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The Housing Group, et al v. Pma Capital Insurance Company

March 25, 2011


Alameda County Super. Ct. Nos. RG 06291935; RG 07334847 Court: Alameda County Superior Court Judge: Hon. Jon S. Tigar

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


Defendants PMA Capital Insurance Company as successor in interest to Caliber One Indemnity Company, and Caliber One Management Company appeal from an order, filed November 19, 2009, denying their petition to compel arbitration of a dispute concerning attorney fees to be paid to an alleged Cumis counsel.*fn1 (See Civ. Code, § 2860, subd. (c).) We affirm.


On July 10, 2007, plaintiffs The Housing Group, Golden State Developers, Inc., Castro Valley Associates, LP., and Castro Valley, Inc. commenced this lawsuit against their insurers defendants PMA Capital Insurance Company as successor in interest to Caliber One Indemnity Company, and Caliber One Management Company (hereinafter collectively referred to as Caliber One). The record does not include a copy of the first amended complaint, the operative pleading, which was filed May 22, 2008. Caliber One describes the pleading as one in which plaintiffs seek damages for "breach of contract, bad faith, fraud, declaratory relief, malicious prosecution, and negligent representation . . . ." Plaintiffs describe the pleading as seeking damages for Caliber One's failure and refusal to defend plaintiffs in certain third-party actions arising out of The Views subdivision in Castro Valley, California.

Caliber One petitioned to compel arbitration of an alleged Cumis fee dispute pursuant to Civil Code*fn2 section 2860, subdivision (c) (hereinafter section 2860(c)).*fn3 In support of the request, Caliber One argued: "The instant action involves disputes regarding the applicable fee that should be paid by Caliber One for legal services rendered by the independent counsel for plaintiffs" in three underlying third-party lawsuits (hereinafter referred to as the Engleman, Morrison, and Mid-Century actions, or the underlying litigation). According to Caliber One, "[p]laintiffs seek as damages in this action the full hourly billable rate of their corporate counsel while Caliber One agreed to pay the rate that is actually paid by Caliber One to attorneys it retains in the ordinary course of business to defend similar actions in the community where the claim was being defended." Caliber One paid defense fees and costs in excess of $35,000, but plaintiffs found the payment insufficient.*fn4 Consequently, Caliber One argued the court was required, pursuant to section 2860(c), to compel arbitration of the "distinct dispute" regarding the applicable fees that should be paid by Caliber One for legal services rendered by plaintiffs' independent counsel. Relying principally on Compulink Management Center, Inc. v. St. Paul Fire & Marine Ins. Co. (2008) 169 Cal.App.4th 289 (Compulink), Caliber One also argued that arbitration was mandatory even though plaintiffs also sought damages for Caliber One's alleged bad faith and unreasonable delay in agreeing to defend plaintiffs and in failing to make timely payments of defense fees and costs.

Plaintiffs opposed the petition on various grounds, including that Caliber One could not invoke section 2860(c) because it did not and could not offer any evidence it had ever agreed to defend plaintiffs in the underlying litigation. Plaintiffs submitted a declaration of their counsel, who averred that Caliber One had not accepted the tender of the Engleman action and never defended that action (except for making a minor payment to reimburse plaintiffs' damages arising out of fees after the case settled), and Caliber One never responded to a tender of the Morrison and Mid-Century actions or agreed to defend either of those actions. Plaintiffs also submitted "two reservation of rights" letters from Caliber One responding to the tender of the Engleman action. According to plaintiffs, the letters did not indicate Caliber One would defend plaintiffs in the underlying litigation.*fn5 Finally, plaintiffs argued there were outstanding questions concerning whether Cumis counsel was actually retained or required in the first instance, which issues were not subject to arbitration under section 2860(c).

In reply, Caliber One argued that arbitration was compelled by the following allegation in plaintiffs' first amended complaint: "Notwithstanding the fact that on the even [sic] of trial, defendants finally admitted coverage for the Engleman Action and paid Plaintiffs' share of the settlement in the amount of $193,000 and drafted the settlement agreement for the Engleman Action, defendants retaliated against Plaintiffs for having filed this lawsuit by only reimbursing Plaintiffs less than $36,000 for defense fees and costs." Caliber One also argued that its two "reservation of rights" letters, and payment of defense fees and costs, constituted an acknowledgement of their duty to defend the Engleman lawsuit.

After a hearing, the trial court denied the petition to compel arbitration. It noted plaintiffs had submitted declarations and evidence demonstrating that either no defense fees were paid on the underlying actions, or, in one case, defense fees were not paid until the action settled, and that Caliber One had not hired counsel to defend plaintiffs in the underlying litigation. Relying on the reasoning in Stalberg v. Western Title Ins. Co. (1991) 230 Cal.App.3d 1223, 1233 (Stalberg), in which an insurer had rejected a tender to defend, the trial court found Caliber One's failure to provide a defense left plaintiffs in the same position as if Caliber One had failed to defend. The trial court also found persuasive the decision in Atmel Corp. v. St. Paul Fire & Marine (N.D. Cal. 2005) 426 F.Supp.2d 1039, 1047 (Atmel), in which the federal district court, interpreting California law, held that an insurer could not avail itself of the protections and limitations set forth in section 2860, because it was undisputed that the insurer had not defended the insured in the underlying litigation. The trial court here then ruled: "In the case at bar, since the Court finds that the Caliber One Defendants did not provide a defense, the Court finds that these defendants are not entitled to compel an arbitration pursuant to Section 2860." Caliber One timely appeals.


Caliber One presents several arguments challenging the denial of its petition to compel arbitration. We conclude none of the contentions requires reversal.

Initially, we reject Caliber One's argument that we should analyze the trial court's decision de novo because it is based on facts presented in the petition, and therefore the proper scope of the application of section 2860(c), and whether arbitration is mandated in this case, "is a question that is subject to de novo review." Unlike the situations in Compulink, supra, 169 Cal.App.4th at p. 295, and Handy v. First Interstate Bank (1993) 13 Cal.App.4th 917, 922-923 (Handy), cited by Caliber One, the trial court in this case did not deny the petition based on an application of section 2860(c) to undisputed facts. Instead, as plaintiffs correctly argue, the denial of the petition is based on the finding that Caliber One did not defend plaintiffs in the underlying litigation, which we review for substantial evidence. (Engineers & Architects Assn. v. Community Development Dept. (1994) 30 Cal.App.4th 644, 653.)

An insurer's "duty to defend arises when tender is made. It obligates the insurer, unless no part of any claim is potentially covered, to fund a defense to minimize the insured's liability. [Citation.]" (State of California v. Pacific Indemnity Co. (1998) 63 Cal.App.4th 1535, 1546.) "To defend meaningfully, the insurer must defend immediately. [Citation.]" (Buss, supra, 16 Cal.4th at p. 49.) "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. [Citation.]" (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.) "If the courts did not impose an immediate defense obligation upon a showing of a 'potential for coverage,' thereby relieving the insured from the burden of financing his own defense and then having to sue the insurer for reimbursement, the premiums paid by the insured would purchase nothing more than a lawsuit. [Citation.]" (Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 979, fn. 14; emphasis added (Haskel).) If an insurer "is providing a defense under a reservation of rights and has agreed to utilize independent counsel," an insurer may compel arbitration to resolve a dispute regarding the payment of defense fees pursuant to section 2860(c). (Truck Ins. Exchange v. Superior Court (1996) 51 Cal.App.4th 985, 998; see Atmel, supra, 426 F.Supp.2d at p. 1047 ["as numerous courts have recognized, '[t]o take advantage of the provisions of [section] 2860, an insurer must meet its duty to defend and accept tender of the insured's defense, subject to a reservation of rights' "].)

Caliber One argues that in this case it was entitled to compel arbitration pursuant to section 2860(c), because "it is undisputed" that it did not deny the tender by plaintiffs, and it not only "acknowledged the tender and issued a reservation of rights, but also paid defense fees and costs." According to Caliber One, "Plaintiffs provided no evidence, or even argument, that [Caliber One] ever 'denied' the underlying tender of defense. The record plainly establishes, to the contrary, that [Caliber One] issued two separate reservation of rights letters, neither of which included any statements that could possibly be construed as denying the claim. The record clearly demonstrates that [Caliber One] paid sums for defense fees." According to Caliber One, "[o]nce payments of defense expenses have been paid, as [p]laintiffs clearly admit, [p]laintiffs cannot reasonably contend that [Caliber One] 'failed to defend' relative to the underlying action. ...

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