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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IN THE UNITED STATES DISTRICT COURT

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NORTHERN DISTRICT OF CALIFORNIA

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Northern District of California

United States District Court

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TRAVELERS PROPERTY CASUALTY
COMPANY OF AMERICA, FIDELITY &
GUARANTY INSURANCE COMPANY, THE
TRAVELERS INDEMNITY COMPANY OF
CONNECTICUT, AND ST. PAUL MERCURY
INSURANCE COMPANY,

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Plaintiffs,
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v.
CENTEX HOMES and DOES 1 through
10 inclusive,

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CENTEX HOMES,

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Counterclaimant,
v.

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TRAVELERS PROPERTY CASUALTY
COMPANY OF AMERICA, et al.,

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Counterdefendant.
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Case No. 11-3638-SC
ORDER GRANTING IN PART AND
DENYING IN PART CROSSMOTIONS FOR PARTIAL
SUMMARY JUDGMENT

INTRODUCTION & BACKGROUND

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This case arises out of an insurance dispute between the

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defendant Centex Homes ("Centex").

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build residential developments throughout California.

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this case, Centex subcontracted with West Coast Countertops ("West

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Coast"), Fresno Precision Plastics ("Fresno Precision"), Executive

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Landscape, American Woodmark, and Foremost Superior Marble

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("Foremost Superior") to install countertops, cabinets, tub and

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United States District Court

above-captioned plaintiffs (collectively, "Travelers") and

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For the Northern District of California

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shower surrounds, and landscaping features in a number of homes.

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These subcontractors obtained commercial general liability

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insurance policies from Travelers, naming Centex as an additional

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insured.

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from the subcontractors' work but does not provide coverage for

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replacement of the work itself.

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water damage caused by an improperly installed tub, but not cover

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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

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homeowners throughout California.

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number of defects, including a few that may be related to the work

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performed by West Coast, Fresno Precision, Executive Landscape, and

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Foremost Superior.

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actions to Travelers as an additional insured under these

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subcontractors' policies: the Acupan action, the Adkins action, the

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Conner action, the Garvey action, and the Kent action

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(collectively, the "underlying actions").1

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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

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Centex and Travelers appear to disagree about almost every

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relevant aspect of coverage, including whether the underlying

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actions are covered by the policies, whether Travelers has a duty

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to defend the underlying actions, what that duty to defend entails,

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whether Centex has a right to control its own defense, whether

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Centex has a right to Cumis counsel, whether Centex has a duty to

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seek coverage from other insurers, and whether the parties have

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timely responded to each other's requests for information.

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result, Travelers brought suit against Centex for, among other

As a

United States District Court

For the Northern District of California

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things, breach of contract, breach of the implied covenant of good

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faith and fair dealing ("bad faith"), reimbursement, and

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declaratory relief.

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contract, bad faith, and declaratory relief.

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are fully briefed cross-motions for partial summary judgment

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brought by Travelers and Centex.

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("Centex XMSJ/MSJ Opp'n"); 159 ("Trav. MSJ Reply/XMSJ Opp'n"); 162

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("Centex XMSJ Reply").

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Court finds these matters appropriate for resolution without oral

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argument.

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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

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LEGAL STANDARD

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Entry of summary judgment is proper "if the movant shows that

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there is no genuine dispute as to any material fact and the movant

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is entitled to judgment as a matter of law."

Fed. R. Civ. P.

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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.

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56(a).

Summary judgment should be granted if the evidence would

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require a directed verdict for the moving party.

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Liberty Lobby, Inc., 477 U.S. 242, 251 (1986).

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mandates the entry of summary judgment . . . against a party who

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fails to make a showing sufficient to establish the existence of an

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element essential to that party's case, and on which that party

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will bear the burden of proof at trial."

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477 U.S. 317, 322 (1986).

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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

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favor."

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of a scintilla of evidence in support of the plaintiff's position

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will be insufficient; there must be evidence on which the jury

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could reasonably find for the plaintiff."

Id. at 252.

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DISCUSSION

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I.

CENTEX'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT
Centex asks the Court to enter partial summary judgment in its

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favor on five issues: (1) whether Travelers owes a duty to defend

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Centex in the Garvey, Adkins, Acupan, and Conner Actions; (2)

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whether Travelers has a duty to pay Centex's full defense costs;

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(3) whether Centex breached the cooperation clauses in its

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insurance contracts with Travelers by failing to tender to or sue

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other insurers; (4) whether Travelers' delay in responding to the

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Acupan and Conner actions divested it of the right to control those

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actions; (5) whether Travelers' claim for reimbursement fails.

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Court addresses each of these issues below.

The

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A.

Travelers' Duty to Defend Centex

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Under California law, an insurer's duty to defend an insured

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in an underlying action "is determined by reference to the policy,

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the complaint, and all facts known to the insurer from any source."

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Montrose Chem. Corp. v. Super. Ct., 6 Cal. 4th 287, 300 (Cal.

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1993).

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. the insurer must assume its duty to defend unless and until it

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can conclusively refute that potential.

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will be required to defend a suit where the evidence suggests, but

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does not conclusively establish, that the loss is not covered."

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Id. at 299 (quotations omitted).

United States District Court

Necessarily, an insurer

Here, Centex argues that the undisputed evidence shows that

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For the Northern District of California

"[O]nce the insured has established potential liability . .

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Travelers had a duty to defend Centex in the Adkins, Acupan,

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Garvey, and Conner actions.

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Travelers argues that summary judgment should be denied on these

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issues because Centex fails to specify when the duty to defend

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arose in each action.

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responds that its motion is sufficiently specific because the duty

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to defend arises immediately upon tender.

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31.

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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.

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See Montrose, 6 Cal. 4th at 295.

However, courts also recognize

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that an insurer has a right to conduct a reasonable investigation

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before to assuming a duty to defend.

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Homes, C 10-02757 CRB ("Travelers v. Centex I" or the "'57

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Action"), 2011 WL 1225982, at *4 (N.D. Cal. Apr. 1, 2011).

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where an insured tenders an underlying action but fails to provide

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the insurer with necessary information relevant to a coverage

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determination, then the insurer need not defend the action upon

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tender.

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See Travelers Prop. v. Centex

Thus,

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In this case, there are disputed issues of material fact as to

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when Travelers had sufficient information to make an informed

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decision on Centex's tenders.

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evidence showing that, in tendering the Acupan action under the

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Fresno Precision policy, Centex initially failed to provide its

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subcontracts with Frenso Precision, which were necessary to trigger

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coverage under the policy.

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when Travelers had a duty to defend is central to the claims and

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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

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arose well before Travelers provided Centex with a defense in the

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underlying actions, then Centex may be able to succeed on its

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claims for breach and bad faith.

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provided a defense, then Centex's claims may lack merit.

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if Travelers later discovered facts that conclusively refuted the

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potential for coverage under its policies, then Travelers would no

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longer have had a duty to defend.

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If it arose at the time Travelers

Centex does not address these issues.

Further,

Instead, it essentially

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asks the Court to render summary judgment on Travelers' duty to

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defend in a vacuum, without reference to any of the claims involved

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in this action.

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duty to defend the underlying actions at some unspecified point in

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time, it is unclear how that would narrow the scope of the issues

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set for trial.

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summary judgment with respect to Travelers' duty to defend in the

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Adkins, Acupan, Conner, and Garvey actions.

Even if the Court could find that Travelers had a

Accordingly, the Court DENIES Centex's motion for

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B.

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Centex next asks the Court to find Travelers has a duty to pay

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Travelers' Duty to Pay Centex's Full Defense Costs

Centex's full defense costs, not simply a pro-rata share, and that

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Under California law, in actions where all the claims asserted

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against the insured are at least potentially covered, the insured

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has a duty to defend.

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1997).

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least potentially covered by an insurer and the others are not --

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"the insurer has a duty to defend the action in its entirety."

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at 47-48.

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defend the entire underlying action, allocation of defense costs

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United States District Court

Travelers failed to meet this duty.

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For the Northern District of California

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Centex XMSJ/MSJ Opp'n at 40.

may later be apportioned in certain situations involving multiple

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insurers."

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App. 4th 666, 689-90 (Cal. Ct. App. 1997).

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cannot use its right to seek contribution from other insurers to

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avoid fronting an insured's full defense costs.

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Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 105-06

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(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

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with an incomplete defense because, from the beginning, either

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Travelers or some other insurer has paid Centex's defense costs in

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all of the underlying actions.

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29.

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competent, admissible evidence of its actual reasonable and

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necessary defense fees.

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that Centex engaged in improper billing practices through which it

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misrepresented the contribution of other insurers and induced

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Travelers to overpay for Centex's defense costs in the underlying

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actions.

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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

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received all funds necessary to mount a reasonable defense.

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The Court agrees with Travelers, at least in part.

Id.

Even if

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Travelers does have a duty to defend, there are triable issues of

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fact as to whether it has fulfilled that obligation.

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have presented declarations from their attorneys concerning the

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amounts Travelers has paid towards Centex's defense in the

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underlying actions.

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and other insurers have overpaid Centex's defense fees, while

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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

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of dollars.

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evidence is more credible.

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Travelers' argument that Centex engaged in improper billing

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practices, other than to argue that Travelers is procedurally

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barred from raising such an argument.

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this argument is barred, and the Court fails to see why it is

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improper.

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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

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to provide a complete defense to Centex, and Centex's motion is

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DENIED as to this issue.

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C.

The Cooperation Clause

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Travelers has alleged that Centex breached the cooperation

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clause in its policies by failing to (1) acknowledge Travelers'

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right to control Centex's defense in the underlying actions and (2)

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seek recovery of defense fees and costs incurred in underlying

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actions from other insurance carriers.

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Compl.") ¶ 66.

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aspect of this claim on the ground that Centex was not required to

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seek recovery from other insurers.

See ECF No. 5 ("Am.

Centex now moves for summary judgment on the second

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This argument has merit.

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Neither party specifically directs the Court to the

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cooperation clauses in the relevant agreements; however, they

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appear to be referring to the clauses which provide that Centex

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must: (1) "cooperate with [Travelers] in the investigation,

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settlement, or defense of the claim or suit"; and (2) "do all

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that's possible after the loss to preserve for [Travelers] any . .

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. right of recovery [from a third party]; and cooperate with

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[Travelers] in any attempt to exercise any . . . right of recovery

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[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

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For the Northern District of California

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an obligation to tender a defense to other insurers.

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California law, Travelers was entitled to seek contribution for

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Centex's defense costs from other insurance carriers, even if

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Centex did not tender its defense or provide notice to those other

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carriers.

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the insurers' liability is apportioned pursuant to the 'other

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insurance' clauses of the policies or under the equitable doctrine

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of contribution."

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28 Cal. 4th 1059, 1080 (Cal. 2002) (citation and quotations

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omitted).

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insurers did not affect Travelers' rights to seek contribution from

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other carriers who may have insured the losses alleged in the

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underlying actions.

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admitted that Travelers does not believe that its insured have

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contractual obligations to provide notice of their claims to other

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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.

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carriers or to pursue insurance claims against other carriers.

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Hayes Decl. Ex. H8 at 245-49.
Case law from other jurisdictions also suggests that insureds

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do not have an independent duty to seek contribution from other

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insurers.

Specifically, the Seventh Circuit has stated:

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[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.

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United States District Court

For the Northern District of California

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Emp'rs Ins. of Wausau v. James McHugh Const. Co., 144 F.3d 1097,

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1106 (7th Cir. 1998).
Travelers does not directly respond to these points.

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Instead,

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it asserts two new theories of how Centex allegedly breached the

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cooperation clause.

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Travelers' right of recovery against other insurers by (1) failing

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to provide Travelers with requested information regarding other

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additional insured tenders in a timely manner, and (2) specifically

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directing other carriers to stop contributing to Centex's defense.

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Trav. MSJ Reply/XMSJ Opp'n at 17-18.

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in Travelers' Amended Complaint, and it would be unfair to allow

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Travelers to assert them now.3

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amend and the discovery cut-off passed long ago.

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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.

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In any event, Travelers' second new claim fails as a matter of

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law.

Centex's decision to seek 100 percent of its defense costs

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from Travelers does not affect Travelers' right to seek

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contribution from other insurance carriers.

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that these carriers can now argue that they have no contribution

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obligations because Centex represented that Travelers did not want

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them to contribute.

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argument is inconsistent with the evidence presented by Travelers,

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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

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had acknowledged a defense obligation and that Centex was not

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currently seeking contribution from anyone else.

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Decl. Exs. C, F.

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other insurers that Travelers had waived its right to seek

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contribution.

See Aguilera

There is no indication that Centex informed its

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Accordingly, the Court GRANTS Centex's motion for partial

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summary judgment with respect to Travelers' claim for breach of the

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cooperation clauses and finds that Centex did not breach its duty

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to cooperate by failing to seek recovery of its defense fees from

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other carriers.

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undisturbed in all other respects.

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D.

Travelers' Right to Control Centex's Defense in the
Acupan and Conner Actions

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Travelers' claim for breach of contract remains

Centex also asks the Court to find that Travelers' delay in

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responding to Centex's tenders of the Acupan and Conner actions

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divested Travelers of its right to control the defense of those

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actions.

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Acupan action to Travelers under the Fresno Precision policy on

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April 8, 2010.

Centex XMSJ/MSJ Opp'n at 51.

Lopez Decl. Ex. A.

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Centex first tendered the

On September 13, 2010,

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Travelers declined to provide coverage for the Acupan action, but

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it reversed course on June 28, 2011.

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The delay associated with the Conner action was much shorter.

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Centex tendered the Conner action on September 8, 2010, and

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Travelers asked for additional information on September 22, 2010.

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Id. Exs. O27, O28, O38.

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additional information, Travelers agreed to provide an equitable

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defense on January 21, 2011.

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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

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Travelers attempted to appoint its own counsel to defend those

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actions.

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counsel, and insisted that the law firm of Newmeyer and Dillion LLP

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("Newmeyer") continue to manage its defense.

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Travelers lost its right to appoint new counsel by waiting too long

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to accept Centex's tenders.

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actions amount to breach of the cooperation clauses in the relevant

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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

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case.

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that Travelers' delay divested it of the right to control the

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Adkins and Garvey actions.

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ECF No. 56 ("May 10, 2012 Order").4

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lost the right to control the Adkins and Garvey actions because it

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waited over nine months to provide Centex with a defense in those

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actions and because Travelers only agreed to provide a defense

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after Centex brought suit for Travelers' failure to defend.

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4

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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

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3-5, 10-11.

The Court reasoned: "As the duty to defend arises

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immediately upon tender, Travelers' delay in providing Centex with

3

a defense divested it of the right to control that defense."

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at 10.

Id.

Having reviewed the parties' briefs and new authority offered

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by Travelers, the Court finds that its prior decision was in error

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and would work a manifest injustice.5

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insurer cannot lose its right to control the defense of its insured

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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

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Centex.

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Under California law, an insurer's duty to defend is

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immediate, "arising on tender of defense and lasting until the

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underlying lawsuit is concluded or until it has been shown that

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there is no potential for coverage . . . .

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immediate duty to defend is necessary to afford the insured . . .

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the full protection of a defense on its behalf."

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Corp. v. Sup. Ct., 6 Cal. 4th 287, 295 (Cal. 1993).

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insurer takes on the duty to defend, it generally has the absolute

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right to manage the defense and the insured is required to

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surrender all control.

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71 Cal. App. 4th 782, 787 (Cal. App. 1999).

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control the insured's defense extends to the right to select legal

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counsel.

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Civ. S-04-2445 FCD, 2005 WL 1367096, at *7, 2005 U.S. Dist. LEXIS

26

5

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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.

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20485, at *21 (E.D. Cal. May 31, 2005).

However, "[w]hen an

2

insurer wrongfully refuses to defend, the insured is relieved of

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his or her obligation to allow the insurer to manage the litigation

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and may proceed in whatever manner is deemed appropriate."

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v. Worthington, 57 Cal. App. 4th 188, 196 (Cal. Ct. App. 1997).

Eigner

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Centex argues that because the duty to defend is immediate, an

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insurer irrevocably loses its right to control an insured's defense

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if the insurer does not provide an immediate defense, even if the

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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

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authority cited by Centex stands for much more limited

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propositions.

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insured has the right to control its own defense where the insurer

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refuses to provide one, Eigner, 57 Cal. App. 4th at 196; (2) an

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insured may settle a claim without the consent or approval of the

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insurer where the insurer denies liability and refuses to provide a

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defense, St. Louis Dressed Beef & Provision Co. v. Maryland Cas.

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Co., 201 U.S. 173, 181 (1906); and (3) an insurer may irrevocably

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waive its right to control an insured's defense through "a direct

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and positive written request by it to the insured to take charge of

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the litigation and defend the suit," Witt v. Universal Auto. Ins.

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Co., 116 S.W.2d 1095, 1098 (Tex. Civ. App. 1938).

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is not applicable here.

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provide a defense in each of the underlying actions.

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Travelers is not challenging a settlement reached by Centex before

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Travelers offered to defend the underlying actions.

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Travelers did not expressly waive its right to control Centex's

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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

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relevant insurance agreements.

2

The California Court of Appeal's decision in Chase v. Blue

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Cross of California, 42 Cal. App. 4th 1142 (Cal. Ct. App. 1996), is

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more on point.

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its right to compel arbitration because its communications with the

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insured did not mention the arbitration provision in the parties'

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insurance contract.

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that an insurer could only lose a contractual right to arbitration

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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

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While the Chase court was primarily concerned with an arbitration

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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

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