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Sierra Pacific Industries v. American States Insurance Company

July 31, 2012

SIERRA PACIFIC INDUSTRIES,
PLAINTIFF,
v.
AMERICAN STATES INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge

MEMORANDUM AND ORDER

Before the Court is Plaintiff/Counterdefendant Sierra Pacific Industries' ("Sierra") Motion to Dismiss ("MTD") Defendant/Counterclaimant American States Insurance Company's ("ASIC") Second Claim for Relief in its Counterclaim.*fn1 (ECF No. 26.)

Also before the Court is Sierra's Motion for Judgment on the Pleadings.*fn2 (ECF No. 27.) For the reasons that follow, both the Motion to Dismiss and the Motion for Judgment on the Pleadings are denied.

BACKGROUND*fn3

This lawsuit is based on Sierra's contention that ASIC breached its contractual duty to defend Sierra in multiple lawsuits stemming from the "Moonlight Fire," a 2007 fire in or near Plumas National Forest that burned approximately 65,000 acres.

The primary issues that are presently in contention, both in Sierra's Motion to Dismiss the Second Claim in ASIC's Counterclaim and Sierra's Motion for Judgment on the Pleadings, relate to Sierra's desire to utilize the services of its choice of counsel and have ASIC pay that firm's billing rates, which run counter to ASIC's position that Sierra must either (1) accept ASIC's choice of panel counsel, or, if Sierra insists on its choice of counsel, (2) accept the panel counsel hourly rate of $150 an hour.

The underlying events giving rise to this action began in 2007, when Sierra entered into a timber harvest contract with multiple private landowners ("the Landowners") in Plumas County, in which Sierra agreed to defend, indemnify and hold harmless the Landowners from and against any and all claims arising from the timber harvest operations on the Landowner's property.*fn4 Sierra then subcontracted the timber harvest operations to Howell's Forest Harvesting ("Howell"). In its contract with Sierra, Howell agreed to defend and indemnify Sierra from all liability and damages that might arise out of the timber harvest. ASIC provided Howell with a commercial general liability ("CGL") insurance policy (the "Policy"), under which Sierra was an additional insured.*fn5

In the Policy, ASIC agreed to "those sums that the insured becomes legally obligated to pay as damages because of 'bodily injury' or 'property damage' to which this insurance applies," up to the limits of the Policy, and promised to "defend the insured against any 'suit' seeking those damages." (See Counterclaim at 5.) The Policy also includes a cooperation clause, obligating the insured to "[c]ooperate with us in the investigation, settlement or defense of the 'suit.'" (Id. at 7.)

The Moonlight Fire ignited in September 2007, and bulldozers operated by Howell employees may have caused the spark that ignited it.*fn6

On August 7, 2009, the California Department of Forestry and Fire Protection ("Cal Fire") filed a complaint against Sierra, Howell and others in the Plumas County Superior Court seeking various costs and damages arising from the fire (the "Cal Fire Action"). In response, on or about August 26, 2009, Sierra retained Downey Brand LLP ("Downey Brand") to defend it. Then on August 31, 2009, the United States filed a complaint against Sierra, Howell and others in the Eastern District of California (the "Federal Action"), also seeking various costs and damages arising from the fire.

On or about September 9, Sierra advised ASIC of its intent to tender its defense in the Cal Fire Action.*fn7 Rhonda Cully ("Cully") was assigned to handle Sierra's claim. On September 22, Cully had a telephone conversation with Sierra's corporate counsel and during that call, Sierra's counsel advised Cully that Sierra had retained Downey Brand to defend it and that Sierra would be tendering its defense to ASIC. That day, Sierra's counsel sent a letter to ASIC tendering its defense in both cases.*fn8

On September 30, Sierra's Downey Brand counsel apparently informed Cully by phone that he was preparing answers to the Complaints in both the Cal Fire Action and Federal Action. Then, on October 1, Cully, apparently in the course of a telephone conversation with representatives of Sierra, informed Sierra that ASIC was accepting Sierra's defense in the Cal Fire and Federal Action without a reservation of rights and would provide Sierra with panel counsel, specifically Mike Budra ("Budra") from the Law Office of James D. Biernat (the "Biernat firm").

ASIC maintains that Budra and the Biernat firm were qualified to defend Sierra, because the firm had tried a total of seventy cases to verdict, including ones in state and federal court, as well as some unspecified number of fire cases. Sierra's representatives, however, did not agree to ASIC's choice of counsel and indicated that because of the concerns regarding Sierra's excess exposure, Sierra wanted Downey Brand to continue as defense counsel.*fn9

On October 7 and 14, Cully wrote to Sierra, confirming acceptance of the tender of defense without a reservation of rights and stating that ASIC had selected Budra of the Biernat firm as defense counsel. In addition, Cully communicated to Sierra that she understood Sierra had obtained an extension of time to respond in the Cal Fire Action and had not yet been served in the Federal Action.*fn10 For several days thereafter, Sierra and ASIC engaged in negotiations regarding whether Downey Brand or the Biernat firm would represent Sierra. Then, on October 23, a Sierra representative wrote to Cully arguing that Sierra had the right to select its own independent counsel because of the conflict between Sierra and Howell, which are both insured by ASIC.

On November 9, ASIC sent a letter to Sierra stating that Sierra was not entitled to independent counsel, but that ASIC was willing to pay the $150 per hour Biernat firm rate for Downey Brand's services. On or about January 1, 2010, Sierra rejected ASIC's contention that it had the right to select defense counsel, as well as ASIC's offer to pay the $150 per hour panel counsel rates for Downey Brand services.

Throughout 2009 - November 2010, as Sierra tendered its defense for the various other actions that were filed against it, ASIC accepted the defense without a reservation of rights.*fn11

ASIC also represents that it defended Howell without a reservation of rights and provided Howell with panel counsel, but not the Biernat firm.

In October 2010, Sierra, for the first time, forwarded Downey Brand invoices for attorneys' fees and costs incurred in the Cal Fire Action and Federal Action for the period of August 2009 - August 2010, which totaled approximately $1 million, to ASIC. ASIC alleges that Downey Brand provided only minimal services concerning a response to the Cal Fire Action before Cully advised Sierra on October 1, 2009, that American was accepting its defense.

As ASIC received the Downey Brand invoices, it requested clarification for the various charges.

Then, on or about February 1, 2011, ASIC issued a check for $582,819.41 to Sierra, which ASIC contends represented full payment of all Downey Brand invoices in defense of Sierra in the Moonlight Fire actions, adjusted for, inter alia, the $150 panel counsel billing rate, unnecessary and/or unreasonable charges, and non-defense work. On February 7, 2011, Sierra cashed the check and, that same day, it filed its complaint in this action.

On July 18, 2011, this Court denied ASIC's Motion to Dismiss Sierra's First Amended Complaint. (ECF No. 19.) On August 1, 2011, ASIC filed its Counterclaim (ECF No. 20). In its Counterclaim, ASIC asserts two claims for relief: (1) declaratory relief, in which ASIC essentially seeks an order from this Court that it was entitled to control Sierra's defense in the Moonlight Fire actions and that the Biernat firm was not conflicted; and (2) breach of the duty to cooperate and/or breach of contract, in which ASIC contends that by refusing to relinquish control over the lawsuit and refused to accept panel counsel rates, Sierra breached its duty to cooperate or otherwise breached the contract with ASIC. (Counterclaim, ECF No. 20, pp. 20-24.) Sierra thereafter moved to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), ASIC's second claim for relief in its Counterclaim.*fn12 (MTD, ECF No. 26.)

In its Motion to Dismiss, Sierra generally alleges that ASIC cannot maintain this claim because it did not reserve its rights, the cooperation clause does not support an independent cause of action, and ASIC cannot allege any prejudice because the status quo is that Downey Brand is the present defense counsel and ASIC is paying Downey Brand panel counsel rates.

On September 8, 2011, Sierra filed its Motion for Judgment on the Pleadings. (("MJoP"), ECF No. 27.) In this motion, Sierra argues that ASIC's coverage only extends to SPI's vicarious liability, not its independent liability, therefore ASIC has an inherent and irreparable conflict of interest. Sierra seeks an order from this Court that declares that Sierra was ...


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