Travelers Property Casualty Company of America et al v. Centex Homes

Filing 170

ORDER by Judge Samuel Conti granting in part and denying in part 128 Motion for Summary Judgment; granting in part and denying in part 143 Motion for Partial Summary Judgment (sclc1, COURT STAFF) (Filed on 4/8/2013)

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1 2 3 4 5 6 7 IN THE UNITED STATES DISTRICT COURT 8 NORTHERN DISTRICT OF CALIFORNIA 10 Northern District of California United States District Court 9 11 12 TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, FIDELITY & GUARANTY INSURANCE COMPANY, THE TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, AND ST. PAUL MERCURY INSURANCE COMPANY, 13 Plaintiffs, 14 15 16 17 v. CENTEX HOMES and DOES 1 through 10 inclusive, 18 19 CENTEX HOMES, 20 21 Counterclaimant, v. 22 23 TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA, et al., 24 Counterdefendant. 25 26 27 28 ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Case No. 11-3638-SC ORDER GRANTING IN PART AND DENYING IN PART CROSSMOTIONS FOR PARTIAL SUMMARY JUDGMENT INTRODUCTION & BACKGROUND 1 This case arises out of an insurance dispute between the 2 defendant Centex Homes ("Centex"). 5 build residential developments throughout California. 6 this case, Centex subcontracted with West Coast Countertops ("West 7 Coast"), Fresno Precision Plastics ("Fresno Precision"), Executive 8 Landscape, American Woodmark, and Foremost Superior Marble 9 ("Foremost Superior") to install countertops, cabinets, tub and 10 United States District Court above-captioned plaintiffs (collectively, "Travelers") and 4 For the Northern District of California 3 shower surrounds, and landscaping features in a number of homes. 11 These subcontractors obtained commercial general liability 12 insurance policies from Travelers, naming Centex as an additional 13 insured. 14 from the subcontractors' work but does not provide coverage for 15 replacement of the work itself. 16 water damage caused by an improperly installed tub, but not cover 17 the replacement cost of the tub itself. Centex hires subcontractors to Pertinent to The Travelers' policies cover property damage arising For example, Travelers will cover Centex is now being sued for construction defects by over 100 18 19 homeowners throughout California. 20 number of defects, including a few that may be related to the work 21 performed by West Coast, Fresno Precision, Executive Landscape, and 22 Foremost Superior. 23 actions to Travelers as an additional insured under these 24 subcontractors' policies: the Acupan action, the Adkins action, the 25 Conner action, the Garvey action, and the Kent action 26 (collectively, the "underlying actions").1 27 1 28 These actions allege a large Centex has tendered at least five of these The actions are captioned: Acupan v. Centex Homes, Kern County Superior Court Case No. S-1500-CV-273392; Adkins v. Centex Homes, Sacramento County Superior Court; Conner v. Centex Homes, Imperial 2 1 Centex and Travelers appear to disagree about almost every 2 relevant aspect of coverage, including whether the underlying 3 actions are covered by the policies, whether Travelers has a duty 4 to defend the underlying actions, what that duty to defend entails, 5 whether Centex has a right to control its own defense, whether 6 Centex has a right to Cumis counsel, whether Centex has a duty to 7 seek coverage from other insurers, and whether the parties have 8 timely responded to each other's requests for information. 9 result, Travelers brought suit against Centex for, among other As a United States District Court For the Northern District of California 10 things, breach of contract, breach of the implied covenant of good 11 faith and fair dealing ("bad faith"), reimbursement, and 12 declaratory relief. 13 contract, bad faith, and declaratory relief. 14 are fully briefed cross-motions for partial summary judgment 15 brought by Travelers and Centex. 16 ("Centex XMSJ/MSJ Opp'n"); 159 ("Trav. MSJ Reply/XMSJ Opp'n"); 162 17 ("Centex XMSJ Reply"). 18 Court finds these matters appropriate for resolution without oral 19 argument. 20 GRANTED in part and DENIED in part. Centex has also counterclaimed for breach of Now before the Court ECF Nos. 128 ("Trav. MSJ"); 143 Pursuant to Civil Local Rule 7-1(b), the For the reasons set forth below, the cross-motions are 21 22 LEGAL STANDARD 23 Entry of summary judgment is proper "if the movant shows that 24 there is no genuine dispute as to any material fact and the movant 25 is entitled to judgment as a matter of law." Fed. R. Civ. P. 26 27 28 County Superior Court Case No. ECF06075; Garvey et al. v. Centex Homes, et al., Sacramento County Superior Court Case No. 34-201000073233; Kent v. Centex Homes, Sacramento County Superior Court Case No. 07AS04107. 3 1 56(a). Summary judgment should be granted if the evidence would 2 require a directed verdict for the moving party. 3 Liberty Lobby, Inc., 477 U.S. 242, 251 (1986). 4 mandates the entry of summary judgment . . . against a party who 5 fails to make a showing sufficient to establish the existence of an 6 element essential to that party's case, and on which that party 7 will bear the burden of proof at trial." 8 477 U.S. 317, 322 (1986). 9 believed, and all justifiable inferences are to be drawn in his Anderson v. Thus, "Rule 56[] Celotex Corp. v. Catrett, "The evidence of the nonmovant is to be Anderson, 477 U.S. at 255. However, "[t]he mere existence United States District Court For the Northern District of California 10 favor." 11 of a scintilla of evidence in support of the plaintiff's position 12 will be insufficient; there must be evidence on which the jury 13 could reasonably find for the plaintiff." Id. at 252. 14 DISCUSSION 15 16 17 I. CENTEX'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT Centex asks the Court to enter partial summary judgment in its 18 favor on five issues: (1) whether Travelers owes a duty to defend 19 Centex in the Garvey, Adkins, Acupan, and Conner Actions; (2) 20 whether Travelers has a duty to pay Centex's full defense costs; 21 (3) whether Centex breached the cooperation clauses in its 22 insurance contracts with Travelers by failing to tender to or sue 23 other insurers; (4) whether Travelers' delay in responding to the 24 Acupan and Conner actions divested it of the right to control those 25 actions; (5) whether Travelers' claim for reimbursement fails. 26 Court addresses each of these issues below. The 27 A. Travelers' Duty to Defend Centex 28 Under California law, an insurer's duty to defend an insured 4 1 in an underlying action "is determined by reference to the policy, 2 the complaint, and all facts known to the insurer from any source." 3 Montrose Chem. Corp. v. Super. Ct., 6 Cal. 4th 287, 300 (Cal. 4 1993). 5 . the insurer must assume its duty to defend unless and until it 6 can conclusively refute that potential. 7 will be required to defend a suit where the evidence suggests, but 8 does not conclusively establish, that the loss is not covered." 9 Id. at 299 (quotations omitted). United States District Court Necessarily, an insurer Here, Centex argues that the undisputed evidence shows that 10 For the Northern District of California "[O]nce the insured has established potential liability . . 11 Travelers had a duty to defend Centex in the Adkins, Acupan, 12 Garvey, and Conner actions. 13 Travelers argues that summary judgment should be denied on these 14 issues because Centex fails to specify when the duty to defend 15 arose in each action. 16 responds that its motion is sufficiently specific because the duty 17 to defend arises immediately upon tender. 18 31. 19 Centex XMSJ/MSJ Opp'n at 29. Trav. MSJ Reply/XMSJ Opp'n at 22-23. Centex Centex XMSJ Reply at 30- The Court disagrees. Courts frequently refer to the duty to defend as immediate. 20 See Montrose, 6 Cal. 4th at 295. However, courts also recognize 21 that an insurer has a right to conduct a reasonable investigation 22 before to assuming a duty to defend. 23 Homes, C 10-02757 CRB ("Travelers v. Centex I" or the "'57 24 Action"), 2011 WL 1225982, at *4 (N.D. Cal. Apr. 1, 2011). 25 where an insured tenders an underlying action but fails to provide 26 the insurer with necessary information relevant to a coverage 27 determination, then the insurer need not defend the action upon 28 tender. 5 See Travelers Prop. v. Centex Thus, 1 In this case, there are disputed issues of material fact as to 2 when Travelers had sufficient information to make an informed 3 decision on Centex's tenders. 4 evidence showing that, in tendering the Acupan action under the 5 Fresno Precision policy, Centex initially failed to provide its 6 subcontracts with Frenso Precision, which were necessary to trigger 7 coverage under the policy. 8 when Travelers had a duty to defend is central to the claims and 9 counterclaims asserted by the parties. For example, Travelers has submitted See Lopez Decl. Exs. B-C. The issue of For example, if that duty United States District Court For the Northern District of California 10 arose well before Travelers provided Centex with a defense in the 11 underlying actions, then Centex may be able to succeed on its 12 claims for breach and bad faith. 13 provided a defense, then Centex's claims may lack merit. 14 if Travelers later discovered facts that conclusively refuted the 15 potential for coverage under its policies, then Travelers would no 16 longer have had a duty to defend. 17 If it arose at the time Travelers Centex does not address these issues. Further, Instead, it essentially 18 asks the Court to render summary judgment on Travelers' duty to 19 defend in a vacuum, without reference to any of the claims involved 20 in this action. 21 duty to defend the underlying actions at some unspecified point in 22 time, it is unclear how that would narrow the scope of the issues 23 set for trial. 24 summary judgment with respect to Travelers' duty to defend in the 25 Adkins, Acupan, Conner, and Garvey actions. Even if the Court could find that Travelers had a Accordingly, the Court DENIES Centex's motion for 26 B. 27 Centex next asks the Court to find Travelers has a duty to pay 28 Travelers' Duty to Pay Centex's Full Defense Costs Centex's full defense costs, not simply a pro-rata share, and that 6 Under California law, in actions where all the claims asserted 3 against the insured are at least potentially covered, the insured 4 has a duty to defend. 5 1997). 6 least potentially covered by an insurer and the others are not -- 7 "the insurer has a duty to defend the action in its entirety." 8 at 47-48. 9 defend the entire underlying action, allocation of defense costs 10 United States District Court Travelers failed to meet this duty. 2 For the Northern District of California 1 Centex XMSJ/MSJ Opp'n at 40. may later be apportioned in certain situations involving multiple 11 insurers." 12 App. 4th 666, 689-90 (Cal. Ct. App. 1997). 13 cannot use its right to seek contribution from other insurers to 14 avoid fronting an insured's full defense costs. 15 Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 105-06 16 (Cal. Ct. App. 1996). Buss v. Super. Ct., 16 Cal. 4th 35, 46 (Cal. Moreover, in "mixed actions" -- in which some claims are at Id. "[A]lthough an insurer owing a duty to defend must Cnty. of San Bernardino v. Pac. Indem. Co., 56 Cal. An insurer generally Armstrong World Travelers argues that Centex cannot claim that it was provided 17 18 with an incomplete defense because, from the beginning, either 19 Travelers or some other insurer has paid Centex's defense costs in 20 all of the underlying actions. 21 29. 22 competent, admissible evidence of its actual reasonable and 23 necessary defense fees. 24 that Centex engaged in improper billing practices through which it 25 misrepresented the contribution of other insurers and induced 26 Travelers to overpay for Centex's defense costs in the underlying 27 actions. 28 exist triable issues of material fact as to whether Centex has Trav. MSJ Reply/XMSJ Opp'n at 27- Travelers also argues that Centex has failed to provide Id. at 31-32. Id. at 29-31. Finally, Travelers argues In sum, Travelers contends that there 7 1 received all funds necessary to mount a reasonable defense. 2 The Court agrees with Travelers, at least in part. Id. Even if 3 Travelers does have a duty to defend, there are triable issues of 4 fact as to whether it has fulfilled that obligation. 5 have presented declarations from their attorneys concerning the 6 amounts Travelers has paid towards Centex's defense in the 7 underlying actions. 8 and other insurers have overpaid Centex's defense fees, while 9 Centex's evidence indicates Travelers still owes Centex thousands Both parties Travelers' evidence indicates that Travelers United States District Court For the Northern District of California 10 of dollars. 11 evidence is more credible. 12 Travelers' argument that Centex engaged in improper billing 13 practices, other than to argue that Travelers is procedurally 14 barred from raising such an argument. 15 this argument is barred, and the Court fails to see why it is 16 improper. 17 At summary judgment, the Court cannot determine which Further, Centex has failed to address Centex has not explained why Accordingly, the Court declines to find that Travelers failed 18 to provide a complete defense to Centex, and Centex's motion is 19 DENIED as to this issue. 20 C. The Cooperation Clause 21 Travelers has alleged that Centex breached the cooperation 22 clause in its policies by failing to (1) acknowledge Travelers' 23 right to control Centex's defense in the underlying actions and (2) 24 seek recovery of defense fees and costs incurred in underlying 25 actions from other insurance carriers. 26 Compl.") ¶ 66. 27 aspect of this claim on the ground that Centex was not required to 28 seek recovery from other insurers. See ECF No. 5 ("Am. Centex now moves for summary judgment on the second 8 This argument has merit. 1 Neither party specifically directs the Court to the 2 cooperation clauses in the relevant agreements; however, they 3 appear to be referring to the clauses which provide that Centex 4 must: (1) "cooperate with [Travelers] in the investigation, 5 settlement, or defense of the claim or suit"; and (2) "do all 6 that's possible after the loss to preserve for [Travelers] any . . 7 . right of recovery [from a third party]; and cooperate with 8 [Travelers] in any attempt to exercise any . . . right of recovery 9 [from a third party]." United States District Court See Carrillo Decl. Ex. A at 28, 69. Nothing in these cooperation clauses suggests that Centex had 10 For the Northern District of California 2 11 an obligation to tender a defense to other insurers. 12 California law, Travelers was entitled to seek contribution for 13 Centex's defense costs from other insurance carriers, even if 14 Centex did not tender its defense or provide notice to those other 15 carriers. 16 the insurers' liability is apportioned pursuant to the 'other 17 insurance' clauses of the policies or under the equitable doctrine 18 of contribution." 19 28 Cal. 4th 1059, 1080 (Cal. 2002) (citation and quotations 20 omitted). 21 insurers did not affect Travelers' rights to seek contribution from 22 other carriers who may have insured the losses alleged in the 23 underlying actions. 24 admitted that Travelers does not believe that its insured have 25 contractual obligations to provide notice of their claims to other 26 2 27 28 Under "When multiple policies are triggered on a single claim, Dart Indus., Inc. v. Commercial Union Ins. Co., Thus, Centex's refusal to tender its claims to other In fact, Travelers' own Rule 30(b)(6) witness The parties are reminded that the Court is not required to independently search the record on motions for summary judgment. See Carmen v. San Francisco Unified Sch. Dist., 237 F.3d 1026, 1031 (9th Cir. 2001). All future citations to the record should include pin cites. 9 1 carriers or to pursue insurance claims against other carriers. 2 Hayes Decl. Ex. H8 at 245-49. Case law from other jurisdictions also suggests that insureds 3 4 do not have an independent duty to seek contribution from other 5 insurers. Specifically, the Seventh Circuit has stated: 6 [Insureds] have the right to choose which insurer they want to defend them, and their doing so cannot be said to legally impair any right they had against any other insurers. Indeed, [the plaintiff insurer] has cited no cases from any jurisdiction holding that an insurer may force its insured, under the language of the insurance policy, to tender its claims to another insurance company as well. 7 8 9 United States District Court For the Northern District of California 10 11 12 Emp'rs Ins. of Wausau v. James McHugh Const. Co., 144 F.3d 1097, 13 1106 (7th Cir. 1998). Travelers does not directly respond to these points. 14 Instead, 15 it asserts two new theories of how Centex allegedly breached the 16 cooperation clause. 17 Travelers' right of recovery against other insurers by (1) failing 18 to provide Travelers with requested information regarding other 19 additional insured tenders in a timely manner, and (2) specifically 20 directing other carriers to stop contributing to Centex's defense. 21 Trav. MSJ Reply/XMSJ Opp'n at 17-18. 22 in Travelers' Amended Complaint, and it would be unfair to allow 23 Travelers to assert them now.3 24 amend and the discovery cut-off passed long ago. 25 3 26 27 28 Specifically, it argues that Centex impaired These theories were not pled Travelers has not sought leave to See ECF No. 58. In its opposition papers, Travelers also frames these new allegations as breaches of the covenant of good faith and fair dealing. However, according to Travelers' pleadings, its bad faith claim is predicated on "[Centex's] continuous refusal to acknowledge [Travelers'] right to select defense counsel thereby impeding [Travelers'] ability to provide a defense . . . ." Am. Compl. ¶ 111. 10 In any event, Travelers' second new claim fails as a matter of 1 2 law. Centex's decision to seek 100 percent of its defense costs 3 from Travelers does not affect Travelers' right to seek 4 contribution from other insurance carriers. 5 that these carriers can now argue that they have no contribution 6 obligations because Centex represented that Travelers did not want 7 them to contribute. 8 argument is inconsistent with the evidence presented by Travelers, 9 which merely shows that Centex told other carriers that Travelers Travelers contends MSJ Reply/XMSJ Opp'n at 17-18. But this United States District Court For the Northern District of California 10 had acknowledged a defense obligation and that Centex was not 11 currently seeking contribution from anyone else. 12 Decl. Exs. C, F. 13 other insurers that Travelers had waived its right to seek 14 contribution. See Aguilera There is no indication that Centex informed its 15 Accordingly, the Court GRANTS Centex's motion for partial 16 summary judgment with respect to Travelers' claim for breach of the 17 cooperation clauses and finds that Centex did not breach its duty 18 to cooperate by failing to seek recovery of its defense fees from 19 other carriers. 20 undisturbed in all other respects. 21 D. Travelers' Right to Control Centex's Defense in the Acupan and Conner Actions 22 23 Travelers' claim for breach of contract remains Centex also asks the Court to find that Travelers' delay in 24 responding to Centex's tenders of the Acupan and Conner actions 25 divested Travelers of its right to control the defense of those 26 actions. 27 Acupan action to Travelers under the Fresno Precision policy on 28 April 8, 2010. Centex XMSJ/MSJ Opp'n at 51. Lopez Decl. Ex. A. 11 Centex first tendered the On September 13, 2010, 1 Travelers declined to provide coverage for the Acupan action, but 2 it reversed course on June 28, 2011. 3 The delay associated with the Conner action was much shorter. 4 Centex tendered the Conner action on September 8, 2010, and 5 Travelers asked for additional information on September 22, 2010. 6 Id. Exs. O27, O28, O38. 7 additional information, Travelers agreed to provide an equitable 8 defense on January 21, 2011. 9 accepted Centex's tenders in the Conner and Acupan actions, Owens Decl. Ex. O14, O18. After receiving and reviewing this Id. Ex. O29. After Travelers United States District Court For the Northern District of California 10 Travelers attempted to appoint its own counsel to defend those 11 actions. 12 counsel, and insisted that the law firm of Newmeyer and Dillion LLP 13 ("Newmeyer") continue to manage its defense. 14 Travelers lost its right to appoint new counsel by waiting too long 15 to accept Centex's tenders. 16 actions amount to breach of the cooperation clauses in the relevant 17 insurance agreements. Centex refused to cooperate with Travelers proposed Centex contends that Travelers asserts that Centex's This is not the first time this issue has been raised in this 18 19 case. 20 that Travelers' delay divested it of the right to control the 21 Adkins and Garvey actions. 22 ECF No. 56 ("May 10, 2012 Order").4 23 lost the right to control the Adkins and Garvey actions because it 24 waited over nine months to provide Centex with a defense in those 25 actions and because Travelers only agreed to provide a defense 26 after Centex brought suit for Travelers' failure to defend. 27 4 28 Centex previously moved for summary judgment on the grounds ECF No. 21. That motion was granted. The Court held that Travelers Id. at Travelers Prop. Cas. Co. of Am. v. Centex Homes, 2012 WL 1657121, 2012 U.S. Dist. LEXIS 65834 (N.D. Cal. May 10, 2012). 12 1 3-5, 10-11. The Court reasoned: "As the duty to defend arises 2 immediately upon tender, Travelers' delay in providing Centex with 3 a defense divested it of the right to control that defense." 4 at 10. Id. Having reviewed the parties' briefs and new authority offered 5 6 by Travelers, the Court finds that its prior decision was in error 7 and would work a manifest injustice.5 8 insurer cannot lose its right to control the defense of its insured 9 through delay alone. The Court finds that an Rather, it may only lose that right through United States District Court For the Northern District of California 10 waiver, forfeiture, or estoppel, none of which have been proven by 11 Centex. 12 Under California law, an insurer's duty to defend is 13 immediate, "arising on tender of defense and lasting until the 14 underlying lawsuit is concluded or until it has been shown that 15 there is no potential for coverage . . . . 16 immediate duty to defend is necessary to afford the insured . . . 17 the full protection of a defense on its behalf." 18 Corp. v. Sup. Ct., 6 Cal. 4th 287, 295 (Cal. 1993). 19 insurer takes on the duty to defend, it generally has the absolute 20 right to manage the defense and the insured is required to 21 surrender all control. 22 71 Cal. App. 4th 782, 787 (Cal. App. 1999). 23 control the insured's defense extends to the right to select legal 24 counsel. 25 Civ. S-04-2445 FCD, 2005 WL 1367096, at *7, 2005 U.S. Dist. LEXIS 26 5 27 28 Imposition of an Montrose Chem. Once an See Safeco Ins. Co. of Am. v. Super. Ct., The insurer's right to Carolina Cas. Ins. Co. v. Bolling, Walter & Gawthrop, No. Under the law of the case doctrine, courts generally refuse to reopen issues that have already been decided. Gonzalez v. Arizona, 677 F.3d 383, 390 n.4 (9th Cir. 2012). However, a court may depart from the law of the case where its prior decision was erroneous and would work a manifest injustice. Id. 13 1 20485, at *21 (E.D. Cal. May 31, 2005). However, "[w]hen an 2 insurer wrongfully refuses to defend, the insured is relieved of 3 his or her obligation to allow the insurer to manage the litigation 4 and may proceed in whatever manner is deemed appropriate." 5 v. Worthington, 57 Cal. App. 4th 188, 196 (Cal. Ct. App. 1997). Eigner 6 Centex argues that because the duty to defend is immediate, an 7 insurer irrevocably loses its right to control an insured's defense 8 if the insurer does not provide an immediate defense, even if the 9 insurer later agrees to defend and offers to retroactively pay the United States District Court For the Northern District of California 10 insured's legal fees. Centex XMSJ/MSJ Opp'n at 52. But the 11 authority cited by Centex stands for much more limited 12 propositions. 13 insured has the right to control its own defense where the insurer 14 refuses to provide one, Eigner, 57 Cal. App. 4th at 196; (2) an 15 insured may settle a claim without the consent or approval of the 16 insurer where the insurer denies liability and refuses to provide a 17 defense, St. Louis Dressed Beef & Provision Co. v. Maryland Cas. 18 Co., 201 U.S. 173, 181 (1906); and (3) an insurer may irrevocably 19 waive its right to control an insured's defense through "a direct 20 and positive written request by it to the insured to take charge of 21 the litigation and defend the suit," Witt v. Universal Auto. Ins. 22 Co., 116 S.W.2d 1095, 1098 (Tex. Civ. App. 1938). 23 is not applicable here. 24 provide a defense in each of the underlying actions. 25 Travelers is not challenging a settlement reached by Centex before 26 Travelers offered to defend the underlying actions. 27 Travelers did not expressly waive its right to control Centex's 28 defense. Specifically, this authority holds that (1) an This authority First, Travelers has since offered to Second, Third, Rather, it has repeatedly reserved its rights under the 14 1 relevant insurance agreements. 2 The California Court of Appeal's decision in Chase v. Blue 3 Cross of California, 42 Cal. App. 4th 1142 (Cal. Ct. App. 1996), is 4 more on point. 5 its right to compel arbitration because its communications with the 6 insured did not mention the arbitration provision in the parties' 7 insurance contract. 8 that an insurer could only lose a contractual right to arbitration 9 under theories of waiver, forfeiture, or estoppel. The issue in Chase was whether an insurer had lost 42 Cal. App. 4th at 1149. The court found Id. at 1151. United States District Court For the Northern District of California 10 While the Chase court was primarily concerned with an arbitration 11 clause, its holding has broader implications. 12 conclusion, the Court relied on a number of authorities which dealt 13 with other types of contractual rights provided by insurance 14 policies. 15 Inc., 11 Cal. 4th 1 (Cal. 1995); Intel Corp. v. Hartford Acc. & 16 Indem. Co., 952 F.2d 1551 (9th Cir. 1991)). 17 generally referred to the means by which an insurer may lose a 18 contractual right, not just the right to arbitration. 19 In reaching its See id. at 1149-51 (citing Waller v. Truck Ins. Exch., Further, the Court There are also policy justifications for allowing an insurer 20 to reserve its right to control an insured's defense and to assume 21 control over the insured's defense after a delay. 22 insurer may have a duty to indemnify the insured, the insurer often 23 has the most at stake in the outcome of the underlying litigation. 24 As Centex points out, allowing an insurer to appoint new counsel in 25 the middle of a case may not always be the best strategy. 26 since the insurer may be liable for any judgments rendered against 27 the insured, the insurer is often in the best position to make 28 decisions about selecting counsel. 15 Since the But Additionally, the rule proposed 1 by the Court does not relieve an insurer of its duty to provide an 2 "immediate defense." 3 independent counsel due an insurer's delay, the insurer may later 4 be liable for that independent counsel's fees. 5 case, Travelers has offered evidence that it has paid Newmeyer for 6 all of the time it devoted to the underlying actions, even the 7 hours billed prior to Travelers' acceptance of Centex's tenders. 8 Further, in certain circumstances, an insurer's refusal to provide 9 an immediate defense may render it liable for breach of contract or United States District Court For the Northern District of California 10 If an insured is forced to hire its own In fact, in this breach of the covenant of good faith and fair dealing. Accordingly, the Court DENIES Centex's motion for summary 11 12 judgment on the issue of whether Travelers has lost its right to 13 control the defense of the Acupan and Conner actions. 14 also VACATES its prior decision that Travelers lost its right to 15 control the defense of the Adkins and Garvey actions. The Court 16 E. Travelers' Claim for Reimbursement 17 Travelers has asserted a claim for reimbursement in connection 18 with the Kent action. 19 to defend Centex in the Kent action pursuant to the Foremost 20 Superior policy and subsequently paid for a portion of Centex's 21 defense fees in that action. 22 to reimbursement from Centex because Centex billed Travelers and 23 other insurers for more than 100 percent of its defense costs and 24 because Foremost Superior was ultimately dismissed from the Kent 25 action without contributing toward any settlement amount.6 26 116. 27 6 28 Am. Complaint. ¶¶ 113-117. Travelers agreed Travelers alleges that it is entitled Id. ¶ Centex now moves for summary judgment on Travelers' The parties agree that Travelers is pursuing a claim for reimbursement, not a claim for misrepresentation or fraud. Trav. MSJ Reply/XMSJ Opp'n at 62; Centex XMSJ Reply at 31. 16 See 1 reimbursement claim. Insurers have a duty to defend every aspect of a mixed action, 2 3 i.e., an action brought against the insured that includes claims 4 that are covered (or at least potentially covered), as well as 5 claims that are not potentially covered. 6 The insurer may later seek reimbursement from the insured for 7 defending claims that are not even potentially covered, but may not 8 seek reimbursement for claims that are potentially covered. 9 50. Buss, 16 Cal. 4th at 48. Id. at The insurer's right to reimbursement is limited to defense United States District Court For the Northern District of California 10 costs that can be allocated solely to claims that are not even 11 potentially covered. 12 providing an entire defense, can prove that a claim was not even 13 potentially covered because it did not even possibly embrace any 14 triggering harm of the specified sort within its policy or periods 15 caused by an included occurrence, it should have that opportunity." 16 State v. Pac. Indem. Co., 63 Cal. App. 4th 1535, 1550 (Cal. Ct. 17 App. 1998) (emphasis in the original) (internal quotations 18 omitted). 19 Id. at 52. Thus, "[i]f [an insurer], after Centex argues that Travelers is not entitled to reimbursement 20 because Travelers failed to pay for all of Centex's defense costs 21 in the Kent action. 22 where, as here, multiple insurers contribute toward an insured's 23 defense, an insurer does not need to pay for 100 percent of the 24 insured's defense costs in order to provide an entire defense. 25 Travelers v. Centex I, 2011 WL 1225982, at *4 (citing San Gabriel 26 Valley Water Co. v. Hartford Accident & Indem. Co., 82 Cal. App. 27 4th 1230, 1241 (Cal. Ct. App. 2000)). 28 issues of fact as to whether Travelers paid its share of Centex's Centex XMSJ/MSJ Opp'n at 59-60. 17 However, Further, there are triable 1 defense fees. 2 insurers for defense costs, the exact amount of Centex's actual 3 defense costs remains unclear. 4 fact as to whether Centex is trying to hold Travelers responsible 5 for defense costs incurred before Centex tendered the Kent action 6 to Travelers under the Foremeost Superior policy and after Foremost 7 Superior was dismissed from the Kent action. 8 9 For example, because Centex may have overbilled its There are also triable issues of Next, Centex argues that Travelers cannot seek reimbursement because it did not provide an immediate defense to Centex. United States District Court For the Northern District of California 10 However, Centex cites no California authority that would support 11 such a proposition. 12 48-49, the California Supreme Court held that the insurer's duty to 13 defend generally arises as soon as tender is made. 14 does not hold that an insurer irrevocably loses its right to seek 15 reimbursement for payments made on a clearly uncovered claim if the 16 insurer fails to provide an immediate defense. 17 arguably stands for the contrary proposition: As Centex points out, in Buss, 16 Cal. 4th at However, Buss In fact, Buss 18 19 20 21 22 23 24 25 26 27 Under the policy, the insurer does not have a duty to defend the insured as to the claims that are not even potentially covered. With regard to defense costs for these claims, the insurer has not been paid premiums by the insured. It did not bargain to bear these costs. To attempt to shift them would not upset the arrangement. The insurer therefore has a right of reimbursement that is implied in law as quasi-contractual, whether or not it has one that is implied in fact in the policy as contractual. As stated, under the law of restitution such a right runs against the person who benefits from "unjust enrichment" and in favor of the person who suffers loss thereby. The "enrichment" of the insured by the insurer through the insurer's bearing of unbargained-for defense costs is inconsistent with the insurer's freedom under the policy and therefore must be deemed "unjust." 28 18 1 16 Cal. 4th at 50-51 (internal citations and footnotes omitted). 2 Centex is essentially arguing that Travelers' alleged failure to 3 provide an immediate defense gave Centex a blank check to overbill 4 for defense costs. 5 Such an outcome would be inequitable. Even if an insured could lose its right to reimbursement by 6 failing to provide an immediate defense, triable issues of fact 7 exist as to whether Travelers provided a timely defense to Centex 8 in the Kent action. 9 to Travelers on February 7, 2008. Centex tendered the defense of the Kent action Imamura Decl. Ex. D. On United States District Court For the Northern District of California 10 February 19, 2008, Travelers indicated that it was still 11 investigating the claim and requested additional information from 12 Centex. 13 the requested information. 14 agreed to defend Centex as an additional insured, but it noted that 15 it did not have sufficient information upon which to base its 16 determination of coverage, and therefore requested additional 17 information. 18 matter of law, Travelers unduly delayed responding to Centex's 19 tenders, especially in light of the fact that Travelers had a right 20 to conduct a reasonable investigation to determine whether it had a 21 duty to defend. 22 Cal. App. 3d 538, 548 (Cal. Ct. App. 1971) ("'[T]he duty to defend 23 should be fixed by the facts which the insurer learns from the 24 complaint, the insured, or other sources.'") 25 Id. Ex. E. Centex subsequently provided at least some of Id. Ex. G. Id. Ex. F. On May 19, 2008, Travelers The Court declines to find that, as a Cf. State Farm Mut. Auto. Ins. Co. v. Flynt, 17 Centex also argues that Travelers' reimbursement claim is 26 barred because it was a compulsory counterclaim in an earlier 27 action between Travelers and Centex pending before Judge Charles 28 Breyer in this Court, Travelers v. Centex I, supra. 19 In that 1 action, Centex counterclaimed against Travelers for breach of 2 contract, declaratory relief, and bad faith because of Travelers' 3 alleged failure to honor its defense obligations in the Kent 4 Action. 5 answer in November 2010, but did not assert a counterclaim for 6 reimbursement. 7 did not learn that Centex was overbilling for defense costs until 8 Travelers deposed a number of Centex witnesses in April and May of 9 2011. '57 Action ECF No. 37 ¶¶ 37-42, 70. '57 Action ECF No. 42. Travelers filed an Travelers asserts that it Trav. MSJ Reply/XMSJ Opp'n at 64-65. In May 2011, Centex United States District Court For the Northern District of California 10 moved to amend its counterclaim to dismiss its claims related to 11 the Kent action, arguing that Travelers would not be prejudiced by 12 such a dismissal. 13 Judge Breyer stayed Travelers v. Centex I and ordered Centex to 14 file an amended complaint. 15 action was filed on July 25, 2011, and Travelers amended its 16 complaint in this action to add a claim for reimbursement one month 17 later. 18 Centex I pursuant to a settlement reached by the parties. 19 Action ECF No. 413. 20 '57 Action ECF No. 306. On August 5, 2011, '57 Action ECF No. 365. The instant Over a year later, Judge Breyer dismissed Travelers v. '57 Under Federal Rule of Civil Procedure 13, a counterclaim 21 arising out of the same transaction or occurrence that is the 22 subject matter of the opposing party's claim is compulsory. 23 R. Civ. P. 13(a)(1). 24 filing of a duplicative action instead of a compulsory 25 counterclaim." 26 (citing 6 Wright & Miller, Federal Practice and Procedure § 1418 27 (2d ed. 1990)). 28 should stay the proceedings in the second-filed action once it Fed. However, "[n]othing in Rule 13 prevents the Adam v. Jacobs, 950 F.2d 89, 93 (2d Cir. 1991) Ideally, the court in the first-filed action 20 1 becomes aware that the second-filed action involves a compulsory 2 counterclaim. 3 reimbursement claim in this action while the Travelers v. Centex I 4 was still pending before Judge Breyer. 5 either party alerted Judge Breyer to the duplicative claim.7 6 Judge Breyer took no action to stay the Travelers' reimbursement 7 claim in this action, Travelers is not barred from pursuing it now. 8 Accordingly, Centex's cross-motion for summary judgment is 9 Id. In this case, Travelers asserted its There is no indication that Since DENIED with respect to Travelers' claim for reimbursement. United States District Court For the Northern District of California 10 11 II. TRAVELERS' MOTION FOR PARTIAL SUMMARY JUDGMENT Travelers moves for partial summary judgment on Centex's 12 13 counterclaims for breach of contract and bad faith on three 14 grounds: (1) Centex has not suffered damages that could support its 15 claims for breach of contract and bad faith; (2) Centex cannot 16 recover for breach of contract and bad faith with respect to the 17 Conner action; (3) Centex is not entitled to independent counsel in 18 any of the underlying actions because no significant conflict 19 exists. 20 A. 21 Travelers first argues that Centex's counterclaims fail The Court addresses each of these issues below. Centex's Damages 22 because Centex has not produced any evidence that it sustained 23 damages. 24 compensated Centex for all claimed amounts submitted in connection 25 7 26 27 28 Travelers is essentially arguing that it fully Travelers moved to relate the instant action to Travelers v. Centex I in August 2012, long after it asserted a claim for reimbursement in connection with the Kent action. '57 Action ECF No. 395. Centex opposed Travelers' motion to relate, representing that the two matters involved different underlying construction defect actions. '57 Action ECF No. 399 at 11. The motion was ultimately denied by Judge Breyer. '57 Action ECF Nos. 399, 406. 21 1 with the underlying actions. 2 ground that Travelers has refused to reimburse Centex's counsel, 3 Newmeyer, at its full hourly rates. 4 Centex disputes this claim on the It is undisputed that Centex paid Newmeyer out-of-pocket at a 5 rate of $225 per hour. Centex claims that this is only a fraction 6 of Newmeyer's standard rates and that Newmeyer's attorneys bill as 7 much as $515 per hour. 8 fronting a portion of Newmeyer's rates until it could convince or 9 compel Travelers to fund Centex's defense and pay the remainder of Centex also claims that it was merely United States District Court For the Northern District of California 10 Newmeyer's fees. 11 Newmeyer and Centex struck an under-the-table deal whereby Newmeyer 12 would charge Centex one rate and then charge Travelers a 13 significantly higher rate. 14 obligated to reimburse Newmeyer at a rate of $225 per hour, because 15 that is the rate that Newmeyer was charging Centex. 16 Travelers disputes this account, arguing that Travelers contends that it is only Both parties point to the deposition testimony of Centex's 17 Assistant General Counsel, Jarrett Coleman. Mr. Coleman testified 18 that Newmeyer bills Centex at a discounted rate of $225 per hour, 19 but Newmeyer ultimately expects that it will collect its full 20 hourly rate from Centex once Centex is reimbursed for defense costs 21 by its insurance carriers. 22 what would happen if Centex's insurance claims were unsuccessful, 23 Mr. Coleman responded: "You know, we ultimately will have a 24 discussion about where that ends . . . depending on how much 25 recovery. 26 Centex argues that this testimony shows that Newmeyer and Centex 27 never agreed to a rate of $225 per hour. 28 this testimony shows that Centex was never obligated to pay Myron Decl. Ex. F at 70. It really has not been an issue with us." 22 When asked Id. at 71. Travelers argues that 1 Newmeyer anything more than $225 per hour. The Court finds that there is a triable issue of fact as to 2 3 exactly what rate was agreed to by Newmeyer and Centex. Thus, 4 there is also a triable issue of fact as to Travelers' 5 reimbursement obligations in the underlying actions, as well as 6 Centex's damages. 7 judgment on this issue is DENIED. Accordingly, Travelers' motion for summary 8 B. The Conner Action 9 Next, Travelers argues that Centex cannot sustain its burden United States District Court For the Northern District of California 10 on it counterclaims for breach of contract and bad faith with 11 respect to the Conner action because Travelers promptly agreed to 12 provide a full and complete defense of that action. 13 undisputed that Centex refused to accept the defense offered by 14 Travelers because of a dispute over the selection of legal counsel. 15 Centex wanted to appoint Newmeyer, its own independent counsel. 16 Travelers wanted to appoint David Lee of the Law offices of Lee, 17 Hernandez, Brooks, Garafalo & Blake. 18 Travelers breached its duty to defend in the Conner action by (1) 19 failing to immediately defend Centex and (2) refusing to provide a 20 full and complete defense.8 i. 21 It is Centex contends that The duty to provide an immediate defense As discussed at length in Section I.D, the duty to defend is 22 23 immediate. 24 have yet to enunciate exactly what an immediate defense entails. 25 In Travelers v. Centex I, Judge Breyer found that Travelers 26 provided Centex with an immediate defense in a number of other 27 8 28 Buss, 16 Cal. 4th at 49. However, California courts Centex also argues that Travelers breached its duty to defend by failing to appoint independent counsel. This issue is discussed in Section II.C infra. 23 1 construction defect actions when it waited three to four months to 2 accept Centex's tenders. 3 reasoned that "an insurer must reasonably investigate to determine 4 if a duty to defend exists" and, "if there was any unreasonable 5 delay in [Travelers'] response to [Centex's] tenders, it occurred 6 because [Centex] failed to promptly provide the reasonable, 7 requested information to facilitate [Travelers'] investigation." 8 Id. 9 on September 8, 2010, and Travelers asked for additional 2011 WL 1225982, at *4. The facts here are similar. Judge Breyer Centex tendered the Conner action United States District Court For the Northern District of California 10 information on September 22, 2010. Owens Decl. Exs. O27, O28, O38. 11 After receiving and reviewing this additional information, 12 Travelers agreed to provide an equitable defense on January 21, 13 2011. Id. Ex. O29. Centex argues that the 135-day delay in the Conner action is 14 15 unreasonable, pointing to the California Fair Claims Settlement 16 Practices ("Fair Claims") regulations. 17 54. 18 receiving proof of claim, every insurer . . . shall immediately, 19 but in no event more than forty (40) calendar days later, accept or 20 deny the claim . . . ." 21 Travelers argues that Centex submitted a "notice of legal action," 22 not a "proof of claim," and thus the forty-day requirement is 23 inapplicable here. 24 Centex XMSJ/MSJ Opp'n at The Fair Claims regulation cited by Centex provides: "Upon Cal. Code Regs. tit. 10, § 2695.7(b). Trav. MSJ Reply/XMSJ Opp'n at 41. The Fair Claims regulations define "proof of claim" as "any 25 evidence or documentation in the possession of the insurer, whether 26 as a result of its having been submitted by the claimant or 27 obtained by the insurer in the course of its investigation, that 28 provides any evidence of the claim and that reasonably supports the 24 1 magnitude or the amount of the claimed loss." 2 10, § 2695.2(s). 3 as "notice of an action commenced against the insurer with respect 4 to a claim, or notice of action against the insured received by the 5 insurer, or notice of action against the principal under a bond, 6 and includes any arbitration proceeding." 7 regulations require insurers to respond to communications regarding 8 claims within certain time periods, but they relieve insurers from 9 those requirements where a notice of legal action is involved. United States District Court For the Northern District of California 10 Cal. Code Regs. tit. The regulations define "notice of legal action" Id. § 2695.2(o). The Id. § 2695.5(b), (e). Travelers interpretation of the regulations is more 11 12 convincing, especially since the "magnitude or the amount of the 13 claimed loss" is generally unknown at the time that an insured asks 14 an insurer to defend a legal action. 15 event, regardless of whether Centex's tender constitutes a notice 16 of legal action or a proof of claim, the regulations are not 17 dispositive. 18 constitutes evidence of bad faith on the part of the insurer. 19 do they provide that an insurer may delay responding to a notice of 20 legal action for 135 days and escape liability for breach of 21 contract or bad faith. See id. § 2695.2(s). In any They do not provide that a delay exceeding forty days Nor The Court finds that the best course would be to allow the 22 23 jury, considering the totality of the evidence, to determine 24 whether Travelers breached its duty to defend or engaged in bad 25 faith in handling Centex's claim. 26 to find that Travelers provided Centex with an immediate defense as 27 a matter of law. 28 /// 25 Accordingly, the Court declines ii. 1 The duty to provide a full and complete defense Under California law, "[i]t is settled that where an insurer 2 3 has a duty to defend, the obligation generally applies to the 4 entire action, even though the suit involves both covered and 5 uncovered claims, or a single claim only partially covered by the 6 policy." 7 4th 571, 575 (Cal. Ct. App. 2001) (citing Buss, 16 Cal. 4th at 48- 8 49). 9 failing to offer a full and complete defense in the Conner action. Presley Homes, Inc. v. Am. States Ins. Co., 90 Cal. App. Centex argues that Travelers breached its duty to defend by United States District Court For the Northern District of California 10 Centex XMSJ/MSJ Opp'n at 56-58, 81. Specifically, Centex points to 11 the fact that, in agreeing to defend the Conner action, Travelers 12 reserved its rights under the Executive Landscape policy: 13 14 15 16 17 [P]lease be advised that the additional insured coverage for Executive [Landscape] is limited to covered damages arising out of the Executive[] [Landscape's] work as a landscape subcontractor . . . . Please be advised that Travelers as an additional insured carrier for Centex will only consider reasonable and necessary fees and costs on an equitable basis from 09/08/10 (post tender) forward to fund and/or resolve the additional insured obligation for this matter. 18 19 Id. (citing Owens Decl. Ex. O29). 20 is any indication that Travelers withheld defense funds requested 21 by Centex. 22 defense payments in connection with the Conner action and offered 23 to appoint counsel to represent Centex. 24 Court is aware of no authority which holds that an insurer fails to 25 provide a full and complete defense when it merely reserves its 26 rights under the policy. 27 28 Lacking from Centex's discussion In fact, Travelers has submitted evidence that it made See Shaw Decl. Ex. A. Nevertheless, for the reasons set forth in Section II.B.i supra, the Court DENIES Travelers motion for summary judgment on 26 The 1 Centex's claims for breach of contract and bad faith with respect 2 to the Conner action. Centex's Right to Cumis Counsel 3 C. 4 In California, an insured is entitled to independent counsel, 5 a.k.a. Cumis counsel, where a conflict exists because of an 6 insurers' control over the litigation.9 7 mere possibility of an unspecified conflict does not require 8 independent counsel. 9 theoretical, actual, not merely potential." Cal. Civ. Code § 2860. The conflict must be significant, not merely Dynamic Concepts, Inc. United States District Court 10 For the Northern District of California "A v. Truck Ins. Exch., 61 Cal. App. 4th 999, 1007 (Cal. Ct. App. 11 1998). 12 actions based on Travelers' reservations of rights, as well as 13 perceived ethical conflicts on the part of Travelers' counsel. 14 Travelers now moves for summary judgment on this issue, arguing 15 that the potential conflicts cited by Centex do not justify the 16 appointment of Cumis counsel. 17 set forth below, the Court agrees with Travelers. Centex asserts a right to Cumis counsel in the underlying i. 18 Trav. MSJ at 29-33. For the reasons Travelers reservation of rights Cumis counsel is generally required "where the insurer 19 20 reserves its rights on a given issue and the outcome of that 21 coverage issue can be controlled by the insurer's retained 22 counsel." 23 1093, 1101 (Cal. Ct. App. 2001). 24 to independent counsel where the coverage issue is independent of, James 3 Corp. v. Truck Ins. Exch., 91 Cal. App. 4th However, "there is no entitlement 25 26 27 28 9 The term "Cumis counsel" is derived from the California Court of Appeal's decision in San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal. App. 3d 358 494 (Cal. Ct. App. 1984), superseded by statue, Cal. Civ. Code § 2860, as recognized in United Enters., Inc. v. Super. Ct., 183 Cal. App. 4th 1004, 1010 (Cal. Ct. App. 2010). 27 1 or extrinsic to, the issues in the underlying action." Gafcon, 2 Inc. v. Ponsor & Assocs., 98 Cal. App. 4th 1388, 1422 (Cal. Ct. 3 App. 2002) (quotations omitted). 4 reservation of rights is based on coverage disputes which have 5 nothing to do with the issues being litigated in the underlying 6 action, there is no conflict of interest requiring independent 7 counsel.'" "Stated otherwise, 'where the Id. In support of its right to Cumis counsel, Centex points to a 8 United States District Court number of reservations of rights on the part of Travelers. 10 For the Northern District of California 9 Centex points out that Travelers reserved its right to deny 11 coverage on the grounds that there is either no property damage or 12 that the only property damage was to Centex's subcontractor's own 13 work. 14 Centex bore the risk of repairing or replacing faulty workmanship, 15 while Travelers bore the risk that faulty workmanship would give 16 rise to other types of property damage. 17 Travelers' reservations create an incentive for Travlers' defense 18 counsel to show that Centex's subcontractor's work was merely 19 faulty and did not give rise to property damage that would be 20 covered under the policy. 21 Centex XMSJ/MSJ Opp'n at 91-92. First, Under Travelers' policies, Centex argues that Id. This same argument was considered and rejected by the 22 California Court of Appeal in Blanchard v. State Farm Fire & 23 Casualty Co., 2 Cal. App. 4th 345 (Cal. Ct. App. 1991). 24 case, Blanchard involved an insurance dispute over an underlying 25 construction defect action concerning subcontractors' work. 26 App. 4th at 348-49. 27 in Blanchard did not cover the risk of repairing or replacing 28 faulty workmanship by the subcontractors. Like this 2 Cal. Like this case, the insurance policy at issue 28 Id. at 348. Like this 1 case, the general contractor in Blanchard argued that it was 2 entitled to Cumis counsel because the insurer reserved its rights 3 to deny coverage excluded by the policy. 4 this argument, reasoning that "insurance counsel had no incentive 5 to attach liability to [the general contractor]. 6 recognized its liability for certain damages flowing from [the 7 general contractor]'s liability; thus it was to the advantage of 8 both [the general contractor] and [the insurer] to minimize [the 9 general contractor]'s underlying liability." United States District Court For the Northern District of California 10 The court rejected Id. [The insurer] Id. at 350. In any event, Centex's argument is unpersuasive. The work of 11 Centex's subcontractors either caused other property damage or it 12 did not. 13 damage, then that property damage is covered under Travelers' 14 policies. 15 liable for that property damage. 16 Travelers are aligned. 17 either theoretical or actual. 18 an insured would be entitled to Cumis counsel whenever an insurer 19 chooses to reserve its right to deny coverage for losses not 20 covered by its policies. 21 If the subcontractors' work did cause other property If it did not, then neither Travelers nor Centex is Thus, the interests of Centex and Centex has failed to point to any conflict, Further, under Centex's reasoning, This is not the law. Next, Centex argues that it has a right to Cumis counsel 22 because Travelers reserved its right to deny coverage for work 23 performed by Centex or work performed by subcontractors other than 24 those insured by Travelers. 25 reasons that this reservation creates an incentive for Travelers to 26 pin the fault on parties other than covered subcontractors in order 27 to eliminate coverage. 28 caused the damage to the homeowners' properties in the underlying Id. Centex XMSJ/MSJ Opp'n at 91. Centex Centex contends that the issue of who 29 1 actions is currently being litigated, pointing to cross complaints 2 it filed against its subcontractors, including West Coast, Fresno 3 Precision, Executive Landscape, American Woodmark, and Foremost 4 Superior. 5 Id. (citing Owens Decl. Exs. O53, O56). The Court finds that the conflicts cited by Centex are either 6 non-existent or theoretical. Travelers' counsel could not possibly 7 attribute the alleged construction defects to Centex, because it is 8 undisputed that Centex did not perform any work of its own. 9 Further, Centex has failed to enunciate how Travelers' chosen United States District Court For the Northern District of California 10 counsel could possibly manipulate the evidence to pin the alleged 11 construction defects on subcontractors who are not insured by 12 Travelers. 13 Executive Landscape, American Woodmark, and Foremost Superior, 14 installed countertops, cabinets, landscaping, and tub and shower 15 surrounds. 16 example, attribute property damage arising from American Woodmark's 17 allegedly defective cabinets to some other construction defect or 18 some other contractor. 19 cannot be transformed into a broken pipe. 20 the control of counsel. 21 file a cross complaint against dozens of its subcontractors does 22 not show that there is a dispute over which subcontractor caused 23 what damage. 24 from third parties, regardless of who is at fault. Travelers' insureds, West Coast, Fresno Precision, It is unclear how Travelers' counsel could, for As Travelers points out, a broken cabinet These are facts beyond Moreover, the fact that Centex elected to It merely shows that Centex may be able to recover 25 Centex also claims that it is entitled to Cumis counsel 26 because Travelers reserved its right to deny coverage for property 27 damage that occurred outside of the policy period. 28 Opp'n at 92-93. Centex XMSJ/MSJ Specifically, Travelers concluded that the 30 1 property damage alleged in some instances must have occurred after 2 the policy period because the homes at issue were completed after 3 the policy period. 4 how Travelers' counsel could possibly manipulate these facts to 5 affect coverage. 6 there is a dispute about when the subject homes were completed. See Owens Decl. O18. Once again, it is unclear Centex has failed to present any evidence that Finally, Centex argues that it is entitled to Cumis counsel 7 8 because Travelers has reserved its right to seek reimbursement for 9 defense fees that do not arise out of Centex's subcontractors' United States District Court For the Northern District of California 10 work. 11 California Court of Appeal in James 3 Corporation. 12 refused to adopt a per se rule that independent counsel was 13 required whenever an insurer reserved its right to seek 14 contribution. 15 court ultimately held that the insured was not entitled to 16 independent counsel, reasoning: "[T]he allocation of defense costs 17 between covered and noncovered claims is not an issue that will be 18 litigated in the underlying . . . action. 19 nothing in the record to suggest that defense counsel would violate 20 his ethical duties to completely defend the insureds . . . ." 21 at 1109 (internal quotations and citations omitted). 22 XMSJ/MSJ Opp'n at 93-95. This issue was addressed by the The court James 3 Corp., 91 Cal. App. 4th at 1107-08. The Moreover, there is Id. Likewise, Centex has failed to point to any actual conflict 23 that would arise as a result of Travelers' reservation of its 24 contribution rights. 25 intends to pay for an equitable share of the defense based on the 26 liability of its subcontractors, it may seek to orchestrate a 27 smaller settlement on behalf of its subcontractors so that it can 28 seek more money back from Centex. Centex argues that because Travelers only 31 However, it is entirely unclear 1 how Travelers' counsel could possibly manipulate the plaintiffs in 2 the underlying actions into settling for a smaller amount. 3 Centex further argues that Travelers' refusal to give up its settlement negotiations in Allie v. Centex (the Allie Action), a 6 construction defect case at issue in Travelers v. Centex I. 7 XMSJ/MSJ Opp'n at 94 (citing Ferrentino Decl. ¶¶ 26-35). 8 settlement conference, the Allie plaintiffs and the subcontractors 9 involved in the action indicated that they were willing to settle 10 United States District Court reimbursement rights could delay settlement, pointing to the 5 For the Northern District of California 4 so long as Centex waived its claims for defense fees against the 11 subcontractors. 12 concerned about giving up Centex's subrogation rights because 13 Travelers had threatened to seek reimbursement for defense fees 14 paid in that action. 15 Id. ¶¶ 27-35. 16 Ferrentino Decl. ¶ 26. Id. Centex At a Centex's counsel was As a result, the settlement was delayed. There are several problems with this line of argument. First, 17 Centex has pointed to no evidence that Travelers' right to 18 contribution has affected the settlement of any of the underlying 19 actions at issue here. 20 would have been an issue regardless of who represented Centex in 21 the Allie action and thus was extrinsic to the underlying action. 22 See Novak v. Low, Ball & Lynch, 77 Cal. App. 4th 278, 285 (Cal. Ct. 23 App. 1999) ("[A]lthough independent counsel controls the insured's 24 defense, that control does not extend to preventing the insurer 25 from exercising its contractual right to settle claims."). 26 Travelers intervention resulted in a favorable settlement in the 27 Allie action: the Allie subcontractors ultimately agreed to allow 28 Centex to reserve its right to seek defense contributions in the Second, Travelers' right to contribution 32 Third, 1 event that Travelers pursued Centex for reimbursement of defense 2 fees. 3 4 Lee Decl. ¶ 17. Accordingly, the Court finds that Travelers' reservations of rights did not give Centex the right to retain Cumis counsel. ii. 5 6 Ethical conflicts In addition to Travelers' reservations of rights, Centex 7 points to a number of other purported ethical conflicts which it 8 claims justify the appointment of Cumis counsel. 9 argues that Travelers is seeking to control the defense of two United States District Court For the Northern District of California 10 adverse parties. 11 filed cross complaints against a number of its subcontractors, 12 including West Coast, Fresno Precision, Executive Landscape, 13 American Woodmark, and Foremost Superior. 14 appoint its own counsel to represent both Centex and the 15 subcontractors in these related actions. 16 attorneys would represent Centex and the subcontractors, Centex 17 contends that these attorneys are conflicted because they both 18 report to Travelers. 19 24 Travelers v. Centex I: [Centex]'s cross-complaints against the subcontractors are for indemnification. [Centex]'s liability to the plaintiffs in the Allie and Agles Actions will be derivative from the liability of the subcontractors who performed the work. Although [Travelers] insures [Centex], American Woodmark, and Foremost [Superior], it will have the same interest in defending all three entities against plaintiffs' general allegations in both lawsuits. [Centex]'s claim that a conflict of interest exists on this basis is "merely theoretical. 25 2011 WL 1225982, at *8. 26 identical, and there is no indication that the legal standards have 27 changed. 20 21 22 23 28 XMSJ/MSJ Opp'n at 96. First, Centex As noted above, Centex Travelers wants to Although different This argument was addressed and rejected in The facts in this case are practically Next, Centex argues that it is entitled to Cumis counsel 33 1 because it is being sued by Travelers in a number of other actions. 2 Centex XMSJ/MSJ Opp'n at 98-99. 3 Exchange v. Fireman's Fund Insurance Co., 6 Cal. App. 4th 1050 4 (Cal. Ct. App. 1992), for the proposition that an insured is 5 entitled to independent counsel whenever it is sued by its insurer. 6 Id. 7 represent clients whose interests conflict. 8 1055. 9 Centex's logic, anytime an insured wishes to obtain Cumis counsel, United States District Court For the Northern District of California 10 Centex cites to Truck Insurance But Truck merely holds that an attorney may not concurrently 6 Cal. App. 4th at Moreover, the rule proposed by Centex is circular. Under it need only sue its insurer to create a conflict of interest. Finally, Centex argues that Travelers' chosen counsel, Mr. 11 12 Lee, faces many conflicts because his website identifies 13 "relationships" with a number of insurance carriers against which 14 Centex has claims for defense and indemnity. 15 at 99. 16 any of these insurance companies. 17 expert report confirms Mr. Lee's conflicts. 18 to Mr. Lee in this report is completely irrelevant. 19 Decl. Ex. H28 at 5 n.2. ("My opinions are not directed towards the 20 professional conduct or integrity of Mr. Lee or his law firm; nor 21 do my opinions state or imply any breach of any professional 22 standard by Mr. Lee or his law firm, since I do not have sufficient 23 information to opine on Mr. Lee's or his firm's conduct."). Centex XMSJ/MSJ Opp'n But there is no indication that Mr. Lee actually represents Centex also argues that its But the only reference See Hayes For these reasons and the reasons set forth in Section II.C.i, 24 25 the Court GRANTS Travelers' motion for partial summary judgment 26 with respect to Centex's claim that it is entitled to Cumis 27 counsel. 28 /// 34 CONCLUSION 1 2 For the foregoing reasons, the Court GRANTS in part and DENIES 3 in part Centex's and Travelers' cross-motions for partial summary 4 judgment. 5 seeks dismissal of Travelers' claim that Centex breached its duty 6 to cooperate by failing to seek recovery of defense fees and costs 7 incurred in underlying actions from other insurance carriers. 8 Court GRANTS Travelers motion to the extent that it seeks a 9 determination on Centex's entitlement to Cumis counsel. The Court GRANTS Centex's motion to the extent that it The The cross- United States District Court For the Northern District of California 10 motions for partial summary judgment are DENIED in all other 11 respects. 12 56, and DENIES Centex's November 4, 2011 motion for partial summary 13 judgment, ECF No. 21. The Court also VACATES its May 10, 2012 Order, ECF No. 14 15 IT IS SO ORDERED. 16 17 18 Dated: April 8, 2013 UNITED STATES DISTRICT JUDGE 19 20 21 22 23 24 25 26 27 28 35

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