Karen E. Adelman, Esq.
On January 22, 2018, in Centex Homes v. St. Paul Fire & Marine Ins. Co. (2018) 19 Cal.App.5th 789, the Third Appellate District of the California Court of Appeal held that a possible or potential conflict of interest did not suffice under Code of Civil Procedure section 2860 to entitle an insured developer to independent counsel. The Court of Appeal affirmed the trial court’s grant of summary adjudication in favor of the insurer regarding a coverage dispute over the defense it provided to the developer, Centex Homes, subject to a reservation of rights issued in connection with a construction defect lawsuit.
In affirming summary adjudication for St. Paul Fire & Marine Ins. Co., the Court of Appeal held that independent counsel was not required because (1) the insured offered no evidence or citations to authority to establish a triable issue of material fact as to whether counsel retained by the insurer could have controlled the coverage dispute under the circumstances of the case, which were that the insured was strictly liable for the construction defects, (2) causation would not necessarily have been litigated in the underlying action, (3) the insured’s liability was derivative, and (4) the insurer had the same interest as the insured in defending the underlying claim. Thus, the insurer did not control both sides of the litigation.
The Court reinforced the established proposition that in order to trigger the right to independent counsel, a reservation of rights must rely on factual or legal theories which are contrary to the insured’s position in the underlying litigation. There is no entitlement to Cumis counsel where the coverage issue is independent of, or extrinsic to, the issues in the underlying action. The mere possibility of an unspecified conflict in a reservation of rights letter does not require the appointment of independent counsel. Rather, the “conflict must be significant, not merely theoretical, actual, not merely potential.” (Id. at 798.)
The Court of Appeal also determined that the Rules of Professional Conduct relating to the representation of joint clients do not generally apply in the context of an insurance-funded defense, where the insurer’s interests are as an indemnity provider and not as a direct party to the action. Thus, the Court held that absent a reasonable likelihood of an actual conflict, the ethical prohibition against an attorney representing conflicting interests, as set forth in California Rules of Professional Conduct, rule 3-310(C)(1), is inapplicable.