San Diego Federal Credit Union v. Cumis Ins. Society, Inc.

• Citation: 208 Cal.Rptr. 494,162 Cal.App.3d 358
• Court: California Court of Appeals
• Decision Date: 03 December 1984
• Parties: , 50 A.L.R.4th 913 SAN DIEGO NAVY FEDERAL CREDIT UNION, et al., Plaintiffs and Respondents, v. CUMIS INSURANCE SOCIETY, INC., Defendant and Appellant. D000911. Civ. 31043.

Page 494

208 Cal.Rptr. 494

162 Cal.App.3d 358, 50 A.L.R.4th 913

SAN DIEGO NAVY FEDERAL CREDIT UNION, et al., Plaintiffs and Respondents, v. CUMIS INSURANCE SOCIETY, INC., Defendant and Appellant.

D000911.

Civ. 31043.

Court of Appeal, Fourth District, Division 1, California.

Dec. 3, 1984.

Hearing Denied Feb. 21, 1985.

Hardin, Cook, Loper, Engel & Bergez, Gennaro A. Filice III, Oakland, and Roberta E. Nalbandian, Sacramento, for defendant and appellant.

Breidenbach, Swainston, Yokaitis & Crispo, Los Angeles, Bronson, Bronson & McKinnon, San Francisco, W.F. Rylaarsdam, Los Angeles, Jeanne E. Emrich, Long Beach, Ronald E. Mallen, San Francisco, Michael J. Brady, Redwood City, David R. Fuller, Chico, Raoul D. Kennedy, Oakland, Paul H. Cyril and David W. Gordon, San Francisco, as amici curiae on behalf of defendant and appellant.

Saxon, Alt, Brewer & Kincannon and Mark A. Saxon, San Diego, for plaintiffs and respondents.

Leonard Sacks, Northridge, Robert E. Cartwright, Harvey R. Levine, San Diego, Wylie A. Aitken, Santa Ana, Harlan Arnold, Beverly Hills, Glen T. Bashore, North Fork, Ray Bourhis, San Francisco, Richard D. Bridgman, Oakland, Edwin Train Caldwell, San Francisco, David S. Casey, Jr., San Diego, Victoria DeGoff, Berkeley Douglas K. deVries, Sacramento, H. Grieg Fowler, San Francisco, Sanford M. Gage, Beverly Hills, Ian Herzog, Los Angeles, G. Dana Hobart, Marina Del Rey, Stanley K. Jacobs, Los Angeles, John C. McCarthy, Claremont, Timothy W. Peach, San Bernardino, R.H. Sulnick, Los Angeles, Arne Werchick, Sausalito, and Stephen Zetterberg, Claremont, as amici curiae on behalf of plaintiffs and respondents.

GAMER, Associate Justice. ^*

Cumis Insurance Society, Inc. (Cumis) appeals a judgment requiring Cumis to pay the San Diego Navy Federal Credit Union, J.W. Jamieson and Larry R. Sharp (insureds) all reasonable past and future expenses of their independent counsel retained for the defense of a lawsuit filed against the insureds by Magdaline S. Eisenmann (Eisenmann action). ¹

The issue presented to this court by the appeal is whether an insurer is required to pay for independent counsel for an insured when the insurer provides its own counsel but reserves its right to assert noncoverage at a later date. We conclude under these circumstances there is a conflict of interest between the insurer and the insured, and therefore the insured has a right to independent counsel paid for by the insurer.

The Eisenmann action against the insureds seeks $750,000 general and $6.5 million punitive damages for tortious wrongful discharge, breach of the covenant of good faith and fair dealing, wrongful interference with and inducing breach of contract, breach of contract and intentional infliction of emotional distress. Under insurance policies issued by Cumis, the insureds tendered the defense of the Eisenmann action to Cumis. Cumis associate counsel Willis E. McAllister reviewed the complaint in the Eisenmann action and concluded Cumis had a duty to provide a defense to the insureds. McAllister selected and retained, at Cumis' expense, the San Diego law firm of Goebel & Monaghan to represent the interests of the insureds in the Eisenmann action. McAllister informed Goebel & Monaghan it was to represent the insureds as to all claims in the Eisenmann action, including the punitive damages claim. He also told Goebel & Monaghan Cumis was reserving its right to deny coverage at a later date and the insurance policies did not cover punitive damages.

McAllister sent Goebel & Monaghan copies of the insurance policies in effect and letters accepting the defense and reserving rights which were delivered to the insureds. McAllister never asked Goebel & Monaghan for an opinion whether coverage existed under the insurance policies, nor did Goebel & Monaghan give any coverage advice to either Cumis or the insureds.

McAllister believed if the Eisenmann action resulted in a finding of wilful conduct or an award of punitive damages, the Cumis policies did not provide coverage for those damages. Moreover, his view was if the Eisenmann action resulted in a finding of breach of contract as against any of the insureds, there might be no coverage under the relevant Cumis policies. Accordingly, on behalf of Cumis, McAllister notified each insured by letter Cumis was reserving its rights to disclaim coverage and denying any coverage for punitive damages. ²

The Credit Union retained the San Diego law firm of Saxon, Alt & Brewer (independent counsel) to provide independent representation to protect the insureds' interests. Independent counsel notified Cumis it was retained to act as co-counsel with Goebel & Monaghan and presented Cumis a claim for its attorneys' fees and costs. McAllister was persuaded California law required Cumis to pay the fees, and he agreed to pay the fees and costs incurred by independent counsel as co-counsel for the insureds. Cumis paid two separate invoices for legal services of independent counsel but additional invoices were not paid. After independent counsel sent a demand letter to Cumis and further discussed the matter with McAllister, McAllister sought a separate opinion on the question from Cumis' home office and asked Goebel & Monaghan if it felt there was a conflict of interest in representing the insureds such that Cumis would be required to pay the expenses of separate counsel. Goebel & Monaghan told McAllister it did not see a conflict of interest. Cumis' home office came to the same conclusion and McAllister notified independent counsel Cumis would pay no further invoices.

In the Eisenmann action settlement conference, the case did not settle after a demand within the Cumis policy limits. Cumis authorized Goebel & Monaghan to make an offer at the settlement conference but in an amount lower than Eisenmann's demand. Goebel & Monaghan did not contact the Credit Union before or during the settlement conference, but informed the Credit Union about the conference afterward.

In this action, the trial court ruled Cumis is required to pay for the insureds' hiring of independent counsel, rejecting Cumis' argument the court was bound by Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168, and reasoning:

"1. Gray involved a question of the duty to defend in an assault and battery case rather than the extent and scope of that duty. The reasoning thus used to support Gray is not controlling, especially if it makes little sense.

"2. The reasoning of Gray, '[s]ince ... the court in the third party suit does not adjudicate the issue of coverage the insurer's argument (as to a conflict of interest) collapses,' just does not stand scrutiny. What the defense attorney in the third party case does impacts the coverage case, in that, the questions of coverage depends [sic] on the development of facts in the third party case and their proper development is left to the attorney paid for by the Carrier. Gray recognized that a finding in the third party action would effect the issues of coverage in a subsequent case but analyzed the question from the point of view of the carrier. Gray recognized a possible conflict from the point of view of the insured in footnote 18, where it stated: 'In rare cases the issue of punitive damages or a special verdict might present a conflict of interest, but such possibility does not outweigh the advantages of the general rule. Even in such cases, however, the insurer will still be bound ethically and legally, to litigate in the interests of the insured.' Additionally, Gray was looking for a way to avoid a conflict of interest, to hold that it was excluding all other approaches just does not make common sense."

The court further explained its ruling:

"The Carrier is required to hire independent counsel because an attorney in actual trial would be tempted to develop the facts to help his real client, the Carrier Company, as opposed to the Insured, for whom he will never likely work again. In such a case as this, the Insured is placed in an impossible position; on the one hand the Carrier says it will happily defend him and on the other it says it may dispute paying any judgment, but trust us. The dictum in Gray flies in the face of the reality of insurance defense work. Insurance companies hire relatively few lawyers and concentrate their business. A lawyer who does not look out for the Carrier's best interest might soon find himself out of work."

In the usual tripartite relationship existing between insurer, insured and counsel, there is a single, common interest shared among them. Dual representation by counsel is beneficial since the shared goal of minimizing or eliminating liability to a third party is the same. A different situation is presented, however, when some or all of the allegations in the complaint do not fall within the scope of coverage under the policy. In such a case, the standard practice of an insurer is to defend under a reservation of rights where the insurer promises to defend but states it may not indemnify the insured if liability is found. In this situation, there may be little commonality of interest. ³ Opposing poles of interest are represented on the one hand in the insurer's desire to establish in the third party suit the insured's "liability rested on intentional conduct" (Gray, supra, 65 Cal.2d 263, 279, 54 Cal.Rptr. 104, 419 P.2d 168), and thus no coverage under the policy, and on the other hand in the insured's desire to "obtain a ruling ... such liability emanated from the nonintentional conduct within his insurance coverage" (ibid.). Although issues of coverage under the policy are not actually litigated in the third party suit, this does not detract from the force of these opposing interests as they operate on the attorney selected by the insurer, who has a dual agency status (see Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 647, 39 Cal.Rptr. 731, 394 P.2d 571). ⁴

Here, it is uncontested the...