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Compulink Management Center, Inc. v. St. Paul Fire and Marine Insurance Co.

December 17, 2008


APPEAL from a judgment of the Superior Court of Los Angeles County. Ruth Ann Kwan, Judge. Reversed and remanded. (Los Angeles County Super. Ct. No. BC377899).

The opinion of the court was delivered by: Zelon, J.


Respondent Compulink Management Center, Inc. ("Compulink") brought an action against its insurer, Appellant St. Paul Fire and Marine Insurance Company ("St. Paul"), for breach of contract and breach of the implied covenant of good faith and fair dealing. In its complaint, Compulink contended that St. Paul failed to comply with its duty to defend Compulink in a third party suit. St. Paul petitioned the trial court to compel arbitration of the action pursuant to Civil Code section 2860, subdivision (c).*fn1 The trial court denied St. Paul's petition in its entirety on the grounds that Compulink's allegations of bad faith took the action beyond the scope of section 2860's arbitration provision. We conclude that, based on the plain language of the statute, the parties were required to arbitrate the portion of their dispute that pertains to the amount of attorney's fees owed to Compulink for its defense by independent (Cumis) counsel. (See San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis).) We accordingly reverse and remand with instructions to the trial court to order a section 2860 arbitration of issues concerning the amount of Cumis fees allegedly owed by St. Paul. All other issues in the action are to be adjudicated in the trial court.


Compulink was insured under a general liability policy issued by St. Paul. Pursuant to the policy, St. Paul had a duty to defend and indemnify Compulink against certain claims or suits. The policy also included a provision entitled "Expenses incurred by protected persons." That provision stated that St. Paul will "pay all reasonable expenses that any protected person incurs at [its] request while helping [it] investigate or settle, or defend a protected person against, a claim or suit."

During the policy period, Compulink sued LR Hines Consulting, Inc. ("Hines"), a former distributor of Compulink, and AlphaCorp, Hines' new vendor. Hines and AlphaCorp then cross-complained against Compulink for defamation, unfair business practices, and intentional interference with prospective economic advantage. Compulink tendered the defense of the cross-complaints to St. Paul, and St. Paul agreed to defend Compulink subject to a reservation of rights. Because St. Paul believed the reservation of rights created a conflict of interest with Compulink, St. Paul agreed to allow Compulink to select independent counsel to defend it in the third party suit.

After the case settled, Compulink filed suit against St. Paul, asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief.*fn2 Compulink alleged that St. Paul failed to comply with its duty to defend by engaging in conduct that included the following: (1) failing to timely accept the defense of the cross-actions; (2) underpaying and delaying payment of legal fees and costs; (3) reneging on agreements regarding the allocation of defense costs and a reasonably hourly fee rate; (4) impeding settlement of the action by refusing to participate in mediation; and (5) refusing to contribute an adequate amount to the settlement. Compulink further alleged that St. Paul's bad faith actions prevented a timely settlement of the cross-complaints and forced Compulink to incur additional legal fees and to enter into a less favorable settlement. Compulink sought economic damages in excess of $1,000,000, along with a declaration that St. Paul had a duty to pay all outstanding legal fees incurred by Compulink in defending against the cross-complaints.

St. Paul filed a petition to compel arbitration pursuant to section 2860, subdivision (c). In its petition, St. Paul alleged that it had already paid Compulink approximately $468,000 in independent counsel's fees and costs, and that the gravamen of Compulink's complaint was that it was entitled to additional attorney's fees. St. Paul argued that, because the central issue in the case was the amount of Cumis fees allegedly owed to Compulink, the action was subject to mandatory arbitration under section 2860, subdivision (c). Compulink opposed the petition on the grounds that its complaint alleged wrongful conduct by St. Paul that extended far beyond the mere failure to pay attorney's fees, and therefore, fell outside the scope of section 2860's arbitration provision. Compulink also asserted that the parties' insurance policy required St. Paul to pay all "reasonable" attorney's fees which, according to Compulink, exempted their fee dispute from both the rate caps and arbitration provisions of section 2860.

The trial court denied St. Paul's petition to compel arbitration because Compulink's complaint included allegations beyond a mere attorney's fees dispute. The court specifically found as follows: "[P]laintiff's bad faith allegations . . . go beyond the scope of Ca. Civ. Code § 2860(c)'s arbitration provision, as '[t]he language of Civil Code section 2860 can only be interpreted to limit the scope of arbitrable disputes to those in which only the amount of legal fees or the hourly billing rates are at issue,' Fireman's Fund Ins. Companies v. Younesi (1996) 48 Cal.App.4th 451, 459." Following the denial of its petition, St. Paul filed a timely notice of appeal.


I. Section 2860's Arbitration Provision

Generally, an insurance carrier owes a duty to defend its insured against third party claims covered under an indemnity policy. (Buss v. Superior Court (1997) 16 Cal.4th 35, 45-46; Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-296.) This includes the duty to provide competent defense counsel and to pay all reasonable legal fees and costs. (Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 57--58; Gray Cary Ware & Freidenrich v. Vigilant Ins. Co. (2004) 114 Cal.App.4th 1185, 1189-1190 (Gray Cary).) Where an insurer provides a defense under a reservation of rights, however, a conflict of interest may arise between the insurer and its insured. (Cumis, supra, 162 Cal.App.3d at pp. 364-365.) In such a case, the insurer has a duty to provide its insured with independent counsel of the insured's choosing (Cumis counsel). (Id. at p. 375.)

In 1987, the Legislature codified the Cumis decision by enacting section 2860. (Stats. 1987, ch. 1498, § 4, p. 5779.) Subdivision (c) of the statute includes a provision concerning the arbitration of attorney's fees disputes:

"When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage. The insurer's obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. This subdivision does not invalidate other different or additional policy provisions pertaining to attorney's fees or providing for methods of settlement of disputes concerning those ...

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