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Insurer's Reservation of Rights as to Additional Insured in Construction Defect Lawsuit Does Not Require Insurer to Provide "Independent Counsel" to Additional Insured

An insurer's reservation of rights letter as to an additional insured in a construction defect lawsuit did not trigger a conflict of interest sufficient to require the insurer to provide "independent counsel" to the additional insured. (Centex Homes v. St. Paul Fire and Marine Insurance Company (2015) 237 Cal.App.4th 23)

Facts

Centex Homes (Centex) was the developer of a residential housing project. In connection with the project, Centex hired various subcontractors, including Oak Leaf Landscape, Inc. (Oak Leaf), to assist with construction.

After the project was completed, some of those who purchased homes in the project sued Centex for construction defects. Centex in turn sought coverage as an additional insured on a general liability policy which Oak Leaf had obtained through St. Paul Fire & Marine Insurance Company (St. Paul). In response to Centex's tender, St. Paul agreed to provide "panel defense counsel" to defend Centex under a reservation of rights. Among other things, St. Paul reserved its right to seek reimbursement from Centex of defense costs that were not related to covered "property damage" arising from the work of the named insured, Oak Leaf.

Centex filed a declaratory relief action against St. Paul seeking a determination that St. Paul was obligated to provide "independent counsel" to Centex. Centex alleged that a conflict of interest requiring independent counsel existed because, among other things, St. Paul might instruct panel defense counsel to (1) file a cross-complaint against the named insured, Oak Leaf, (2) determine whether Oak Leaf had any liability to the homeowners in the underlying litigation, (3) determine whether Oak Leaf's work caused "property damage" which would be covered under the St. Paul policy, etc. Centex alleged that to the extent panel defense counsel could challenge Oak Leaf's liability in the underlying litigation, such challenge would enhance St. Paul's reimbursement claim against Centex, thus triggering a conflict of interest requiring independent counsel.

St. Paul demurred to Centex's complaint, arguing that Centex had failed to state a cause of action against St. Paul. The trial court sustained the demurrer and dismissed Centex's claim against St. Paul. Centex appealed.

Holding

The Court of Appeal affirmed the dismissal of Centex's claims against St. Paul. According to the appellate court, Centex had not alleged specific facts indicating an actual, present conflict of interest requiring independent counsel. Centex had merely alleged "anticipated circumstances" that "have not yet occurred in the underlying action." In short, Centex had not pled facts demonstrating a conflict of interest that would give Centex the right to have independent counsel at St. Paul's expense. Further, at least at this juncture, there was no indication that Centex could plead any such facts.

Comment

The mere fact that an insurer has issued a reservation of rights letter does not necessarily create a conflict of interest requiring the insurer to provide the insured with independent counsel. However, an insurer may have an obligation to provide independent counsel when the insurer "reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim." (Civ. Code § 2860 (b).) Even in that circumstance, however, the conflict must be "significant, not merely theoretical, actual, not merely potential." (Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1007.) According to the appellate court in this case, the additional insured, Centex did not plead specific facts demonstrating an actual, present conflict of interest requiring independent counsel.

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