Zenith Ins. Co. v. O'Connor

• Decision Date: 21 March 2007
• Docket Number: No. B184684.,B184684.
• Citation: 55 Cal.Rptr.3d 911,148 Cal.App.4th 998
• Court: California Court of Appeals Court of Appeals
• Parties: ZENITH INSURANCE COMPANY, Plaintiff and Appellant, v. Cozen O'CONNOR, Defendant and Respondent.

55 Cal.Rptr.3d 911

148 Cal.App.4th 998

ZENITH INSURANCE COMPANY, Plaintiff and Appellant, v. Cozen O'CONNOR, Defendant and Respondent.

No. B184684.

Court of Appeal, Second District, Division 3.

March 21, 2007.

Irell & Manella, Richard J. McNeil, Newport Beach, and Wendy A. Sugg for Plaintiff and Appellant.

Hinshaw & Culbertson, Ronald E. Mallen, Paul E. Vallone, San Francisco, and Wendy Wen Yun Chang, Los Angeles, for Defendant and Respondent.

CROSKEY, J.

In this action for professional negligence, the appellant, Zenith Insurance Company (Zenith), had entered into a contract of reinsurance with Royal Insurance Company (Royal) pursuant to which it had reinsured 100% of Royal's exposure under certain liability policies. After claims were asserted against Royal's insured, Royal retained the respondent law firm of Cozen O'Connor (Cozen) to provide legal services with respect to the defense of such claims. Ultimately, Zenith filed this action for professional negligence against Cozen alleging that, under the circumstances, an attorney-client relationship existed between Cozen and Zenith based on (1) an implied in fact contract and (2) the theory that Zenith was an intended beneficiary of the legal services to be performed by Cozen pursuant to its retention agreement with Royal. Cozen successfully demurred to Zenith's claim and the cause of action against it was dismissed with prejudice.

As we concur with the trial court that Cozen, who was hired by Royal, owed no duty of care to Zenith, we will affirm. The fact that Zenith had reinsured 100% of Royal's potential policy liability, would thereby benefit (or suffer) from the performance of Cozen's legal services, and had multiple communications with Cozen (who was obligated as Royal's counsel to keep the reinsurer informed of the status of claim adjustment and defense) does not provide a basis for the establishment of an attorney-client relationship; moreover, Zenith makes no claim that there was any express agreement with Cozen regarding such a relationship.

FACTUAL AND PROCEDURAL BACKGROUND¹

On May 1, 1975, Royal entered into a Reinsurance Agreement with Pacific Basin Insurance Company (Pacific Basin) pursuant to which it reinsured four general liability policies issued by Royal to the Dillingham Corporation and its subsidiaries for the fiscal years 1975-1976 and 1976-1977. Subsequently, on July 29, 1992, the Reinsurance obligations of Pacific Basin were assumed by Zenith and, on August 31, 1992, Royal and Zenith entered into a novation agreement whereby Royal released Pacific Basin and accepted Zenith as the reinsurer of the four Dillingham policies. Zenith, at least for purposes of this appeal, does not dispute its obligations as the reinsurer under the original Reinsurance Agreement.²

The Reinsurance Agreement provided, among other things:

1. Zenith reinsured 100% of the limits of Royal's underlying policies issued to Dillingham;

2. Zenith's liability "shall fully follow" that of Royal;

3. Royal had the right and duty to investigate, settle or defend suits against its insureds;

4. Royal had the right and duty, in its sole discretion, to make such settlements as it deemed expedient in accordance with the provisions of the underlying policies; and

5. Zenith did not have the right to associate in the defense or settlement of claims made under the reinsured Royal policies.

In October of 1989, one of Dillingham's wholly owned subsidiaries, Foss Maritime (Foss), notified Royal of a claim by the United States Environmental Protection Agency which alleged that Foss was liable for the environmental cleanup of the Middle Waterway of Commencement Bay in Tacoma, Washington (the Middle Waterway Claim). After Zenith had assumed the obligations as Royal's reinsurer, Royal advised Zenith that there were some 22 other insurers on the risk represented by the Middle Waterway Claim.

In 1996, Royal engaged Cozen to provide legal advice and services with regard to the Middle Waterway Claim as well as other Foss pollution claims in the State of Washington. In 2002, Zenith contacted Cozen regarding Royal's failure to seek contribution from other insurers who, as Zenith understood it, were also on the risk. Cozen advised Zenith that because of certain conflicts of interest, Cozen was not able to pursue any of the potential contribution claims. Zenith then demanded that Royal retain other counsel to pursue those claims and Royal did so.

Royal ultimately agreed to pay Foss approximately $2.8 million in settlement of the Middle Waterway Claim, plus another $1 million in defense costs and in settlement of claims arising from two other Foss sites. Royal thereafter demanded reimbursement from Zenith pursuant to the terms of the Reimbursement Agreement. As of the date that Zenith filed its initial complaint in this matter, it had paid only about $500,000 on Royal's demand.

On July 28, 2004, Zenith filed this action against Royal for breach of contract and declaratory relief. In essence, Zenith alleged that Royal had mishandled the adjustment of the several Foss claims and, specifically, had failed to timely pursue contribution and indemnification claims against other insurers. As a result of Royal's failure, recovery on such contribution and indemnification claims had been lost and Zenith, as the reinsurer of 100% of Royal's policy obligations has been thereby damaged. Cozen was not named as a defendant in this pleading.

Zenith thereafter amended its complaint to add a third cause of action against Cozen for professional negligence. Cozen demurred, arguing that there were insufficient allegations to demonstrate any attorney-client relationship between the law firm and Zenith. The trial court sustained the demurrer with leave to amend and directed Zenith to attach a copy of the Reinsurance Agreement to any future pleadings. Two other pleading efforts by Zenith had similar results. Zenith was repeatedly unable to allege sufficient facts to demonstrate that Cozen had any duty of care owed to Zenith or that any attorney-client relationship existed between them. Finally, on March 28, 2005, Zenith filed its fourth amended complaint, the operative pleading herein.

Zenith concedes that there was never any express agreement with Cozen that legal services were to be provided to Zenith. The basis for Zenith's conclusion that an attorney-client relationship existed is apparently founded on the following summarized allegations:

1. In 2002, Zenith demanded that Cozen pursue contribution claims against other insurers and that Cozen refused on the ground that it was ethically unable to do so as conflicts of interest existed. When Zenith demanded that Royal engage other counsel to pursue such claims, however, Royal did so;³

2. From time to time, Cozen had discussions with Zenith concerning the pending litigation and settlement strategy respecting the several Foss claims. On one occasion, Cozen stated to Zenith that a particular settlement that Royal proposed to make with respect to two of the Foss claims was in "Zenith's best interests." On another occasion, one of Royal's representatives assured Zenith that "Cozen is protecting all of our interests." Cozen was not a party to this latter statement;

3. Cozen was aware at all times that Zenith had reinsured 100% of Royal's policy liability under the Dillingham policies;

4. As a result of these circumstances. Zenith alleged that it had "reasonably relied on Cozen to evaluate, investigate and prosecute claims for contribution or indemnification or other claims to reduce Royal's, and thus Zenith's, financial liability;"

5. Zenith also alleged that "[a]t no time did Cozen ever say to Zenith that it was not representing Zenith. Nor did Cozen ever say to Zenith that Zenith should seek separate counsel respecting any matters discussed between Cozen and Zenith as to the Foss claims;" and

6. Cozen knew that Zenith was not only 100% liable on the Foss claim, but also that Zenith was 100% potentially responsible for Cozen's legal fees. As of the date of the fourth amended complaint, Zenith had paid "a substantial portion of Cozen's fees respecting their representation."

⁴

Based on these general allegations, Zenith asserted, in its third cause of action,⁵ that (1) an implied contract existed between Cozen and Zenith establishing an attorney-client relationship and (2) the agreement between Royal and Cozen whereby Cozen was to provide legal advice and services with respect to the claims against Foss "was specifically intended to affect and/or benefit Zenith in that Cozen was aware of Zenith's 100% financial interest in the Foss claims and was also aware of Royal's obligations to Zenith under . . . the Reinsurance Agreement."

Thus, Zenith concludes, in its allegations against Cozen, "separate and apart from the implied contract between Zenith and Cozen that Zenith was a third party beneficiary of the written agreement between Royal and Cozen." Zenith then goes on to allege that Cozen had failed to act within the standard of care and breached that duty of care by the manner in which it (1) permitted the existence of or maintained relationships that created conflicts of interest, (2) failed to act in Zenith's best interests, (3) failed to handle the Foss claims in a proper manner, (4) failed to properly, and in timely manner, pursue claims against other insurers and indemnitors and (5) failed to timely and adequately disclose its conflicts of interest to Royal and Zenith.

Cozen again filed a demurrer and the trial court sustained it without leave to amend. After examining Zenith's allegations as summarized above, the trial court concluded that there were not sufficient facts alleged to demonstrate the creation or existence of an attorney-client relationship and that Cozen did not owe a duty of care to Zenith. The trial court held that the client was Royal and the fact that Cozen may have been aware that Zenith had 100% reinsurance liability...