ORIGINAL PROCEEDING. Proceedings in mandate after the superior court granted real party's petition to compel arbitration of a Cumis fee dispute. Joan M. Lewis, Judge. Petition granted. (Super. Ct. No. 37-2008-00080945-CU-IC-CTL).
The opinion of the court was delivered by: McINTYRE, J.
CERTIFIED FOR PUBLICATION
This case presents the question whether an insurer is entitled to binding arbitration of an alleged Cumis fee dispute pursuant to Civil Code section 2860, subdivision (c) in an action by the insured against the insurer for breach of contract and bad faith where there has been no determination that the insurer had a duty to defend and the parties dispute whether the insurer satisfied that duty and its obligations under Civil Code section 2860. (See San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis), superseded by Civ. Code, § 2860 as stated in Derivi Constr. & Architecture, Inc. v. Wong (2004) 118 Cal.App.4th 1268, 1276, fn. 1; undesignated statutory references are to the Civil Code.) Having considered the argument and additional briefing submitted by the parties following transfer from the Supreme Court, we conclude that the court erred in treating this case as a fee dispute subject to section 2860, subdivision (c), and ordering arbitration before questions of bad faith and breach of contract were resolved. Accordingly, we grant the relief requested.
FACTUAL AND PROCEDURAL BACKGROUND
Treo at Kettner Homeowners Association sued petitioner Intergulf Development LLC (Intergulf) and others for alleged defects in the construction of a condominium project in downtown San Diego. Real party in interest Interstate Fire & Casualty Company (Interstate) insured Intergulf from liability for bodily injury or property damage under a policy which read in part:
"We will pay those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies. We will have the right and duty to defend the insured against any 'suit' seeking those damages. However, we will have no duty to defend the insured against any 'suit' seeking damages to which this insurance does not apply. We may at our discretion investigate any 'occurrence' and settle any claim or 'suit' that may result. . . ."
By letter dated March 19, 2007, Intergulf tendered the construction defect claims and demanded that Interstate defend and indemnify Intergulf as an additional insured in policies issued to its subcontractor. Interstate, a division of Fireman's Fund Insurance Company, responded that it would undertake an investigation "under a full and complete reservation of rights." On November 8, 2007, Interstate acknowledged receipt of tender and agreed to participate in Intergulf's defense through the law firm of Wood, Smith Henning & Berman subject to a reservation of rights. Ten days later, Intergulf objected in writing to the defense by Interstate's counsel, cited Cumis and section 2860, and requested appointment of independent counsel of Intergulf's choice. The letter closed with the request: "Please let me know whether Fireman's Fund will agree to counsel selected by Intergulf." There was no response from Interstate. By letter dated November 29, 2007, Intergulf requested that Interstate immediately reimburse Intergulf for its defense costs and reaffirmed that it was entitled to appointment of independent counsel. There was no response from Interstate. Intergulf wrote Interstate on January 7, 2008, "to follow-up on our previous requests for a defense from Fireman's Fund." It demanded payment of defense costs by January 21, 2009, stating that Interstate had "failed to satisfy its defense obligations . . . which in turn ha[d] caused Intergulf severe hardship and expense." There was no response from Interstate.
Intergulf sued Interstate for bad faith, breach of contract, and declaratory relief, seeking compensatory and punitive damages. It later acknowledged that Interstate made two payments toward the defense costs: (1) a payment of approximately $140,000 more than two months after Intergulf filed its complaint and (2) a payment of approximately $98,000 nine months after the first payment.
Five weeks before the scheduled trial, Interstate filed a petition to compel arbitration of what it characterized as a "Cumis Fee Dispute." Using language from section 2860, subdivision (c), counsel for Interstate declared that Luce, Forward, Hamilton & Scripps (Luce), Intergulf's independent counsel, was "attempting to charge legal fees far in excess of those actually paid by Interstate in the normal course of business, to attorneys retained by it to defend similar actions in San Diego County." Intergulf responded that the case was about the damages Interstate owed for breaching its duty to defend. It argued that because the questions of Interstate's duty to defend, conflict of interest and bad faith had not been resolved, Interstate did not satisfy the prerequisites for arbitration under section 2860, subdivision (c). The papers filed by both parties highlight the dispute over when, if ever, Interstate agreed that Intergulf was entitled to select its own counsel. Without citation to supporting evidence Interstate represented that it "ultimately" agreed to the demand that Luce serve as Cumis counsel. By declaration, counsel for Intergulf responded: "[A]s far as I know Interstate has never agreed that [Intergulf] was entitled to independent counsel in the Treo litigation."
Citing Compulink Management Center, Inc. v. St. Paul Fire & Marine Ins. Co. (2008) 169 Cal.App.4th 289 (Compulink), and Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460 (Long), the trial court granted Interstate's petition to compel arbitration and continued the trial pending completion of arbitration.
Intergulf challenged the trial court's ruling by filing a petition for writ of mandate in this court. We summarily denied the petition. The Supreme Court granted Intergulf 's petition for review and transferred the matter to us with directions to vacate the order denying mandate and issue an order to show cause why the relief sought should not be granted.
Briefing in response to the order to show cause focused once again on the question whether Interstate satisfied its obligations under Cumis and section 2860. Interstate admitted that it did not pay Intergulf anything before April 1, 2008. It also represented that it "acceded" to Intergulf's demand for independent counsel but did not state when this occurred.
We agree with Intergulf that the gravamen of the complaint is bad faith and breach of contract, not a dispute over the amount Interstate should pay independent counsel under section 2860, subdivision (c). Unreasonable delay in paying policy benefits or paying less than the amount due is actionable withholding of benefits which may constitute a breach of contract as well as bad faith giving rise to damages in tort. (Wilson v. 21st Century Ins. Co. (2007) 42 Cal.4th 713, 720, 723; Major v. Western Home Ins. Co. (2009) 169 Cal.App.4th 1197, 1209.) The general measure of damages for breach of duty to defend consists of the insured's cost of defense in the underlying action, including attorney fees. (Emerald Bay Community Assn. v. Golden Eagle Ins. Corp. (2005) 130 Cal.App.4th 1078, 1088-1089.) Breach of duty to defend also results in the insurer's forfeiture of the right to control defense of the action or settlement, including the ability to take advantage of the ...