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

Filing 235

ORDER by Judge Samuel Conti granting (213) Motion for Reconsideration in case 3:11-cv-03638-SC (sclc1, COURT STAFF) (Filed on 10/7/2015)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

United States District Court

For the Northern District of California

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TRAVELERS INDEMNITY COMPANY OF
CONNECTICUT; and ST. PAUL FIRE
AND MARINE INSURANCE COMPANY,

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Plaintiffs,
v.
CENTEX HOMES; and CENTEX REAL
ESTATE CORPORATION,
Defendants.

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) Case No. 11-CV-03638-SC
)
) ORDER GRANTING DEFENDANT'S
) MOTION FOR RECONSIDERATION
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On April 8, 2013 the Court issued an order granting in part

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and denying in part the above-captioned parties' cross-motions for

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partial summary judgment.

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the Court's leave, Defendant Centex Homes ("Centex") now moves for

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reconsideration of the April 2013 Order.

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The primary question raised by the Motion is whether an insurer

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loses its right to control the defense of its insured if it fails

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to provide the insured with a defense immediately after its duty to

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defend has been triggered, where the insurer subsequently accepts

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the insured's tender and offers to provide a defense, and where the

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insurer reimburses the insured for any legal costs incurred prior

ECF No. 170 ("Apr. 2013 Order").

With

ECF No. 213 ("Mot.").

briefed, ECF Nos. 219 ("Opp'n"), 221 ("Reply"), and appropriate for

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determination without oral argument per Civil Local Rule 7-1(b).

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Having reviewed the arguments presented by the parties, the Court

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finds that its April 2013 Order as to Travelers' right to control

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Centex's defense in the Acupan and Conner actions was inconsistent

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with a case decided by the California Court of Appeal in May 2013,

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United States District Court

to its acceptance of the insured's tender.

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For the Northern District of California

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The Motion is fully

J.R. Mktg., L.L.C. v. Hartford Cas. Ins. Co., 216 Cal. App. 4th

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1444 (2013), and affirmed in relevant part by the California

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Supreme Court in August 2015, Hartford Cas. Ins. v. J.R. Mktg., 61

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Cal. 4th 988 (Aug. 10, 2015).

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its April 2013 Order as to Travelers' right to control Centex's

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defense in the Acupan and Conner actions was in error.

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motion for reconsideration is GRANTED.

Accordingly, the Court finds that
Centex's

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I.

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BACKGROUND
A.

Factual Background

Centex participates in the development of residential

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communities throughout California, though it does not perform any

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actual construction work.

Instead, it hires subcontractors to

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build the homes it sells.

These subcontractors include American

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Woodmark ("Woodmark"), Foremost Superior Marble ("Foremost"), West

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Coast Countertops ("West Coast"), Fresno Precision Plastics

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("Fresno"), and Executive Landscape ("Executive").

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subcontractors purchased commercial general liability insurance

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from the above-captioned Defendants (collectively, "Travelers"),

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and the policies name Centex as an additional insured.

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Each of these

This case arises from a number of underlying construction

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These underlying suits include the Adkins, Garvey, Acupan, and

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Conner actions.

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pursuant to one or more of the insurance policies described above.

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It is undisputed that, in each of these actions, some time elapsed

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between Centex's tender and Traveler's decision to provide a

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United States District Court

defect lawsuits filed against Centex in California state court.

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For the Northern District of California

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defense subject to a reservation of rights.

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retained the law firm of Newmeyer and Dillion LLP ("Newmeyer") to

Centex tendered each of these actions to Travelers

In the interim, Centex

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defend it in the underlying actions.

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to provide a defense, it insisted on appointing its own counsel.

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Centex insisted on retaining Newmeyer, arguing that Travelers lost

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its right to control the defense by waiting too long to provide

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one.

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actions are pertinent to the instant motion, the Court recounts

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them below.

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When Travelers finally agreed

As the facts surrounding the tender of the Acupan and Conner

Centex first tendered the Acupan action to Travelers under the

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Fresno policy on April 8, 2010.

On September 13, 2010, Travelers

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concluded that there was no potential for coverage under the Fresno

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policy and declined to provide a defense.

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months later, on June 28, 2011, Travelers reversed course and

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agreed to provide a defense pursuant to the Fresno Policy, subject

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to a reservation of rights.

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the Acupan action under the West Coast policy on January 21, 2011.

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ECF No. 148-24.

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additional information, Travelers agreed to participate in Centex's

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defense under the West Coast policy, subject to a reservation of

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rights.

ECF No. 148-14.

ECF No. 148-18.

Several

Centex also tendered

On June 1, 2011, after requesting and receiving

ECF Nos. 148-16, 148-26.
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Centex tendered the Conner action to Travelers under the

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weeks later, on September 22, Travelers requested additional

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information.

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very same day.

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agreed to participate in Centex's defense in the Conner action

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under the Executive policy subject to a reservation of rights.

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United States District Court

Executive policy on September 8, 2010.

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For the Northern District of California

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No. 148-29.

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ECF No. 148-28.

B.

ECF No. 148-27.

About two

Centex responded to the request that

ECF No. 146-11.

On January 21, 2011, Travelers
ECF

Procedural History

On July 25, 2011, Travelers filed the instant action against

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Centex.

ECF No. 1.

One month later Travelers filed a First

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Amended Complaint, which asserts causes of action for (1)

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declaratory relief, (2) breach of contract, (3) breach of the

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implied covenant of good faith and fair dealing, and (4)

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reimbursement.

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declaration that it had the right to control Centex's defense in

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the Garvey, Adkins, Acupan, and Conner actions.

Among other things, Travelers seeks a judicial

On May 10, 2012, the Court issued an order granting Centex's

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motion for partial summary judgment and partial judgment on the

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pleadings.

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Court found that, since the duty to defend is immediate, Travelers

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lost its right to control the defense of the Garvey and Adkins

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actions when it declined to participate in the defense of those

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actions in late 2010 and early 2011.

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Court also rejected Travelers' argument that Centex needed to show

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that Travelers intended to waive its right to control the defense

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of Garvey and Adkins actions, reasoning: "[A] court need not

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///

ECF No. 56 ("May 2012 Order").

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Among other things, the

May 2012 Order at 9-10.

The

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discern an insurer's intent to determine whether it has breached

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that duty.

A delay is evidence enough."

Id. at 13.

ruled on the parties' cross-motions for partial summary judgment on

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April 8, 2013.

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delay in responding to Centex's tenders of the Acupan and Conner

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actions divested Travelers of its right to control the defense of

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United States District Court

The Court reconsidered and reversed this decision when it

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For the Northern District of California

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those actions.

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under Chase v. Blue Cross of California, 42 Cal. App. 4th 1142

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(Cal. Ct. App. 1996), an insurer could only lose a contractual

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right under theories of waiver, forfeiture, or estoppel.

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The Court agreed, finding that "an insurer cannot lose its right to

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control the defense of its insured through delay alone.

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may only lose that right through waiver, forfeiture, or estoppel,

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none of which have been proven by Centex."

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denied Centex's motion for summary judgment on the issue of whether

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Travelers had lost its right to control the defense of the Acupan

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and Conner actions, and vacated its prior decision that Travelers

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had lost its right to control the defense of the Garvey and Adkins

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actions.

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issues of fact as to whether Travelers had a duty to defend the

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Garvey, Adkins, Acupan, and Conner actions.

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Centex had asked the Court to find that Travelers'

April 2013 Order at 11.

Id. at 16.

Travelers responded that,

Id. at 13.

See id.
Rather, it

The Court

The Court also found that there were triable
Id. at 6.

Centex subsequently filed a motion for reconsideration

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concerning the Court's vacation of the May 2012 Order and the

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Court's findings with respect to the Garvey and Adkins actions.

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ECF No. 195.

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reconsideration on whether Travelers lost the right to control

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Centex's defense in the Acupan and Conner actions.

Centex also sought leave to file a motion for

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Id.

The Court

the Garvey and Adkins actions was inconsistent with the Court of

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Appeal's decision in J.R. Marketing, which was decided after the

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April 2013 Order.

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motion for leave to file a motion for reconsideration as to the

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Acupan and Conner actions.

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instant motion for reconsideration concerning Travelers' right to

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United States District Court

granted Centex's motion, finding that its April 2013 Order as to

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For the Northern District of California

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control Centex's defense with respect to the Acupan and Conner

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actions.

ECF No. 200.
Id.

The Court also granted Centex's
Subsequently, Centex filed the

Before issuing an order on Centex's motion, however, the

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Court stayed the case pending the California Supreme Court's review

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of the Court of Appeal's decision in J.R. Marketing.

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California Supreme Court affirmed in relevant part the Court of

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Appeal's decision on August 10, 2015, Hartford Cas. Ins., 61 Cal.

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4th at 997, and the Court subsequently lifted the stay in this

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case, ECF No. 233.

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reconsideration as to Travelers' right to control Centex's defense

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in the Acupan and Conner actions.

The

Now before the Court is Centex's motion for

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II. LEGAL STANDARD

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A party may ask a court to reconsider and amend a previous

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order pursuant to Federal Rule of Civil Procedure 59(e) and Civil

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Local Rule 7-9.

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used sparingly in the interests of finality and conservation of

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judicial resources."

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Cir. 2003) (quotations omitted).

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that a party moving for reconsideration must generally show: (1) an

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intervening change in controlling law, (2) the emergence of new

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material facts, or (3) a manifest failure by the Court to consider

Rule 59(e) offers "an extraordinary remedy, to be
Carroll v. Nakatani, 342 F.3d 934, 945 (9th
Civil Local Rule 7-9(b) provides

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material facts or dispositive legal arguments.

"Whether or not to

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grant reconsideration is committed to the sound discretion of the

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court."

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Yakama Indian Nation, 331 F.3d 1041, 1046 (9th Cir. 2003).

Navajo Nation v. Confederated Tribes and Bands of the

As Centex moves for reconsideration of a summary judgment

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Federal Rule of Civil Procedure 56.

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United States District Court

order, the Court also employs the legal standard set forth in

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For the Northern District of California

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proper "if the movant shows that there is no genuine dispute as to

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any material fact and the movant is entitled to judgment as a

Entry of summary judgment is

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matter of law."

Fed. R. Civ. P. 56(a).

Summary judgment should be

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granted if the evidence would require a directed verdict for the

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moving party.

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(1986).

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. . . against a party who fails to make a showing sufficient to

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establish the existence of an element essential to that party's

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case, and on which that party will bear the burden of proof at

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trial."

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evidence of the nonmovant is to be believed, and all justifiable

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inferences are to be drawn in his favor."

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255.

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251

Thus, "Rule 56[] mandates the entry of summary judgment

Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

"The

Anderson, 477 U.S. at

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III.

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In general, an insurer has the right to control the defense it

DISCUSSION

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provides to its insured.

James 3 Corp. v. Truck Ins. Exch., 91

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Cal. App. 4th 1093, 1105 (2001).

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its duty to defend, the insurer forfeits its right to control the

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defense of the action.

However, when an insurer breaches

J.R Mktg., L.L.C. v. Hartford Casualty Ins.

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Co., 216 Cal. App. 4th 1444 (2013); Intergulf Dev. v. Super. Ct.,

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183 Cal. App. 4th 16, 20 (2010).
In J.R. Marketing, the defendant insurer refused to defend or

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App. 4th at 1449.

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L.L.P. ("Squire") to defend it in the underlying action and bring

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suit against the insurer for coverage.

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United States District Court

indemnify the plaintiff insured in an underlying lawsuit.

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For the Northern District of California

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216 Cal.

reconsidered its position and agreed to provide the insured with a

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defense, but the insurer refused to pay defense costs incurred

The insured hired the law firm of Squire Sanders
Id.

The insurer then

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prior to a certain date and insisted that its own counsel represent

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the insured in place of Squire, the insured's chosen Cumis

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counsel.1

Id.

On summary adjudication, the trial court in J.R. Marketing

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found that the insured was entitled to Cumis counsel from the date

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it tendered the underlying action and that the insurer could not

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invoke the provisions of California Civil Code section 2860 that

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cap the amount of fees payable to Cumis counsel.

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The trial court found that section 2860's protections were

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unavailable since the insurer had breached and continued to breach

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its defense obligations by failing to pay all reasonable and

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necessary defense costs incurred by the insured, and by failing to

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provide Cumis counsel.

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reasoning: "Where, as here, the insurer breaches its duty to defend

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the insured, the insurer loses all right to control the defense,

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including, necessarily, the right to control financial decisions

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such as the rate paid to independent counsel or the cost-

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Id. at 1450.

Id. at 1449-50.

The Court of Appeal affirmed,

In California, an insured is entitled to independent counsel,
a.k.a. Cumis counsel, where a conflict exists because of an
insurer’s control over the litigation. See Cal. Civ. Code § 2860.
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at 1457.

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portion of the Court of Appeal's decision.

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Cal. 4th at 997; see also id. at 1002 ("where . . . the insurer

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wrongfully refused to defend the insured or to afford Cumis

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counsel, the insured may proceed as he or she deems appropriate,

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and the insurer forfeits all right to control the insured's

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United States District Court

effectiveness of any particular defense tactic or approach."

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For the Northern District of California

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Id.

defense, including the right to determine litigation strategy.").

The California Supreme Court subsequently affirmed that
J.R. Mktg., L.L.C., 61

J.R. Marketing stands for the proposition that an insurer

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loses its right to control the insured's defense upon breach of its

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duty to defend.

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Order that an insurer can lose its right to control the insured's

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defense solely "through waiver, forfeiture, or estoppel" was in

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error.

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2013, the Court found that Travelers breached its duty to defend as

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to the Garvey and Adkins actions when it wrongfully denied Centex's

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tenders.

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however, Travelers accepted Centex's tenders of the Acupan and

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Conner actions.

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days, respectively, during which time Centex hired its own counsel

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and incurred legal expenses (although Travelers subsequently

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reimbursed Centex for those expenses).

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motion for reconsideration, therefore, is whether this delay

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constitutes a breach of Travelers' duty to defend such that

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Travelers lost its right to control Centex's defense.

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Accordingly, the Court's holding in its April 2013

April 2013 Order at 13.

ECF No. 200 at 11.

In its Order dated August 26,

Unlike the Garvey and Adkins actions,

Nevertheless, Travelers' response took 131 and 135

The issue on the instant

Neither the parties nor the Court were able to find a case

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clearly delineating the point at which an insurer's delay amounts

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to a breach of its duty to defend.
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In general, to establish a duty

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to defend, the burden is on the insured to make a prima facie

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showing that a third party claim potentially falls within the

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insuring provisions of its policy.

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F.3d at 1054.

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ripen until a third party files a complaint against the insured.

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See Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 18 Cal. 4th

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857, 886 (1998).

United States District Court

For the Northern District of California

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Anthem Electronics, Inc., 302

In addition, an insurer's duty to defend will not

However,

[t]his should not be understood literally to mean the
instant the insurer receives the complaint filed against
its insured and before any investigation is made.
Rather, it probably means the point in time a liability
insurer is required to act on the insured's behalf (e.g.
when an answer to the complaint is due).
Croskey, et al., Cal. Prac. Guide Ins. Lit. Ch. 7B-C (Rutter 2013).
At that point, the insurer has an immediate duty to defend until it
can show conclusively that the damages sought in the third party
lawsuit are not covered under the policy.

See Montrose Chem. Corp.

v. Superior Court, 6 Cal. 4th 287, 295 (1993). ("Imposition of an
immediate duty to defend is necessary to afford the insured what it
is entitled to: the full protection of a defense on its behalf.");
id. at 300 ("[T]he insured need only show that the underlying claim
may fall within policy coverage; the insurer must prove it
cannot.") (emphasis added).
Here, Centex tendered its defense in the Acupan action on
January 21, 2011.

It made a prima facie showing that the action

potentially fell within its coverage by February 1, 2011 when it
submitted copies of subcontracts and other documents at Travelers'
request.

However, the complaint in the Acupan action was not filed

until April 19, 2011.

In California, a responsive pleading is not

due until 30 days after the complaint is filed.
Court 3.110.

Cal. Rules of

Thus, Travelers' duty to defend was not triggered
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until

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however, until June 1, 2011.

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during which Travelers had a duty to defend Centex but did not

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provide a defense.

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counsel.

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May 19, 2011.

Travelers did not accept Centex's tender,
Thus, there were at least 13 days

As a result, Centex had to employ its own

Centex tendered its defense in the Conner action on

United States District Court

September 8, 2010, at which point it had made a prima facie showing

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For the Northern District of California

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that the action potentially fell within its coverage.

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complaint in the Conner action was not filed, however, until

The

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October 15, 2010.

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November 15, 2010, the date on which a responsive pleading was due

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from Centex.

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until January 21, 2011.

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days after its duty to defend was triggered.

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Travelers' duty to defend therefore arose on

Travelers did not accept Centex's tender, however,
Its acceptance, therefore, was made 67

Travelers argues that it did not breach its duty to defend

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because (1) it had a right to conduct a reasonable investigation

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before accepting Centex's tender and (2) it reimbursed Centex for

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legal costs incurred prior to accepting Centex's tender.

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to defend imposes upon the insurer several responsibilities,

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including that it "employ competent counsel to represent the

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assured."

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882 (1973).

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payment of legal fees immediately after an insurer's duty to defend

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has been triggered constitutes a breach of the duty to defend, even

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if the insurer later reimburses the insured.

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Corp., 6 Cal. 4th at 295, 300.

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to secure the right to call on the insurer's superior resources for

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the defense of third party claims is, in all likelihood, typically

The duty

Merritt v. Reserve Insurance Co., 34 Cal. App. 3d 858,
A failure to provide counsel or to guarantee the

See Montrose Chem.

After all, "[t]he insured's desire

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wish to obtain indemnity for possible liability."

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Of course, an insurer is free to conduct an investigation beyond

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the point at which its duty to defend has been triggered.

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investigation may lead to facts establishing that there is no

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possibility of coverage, thereby ending the insurer's duty to

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defend.

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United States District Court

as significant a motive for the purchase of insurance as is the

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For the Northern District of California

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security implicit in the duty to defend -- specifically, "the right

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to [immediately] call on the insurer's superior resources" as

Id. at 295-96.
Such an

An insurer may not, however, deprive an insured of the

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opposed to having to marshal its own resources to mount a defense

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against a claim that possibly falls within the policy's coverage.

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Id.
Accordingly, the Court finds that Travelers breached its duty

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to defend by failing to provide Centex with a defense at least 30

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days after the complaints were filed in the Acupan and Conner

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actions.

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its right to control Centex's defense.

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Cal. App. at 1457.

Upon breaching its duty to defend, Travelers also lost
See J.R Mktg., L.L.C., 216

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IV.

CONCLUSION
For the forgoing reasons, the Court GRANTES Centex's motion

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for reconsideration and finds that Travelers lost its right to

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control Centex's defense in the Acupan and Conner actions.

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IT IS SO ORDERED.

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Dated: October 7, 2015

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UNITED STATES DISTRICT JUDGE
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