( Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, 26, 187 Cal.Rptr.3d 542 ( Centex Homes I ).) We also assume the numerous attachments to the complaint are true, and they take precedence over any conflicting allegations in the SAC. ( Brakke v. Economic Concepts, Inc. (2013) 213 Cal.App.4th 761, 767, 153 Cal.Rptr.3d 1.)
On July 4, 2015, a fire occurred on a property covered by the insurance policy at issue. A squatter died. Two tenants, two surviving squatters, and the estate of the deceased squatter sued the Darwish family and their corporate entities, including Nede. The lawsuit alleged claims for wrongful death, negligence, premises liability, and conversion (the Hall action).
David and Barbara tendered their defense in the Hall action to D&H and Aspen. D&H assumed control of the action and hired attorney Gary Fields as counsel for the Darwish family. Fields’ representation was subject to two reservations of rights: Aspen would not pay any judgment exceeding the $1 million policy limit and would not pay punitive damages.
The Darwish family alleged Fields "failed and refused to properly defend" them, outlining specific examples of his faulty representation. They believed these various allegations, if proven, created a conflict of interest between them and Aspen that required Aspen to provide them independent counsel pursuant to section 2860. Specifically, they alleged a conflict of interest arose from Fields’ coverage and settlement decisions adverse to them; the manner in which Fields defended the action; and Fields’ failure to defend against punitive damages. This alleged conflict was reflected in Fields’ failure to communicate an initial settlement demand within policy limits and failure to fully investigate the case.
Aspen and D&H denied the request for independent counsel for David and Barbara. In their view, the reservation of rights limited to damages exceeding policy limits and punitive damages did not create a conflict of interest that triggered a right to independent counsel.
Aspen did, however, approve independent counsel for Nede for a time. Nede was not a named insured, so the approval was subject to a reservation of rights that Nede was deemed an insured under the policy in its role as the building's property manager. Aspen also denied any obligation to pay damages arising from any act or omission by Nede in any capacity other than as property manager.
Nede retained separate counsel. According to the SAC, Aspen's counsel interfered with that independent representation in various ways. Nonetheless, Aspen paid Nede's counsel's invoices, subject to reductions. A little less than a year after approval, Aspen terminated approval for Nede's separate counsel because it had revoked its reservation of rights.
The Hall action eventually settled. Although not expressly alleged in the SAC, there appears to be no dispute the Darwish family paid nothing out of pocket for the settlement.
The Darwish family sued Aspen and D&H, alleging a single claim for declaratory relief seeking a declaration of their rights pursuant to section 2860. In the operative SAC, they alleged an actual conflict of interest existed between them and insurer-appointed counsel, so they sought a declaration they were entitled to independent counsel at Aspen's expense for the periods prior to December 2017 and after September 10, 2018.
Aspen and D&H demurred to the SAC. The trial court sustained the demurrer without leave to amend. The court viewed the declaratory relief claim as "wholly derivative" of an unpled substantive claim under section 2860. The substantive claim failed because Aspen's reservations of rights for punitive damages and for claims in excess of policy limits did not trigger the right to independent counsel under section 2860. The court also held the allegations that insurer-appointed counsel improperly litigated the Hall action did not create the type of conflict of interest triggering section 2860.
As for Nede, Aspen was entitled to withdraw its reservation of rights, and nothing alleged in the SAC entitled Nede to independent counsel after that time.
The court also held any fee dispute had to be resolved in arbitration per section 2860, subdivision (c).
D&H had also filed a motion to strike D&H as a defendant. After the court sustained the demurrer, it noted the motion to strike was moot but granted it anyway. It held the SAC did not sufficiently allege D&H was an insurer, and section 2860 on its face applies only to insurers.
We independently review the sustaining of a demurrer. ( Centex Homes I, supra, 237 Cal.App.4th at p. 28, 187 Cal.Rptr.3d 542.) We assume the truth of properly pleaded facts, and we give the complaint a reasonable interpretation, reading it as a whole. ( Ibid. ) We review the denial of leave to amend for abuse of discretion, asking whether there is "a reasonable possibility that the complaint can be cured by amendment." ( Ibid. )
Before turning to section 2860, we address the Darwish family's argument that the trial court's order must be reversed because the SAC sufficiently alleged a controversy subject to declaratory relief, "regardless of whether the plaintiff is entitled to the requested relief." Citing Ball v. FleetBoston Financial Corp. (2008) 164 Cal.App.4th 794, 79 Cal.Rptr.3d 402 ( Ball ), the trial court disagreed, viewing the declaratory relief claim as "wholly derivative" of a substantive claim under section 2860, and "if the underlying substantive claim fails, the demurrer may properly be sustained."
As we explain, the trial court's reasoning sustaining the demurrer was incorrect, but the error was not prejudicial because Aspen and D&H were entitled to judgment as a matter of law. (See Robertson v. Saadat (2020) 48 Cal.App.5th 630, 639, 262 Cal.Rptr.3d 215 [].) The proper course is to modify the judgment to reflect a declaration adverse to the Darwish family and affirm.
The Darwish family relies on a line of cases holding that " ‘[a] general demurrer is usually not an appropriate method for testing the merits of a declaratory relief action, because the plaintiff is entitled to a declaration of rights even if it is adverse to the plaintiff's interest.’ " ( Qualified Patients Assn. v. City of Anaheim (2010) 187 Cal.App.4th 734, 751, 115 Cal.Rptr.3d 89 ; see Lockheed Martin Corp. v. Continental Ins. Co. (2005) 134 Cal.App.4th 187, 221, 35 Cal.Rptr.3d 799 ( Lockheed ), disapproved on another ground by State of California v. Allstate Ins. Co. (2009) 45 Cal.4th 1008, 1036, fn. 11, 90 Cal.Rptr.3d 1, 201 P.3d 1147 ; Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592, 606, 98 Cal.Rptr.2d 277.)
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