In Federal Ins. Co. v. MBL, Inc., 2013 WL 4506149 (Cal. Ct. App. Aug. 26, 2013), the California Court of Appeal continued the judicial trend of restricting the insured’s right to insurer-paid independent counsel. The court held that a general reservation of rights, and a specific reservation of rights to deny coverage on the basis of the Absolute Pollution exclusion and to contend that the alleged damages did not occur during the policy period, do not create a conflict of interest between the insurer and its insured which would entitle the insured to independent counsel in an underlying action.
Pursuant to Section 2860 of the California Civil Code, if an insurer has a duty to defend and reserves its right to deny coverage regarding an issue that can be controlled by defense counsel appointed by the insurer, a conflict of interest arises between the insurer and the insured and entitles the insured to its own independent counsel, paid for by the insurer. The insured MBL, a supplier of PCE and other dry cleaning products, was named as a defendant in several third party complaints and cross-complaints in litigation instituted by the federal government for recovery of costs associated with remediation of groundwater contamination. Several of MBL’s liability insurers agreed to defend under a reservation of rights, and the insurers appointed defense counsel for MBL. MBL refused the defense counsel selected by the insurers, and contended that the reservations of rights entitled it to independent counsel of its own choosing at the insurers’ expense.
The court rejected MBL’s arguments and held that none of the three types of reservations issued by the insurers created a conflict of interest which would warrant an appointment of independent defense counsel. First, the court held that a general reservation of rights, pursuant to which the insurers did not expressly reserve their right to deny coverage under any particular exclusion (but preserved the insurers’ rights to rely on all their policies’ terms) did not create an actual conflict that gives rise to a right to independent counsel. The court reasoned that such a general reservation could do nothing more than create a theoretical, potential conflict of interest. Second, the court held that a reservation to deny coverage under an “Absolute Pollution” exclusion did not create a conflict because whether the exclusion applies is strictly a matter of contract interpretation and could not be controlled by defense counsel. Finally, the court held that a reservation on the issue of when the alleged damages occurred was irrelevant to the defense of the underlying claim and did not trigger a right to independent counsel, because MBL did not show how defense counsel could control that issue.
The case affirmed the holding of prior case law, first espoused in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal. App.3d 358, that only an actual and significant conflict of interest – as opposed to a potential or theoretical conflict – entitles an insured to independent counsel under Section 2860.