State Farm Mut. Auto. Ins. Co. v. Federal Ins. Co.

• Decision Date: 18 June 1999
• Docket Number: No. F031707,F031707
• Citation: 86 Cal.Rptr.2d 20,72 Cal.App.4th 1422
• Court: California Court of Appeals Court of Appeals
• Parties: , 99 Cal. Daily Op. Serv. 4828, 1999 Daily Journal D.A.R. 6223 STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Plaintiff and Respondent, v. FEDERAL INSURANCE COMPANY, Defendant and Appellant.

Page 20

86 Cal.Rptr.2d 20

72 Cal.App.4th 1422, 99 Cal. Daily Op. Serv. 4828,

1999 Daily Journal D.A.R. 6223

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY, Plaintiff and Respondent, v. FEDERAL INSURANCE COMPANY, Defendant and Appellant.

No. F031707.

Court of Appeal, Fifth District, California.

June 18, 1999.

Newton, Kastner & Remmel, Stephen L. Newton, Los Angeles, and O. Antony Abdollahi, Mountain View, for Defendant and Appellant.

McCormick, Barstow, Sheppard, Wayte & Carruth, Wade M. Hansard, Patrick D. Toole, Scott D. Laird and Todd M. Baxter, Fresno, for Plaintiff and Respondent.

O P I N I O N

LEVY, J.

The primary issue presented by this appeal is whether, for purposes of disqualification, the attorney representing an insured is also representing the insurance company. If the insurance company is a client, this case poses a secondary question regarding the applicable disqualification standard. The issue becomes whether the insurance company is a "former" or a "concurrent" client when the attorney files a complaint naming the insurance company as a defendant and then settles the insured's case.

When presented with these issues, the trial court denied the disqualification motion. However, the obligations and duties an attorney owes to an insurance company in this situation support finding an attorney-client relationship for purposes of a disqualification motion. Additionally, the overlap in representation requires application of the "concurrent" client standard. Thus, the motion to disqualify should have been granted.

STATEMENT OF THE CASE

In 1996, respondent, State Farm Mutual Automobile Insurance Company (State Farm) retained the law firm of McCormick, Barstow, Sheppard, Wayte & Carruth (McCormick) to advise State Farm regarding the coverage available to its insured, Gerawan Farming, with respect to personal injury actions arising out of a motor vehicle accident. McCormick and State Farm concluded that insurance policies issued by appellant, Federal Insurance Company (Federal), provided additional coverage for this accident. McCormick relayed this information to Federal's coverage counsel. However, Federal disagreed with State Farm's conclusion and refused to voluntarily participate in the Gerawan cases. The last contact McCormick had with Federal's coverage counsel regarding this issue was in September 1996.

In January 1997, Federal retained McCormick to represent its insured, C & S Distributing Company, in a case entitled Pinion v. Clark-Stebbins, Inc. (Pinion ). Federal did not dispute coverage in this matter and thus proceeded to provide a defense for its insured without a reservation of rights.

On February 4, 1998, State Farm filed this action against Federal for declaratory relief and subrogation damages. State Farm is asserting that policies issued by Federal provided additional coverage for the Gerawan Farming cases. State Farm defended Gerawan Farming in these actions and now seeks contribution from Federal for all the costs and expenses it incurred. This complaint was filed on behalf of State Farm by McCormick.

On March 6, 1998, approximately one month after the complaint was filed, Federal, through its defense counsel, Stephen Newton of Newton, Kastner & Remmel, advised McCormick that Federal objected to McCormick's continued representation of State Farm. Federal based its objection on California Rules of Professional Conduct, rule 3-310 ¹ "which requires [McCormick] to refrain from proceeding with a claim against Federal of an adverse nature given the fact that [McCormick] has represented and does presently represent insureds of Federal as well as Federal itself and other members of the Chubb Group of Insurance Companies." McCormick did not respond to this letter.

On April 7, 1998, Federal reiterated its objection to McCormick's representation of State Farm. However, McCormick again did not respond to the letter.

On May 28, 1998, the parties in the Pinion action settled the matter at mediation.

Also on May 28, 1998, State Farm commenced discovery in this case. In response, Federal filed the motion to disqualify McCormick. Federal further sought a protective order relieving Federal from the obligation of responding to the discovery requests until McCormick withdrew as counsel for State Farm.

The trial court denied the motion. The court did not make a specific finding regarding the existence of an attorney-client relationship. Rather, the court relied primarily on its conclusion that Federal's status was that of a " 'former' " client by the time the motion was filed. Accordingly, the court applied the " 'substantial relationship' " test for disqualification. Under this test, the court found disqualification was not required. The trial court also noted that Federal could be considered to have given " 'implied consent' " to the potential conflict in that Federal's coverage counsel was in contact with McCormick regarding State Farm's adverse position approximately two years before this lawsuit was filed.

DISCUSSION

When reviewing an order granting or denying a motion to disqualify counsel, the appellate court defers to the trial court's decision, absent an abuse of discretion. (Truck Ins. Exchange v. Fireman's Fund Ins. Co. (1992) 6 Cal.App.4th 1050, 1055, 8 Cal.Rptr.2d 228.) Thus, the court is bound by the trial court's express or implied factual findings so long as those findings are supported by substantial evidence. (In re Marriage of Zimmerman (1993) 16 Cal.App.4th 556, 561, 20 Cal.Rptr.2d 132.)

However, the appellate court independently reviews the resulting legal conclusions. (In re Marriage of Zimmerman, supra, 16 Cal.App.4th at p. 561, 20 Cal.Rptr.2d 132.) In exercising discretion, the trial court is required to make reasoned judgments which comply with legal principles and policies. Consequently, the trial court's ruling is subject to reversal where there is no reasonable basis for the action taken. (Metro-Goldwyn-Mayer, Inc. v. Tracinda Corp. (1995) 36 Cal.App.4th 1832, 1838, 43 Cal.Rptr.2d 327.)

The motion to disqualify McCormick should have been granted.

The issue of disqualification ultimately involves a conflict between a client's right to chosen counsel and the need to maintain ethical standards of professional responsibility. (Comden v. Superior Court (1978) 20 Cal.3d 906, 915, 145 Cal.Rptr. 9, 576 P.2d 971.) However, the paramount concern must be the preservation of public trust both in the scrupulous administration of justice and in the integrity of the bar. Consequently, the recognizably important right to choose one's counsel must yield to the ethical considerations that embody the moral principles of our judicial process. (Ibid.)

The applicable standard of professional responsibility regarding representation of clients with adverse interests is found in rule 3-310. That rule provides, in part:

"(C) A member shall not, without the informed written consent of each client:

"....

"(3) Represent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter."

Obviously, this rule is inapplicable if the adverse action is taken against a person or entity who is not also a client. Thus, preliminarily, the complaining party's "client status" must be ascertained.

a. Federal was McCormick's client.

The issue of whether an attorney-client relationship is formed between an insurance company and the counsel it hires to defend an insured has arisen in several contexts. In analyzing these situations, the courts have described counsel's representation as "triangular." (Purdy v. Pacific Automobile Ins. Co. (1984) 157 Cal.App.3d 59, 76, 203 Cal.Rptr. 524.) In other words, the attorney represents two clients, the insured and the insurer. (Lysick v. Walcom (1968) 258 Cal.App.2d 136, 146, 65 Cal.Rptr. 406.) This trio has been portrayed as a "loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured." (American Mut. Liab. Ins. Co. v. Superior Court (1974) 38 Cal.App.3d 579, 592, 113 Cal.Rptr. 561.)

"Conceptually, each member of the trio, attorney, client-insured, and client-insurer[,] has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well." (Ibid.)

Based on this reasoning, it has been held that an insurance company is a client with respect to its ability to assert the attorney-client privilege under Evidence Code section 954. (American Mut. Liab. Ins. Co. v. Superior Court, supra, 38 Cal.App.3d 579, 113 Cal.Rptr. 561.) Between the attorney and the insurer who retained the attorney and paid for the defense, there exists a separate attorney-client relationship endowed with confidentiality. (Id. at pp. 591-592, 113 Cal.Rptr. 561.)

Further, an insurance company has an independent right, as a client, to bring a legal malpractice action against the counsel it hired to defend its insured. (Unigard Ins. Group v. O'Flaherty & Belgum (1995) 38 Cal.App.4th 1229, 1236-1237, 45 Cal.Rptr.2d 565; American Casualty Co. v. O'Flaherty (1997) 57 Cal.App.4th 1070, 1076, 67 Cal.Rptr.2d 539.) In the absence of a conflict of interest between the insurer and the insured that would preclude an attorney from representing both, the attorney has a dual attorney-client relationship with insurer and insured. (Unigard Ins. Group v. O'Flaherty & Belgum, supra, 38 Cal.App.4th at pp. 1236-1237, 45 Cal.Rptr.2d 565.) Thus, the insurer has retained counsel and is entitled to expect counsel to fulfill the duty it has undertaken to the insurer. (American Casualty Co. v. O'Flaherty, supra, 57 Cal.App.4th at p. 1076, 67 Cal.Rptr.2d 539.)

In analyzing this attorney-insurer-insured relationship, the courts have acknowledged that, as a practical matter, the attorney may have closer ties with...