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Century Surety Co. v. 350 W.A.

September 26, 2008

CENTURY SURETY COMPANY, PLAINTIFF,
v.
350 W.A., LLC, ET AL., DEFENDANTS.



The opinion of the court was delivered by: M. James Lorenz United States District Court Judge

ORDER GRANTING MOTION FOR ATTORNEYS' FEES [doc. #173]

The parties are familiar with the factual and procedural background of this case and the underlying state court case*fn1 and therefore, it will not be repeated at length here except as necessary to explain the decision. Plaintiff's present motion seeks full recoupment of its attorneys' fees and expenses incurred in providing a defense to defendant 350 ("350" or "defendant") in the appeal of the Helleis case.*fn2 The present motion is based on this Court's September 25, 2007 Order that found, as a matter of law, that the wrongful eviction and breach of contract claims asserted against 350 in the Helleis case were not covered under the insurance policy issued by plaintiff to 350. In its Order, the Court also noted that "[w]hen an insurer provides an insured a defense under a reservation of rights, and it is later determined that the claims were not covered and the duty to defend never arose, the insurer is entitled to reimbursement for costs advanced. Scottsdale Ins. Co. v. MV Transportation, 36 Cal. 4th 643 (2005)." (Order at 11 [doc. #73].)

As discussed in the Court's Order, the Helleis bench trial concluded on June 27, 2005, with the court stating its decision from the bench. On July 8, 2005, twelve days after the trial court made its decision, 350 tendered a claim for defense and indemnity to Century. (Complaint

On July 27, 2005, Century sent 350 notice it would defend the company in post-judgment and appellate proceedings under a reservation of rights. Id. Century retained Gordon & Rees to represent 350 on appeal. Ultimately, the California Court of Appeal affirmed the Helleis decision in its entirety.

Notwithstanding the Court's determination that the claims raised against 350 in the underlying action were not covered claims under the commercial general liability policy issued to 350, 350 contends that Century failed to properly and adequately reserve its rights to pursue reimbursement of the defense fees and cost it incurred on behalf of 350. Defendant also assert that Century's appointment of counsel created a Cumis conflict of interest between the attorneys appointed to represent 350 and 350. Finally, defendant argues that Century fails to establish that the fees and cost it seeks were reasonably incurred.

1. Reservation of Rights

Once 350 tendered its claim for defense, which was after the trial verdict in the state court, Century accepted the tender of defense for 350's appeal under a full reservation of rights. In its opposition to plaintiff's motion for attorneys' fees, 350 asserts that Century's motion is "bereft of any evidence that Century properly and adequately reserved its rights to pursue reimbursement of the defense fees and costs it claims to have incurred on behalf of 350, . . ." (Opp. at 2). The reservation of rights is found in the July 27, 2005 letter to defendant's attorney, Michael W. Vivoli, from Marty Hunger, Century's General Adjustor, which 350 provided to the Court. (350's Exh. A [doc. #184-3].) Hunger's letter states:

Century Surety's Reservation of Rights includes, but is not limited to, (1) the right to seek a judicial declaration as to its rights and obligations, if any, under the Century Surety policy; (2) the right to seek reimbursement and/or contribution from the insured or from any other insurer which should be providing a defense to the insured, for any defense costs incurred or indemnity paid if it should be determined that Century Surety had no obligation to pay defense costs or indemnity, or that another insurer has such an obligation, or tha Century Surety had no obligation to defend or indemnify against certain claims; (3) the right to withdraw from the defense at any time; and (4) the right to decline indemnity. Century Surety expressly reserves all of its rights to reimbursement or otherwise under the California Supreme Court decision of Buss v. Superior Court . . .. Century Surety also reserves the right to seek reimbursement from 350 W.A. for any and all payments it might make on behalf of 350 W.A. in this matter. 350 provides almost two pages of discussion of Century's reservation of rights. But neither in that discussion nor at any other point in its opposition does 350 discuss why it believes Century did not properly and adequately reserve its rights to pursue reimbursement of the defense fees and costs. Because there is evidence of Century's reservation of rights in the record, the Court finds that Century has reserved its rights to pursue reimbursement of its attorneys' fees and costs incurred on behalf of 350.

2. Cumis Conflict of Interest

350 argues it was entitled to have Century pay for independent counsel for its defense on appeal because of a Cumis conflict. The requirement to provide Cumis counsel was originally set forth in San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App.3d 358 (1984). The issue presented in Cumis was "whether an insurer is required to pay for independent counsel for an insured when the insurer provides its own counsel but reserves it right to assert noncoverage at a later date." Id. at 361. The California State Legislature superseded the result in Cumis by enacting California Civil Code section 2860. That section states, in relevant part:

(a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured . . .

(b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an 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, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.

AL. CIV. CODE § 2860(a), ( b).

In order to trigger the obligation to provide Cumis counsel, the insurer must make a reservation of rights as to a coverage issue and the counsel first retained by the insurer must be able to control the outcome of that issue. CAL. CIV. CODE ยง 2860(b). This dual requirement has been carefully prescribed. "[N]ot every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer's expense." In James 3 Corp. v. Truck Insurance Exchange, 91 Cal. App.4th 1093, 1101 (2001). "The mere fact the insurer disputes coverage does not entitle the insured to Cumis counsel . . . ." Id. An insured has no entitlement to Cumis counsel "where the coverage issue is independent of, or extrinsic to, the issues in the underlying action." Dynamic Concepts, Inc. v. Truck Ins. Exchange, 61 ...


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