Warning: A Builder Who Rejects Assigned Counsel May Jeopardize Insurance Coverage

by Nossaman LLP

For many reasons, developers and builders in a construction defect lawsuit want to pick their own counsel to defend them.  For instance, they have a good working relationship with the counsel, counsel did well in another case or they want to control the overall defense.  Commercial general liability policies generally provide that when an insurer accepts a defense under the policy, the insurer then gets to control the defense and choose counsel.  There are exceptions where an insurer defends under certain kinds of reservations, such as under Civil Code Section 2860.  How about when the insurer does not reserve such rights?  A recent unpublished case reminds us that there may be costs to a developer who insists on using its own counsel and careful consideration should be given early in any case about how to avoid or minimize those costs.  Travelers Indemnity Company of Connecticut v. Centex Homes, No. 14-0217 (E.D. Cal. May 15, 2014).

The case involved a residential home builder that required its subcontractors to obtain insurance and name the builder as an “additional insured.”  The builder was then sued by homeowners who alleged construction defects existed in their homes.  The builder tendered the construction defect action to the Travelers Insurance Company, the insurance company of two subcontractors, as an additional insured under their policies.  The facts described in the case are a little unclear but the insurance company agreed to defend the builder as an additional insured.  Notably, the case references no reservation of rights of any kind being asserted by Travelers.  Travelers then indicated it would assert its right to retain counsel of its choosing to represent and defend the builder in the action.  The builder refused to accept that counsel and Travelers asserted in a federal court action that the builder breached the insurance agreements because it “has refused or will refuse” to accept the insurance company’s choice of counsel and “is demanding or will demand independent counsel.”  Travelers sued for declaratory relief, breach of contract and equitable relief.  The builder, Centex Homes, sought to dismiss the entire complaint. But the builder had already fought the same battle with Travelers and lost—it fared no better before this court.

The court considered whether Travelers had sufficiently alleged that the builder had breached its duty to cooperate under the insurance policies by refusing to accept Traveler’s appointed counsel.  Travelers alleged that the developer’s “refusal to acknowledge that [the insurance companies have] the right to control the defense and select counsel, its refusal to accept said counsel, and its insistence that [the insurance companies] continue to pay fees and costs of its personal counsel is a breach of its duty to cooperate under the [insurance policies].”  The court cited a prior case between the two same parties in which a different court found that the builder had breached its duty to cooperate by refusing to accept Travelers’ selected counsel and found that Travelers had stated claims for declaratory relief and breach of contract against the builder in this case.

The builder therefore risked losing coverage for a defense by Travelers’.  The opinion does not explain whether other carriers had an obligation to pay for the builder’s defense in the action.  The builder was able to get the claim for equitable reimbursement dismissed because such a claim is premised on a “defend now seek reimbursement later” theory and the case was still ongoing.

The lesson here is that builders who tender claims in construction defect lawsuits as additional insureds under subcontractors’ insurance policies should carefully consider the impact this may have on their ability to select their own counsel and to control their defense.  It may have to choose between keeping the counsel it wants or losing the right to have the insurance company on the hook to pay its fees and costs in the case.   In this instance, because of the prior case involving the same issue between the same parties, the insurance company, by accepting the tender and agreeing to provide counsel, may have been using the builder’s anticipated reluctance to accept the insurance company’s selected counsel as a tactic to avoid paying its share of the defense costs.   If this was the company’s strategy, then tactics such as sending early tenders that demand very prompt acceptance if the company does not consent to using and paying for the current counsel, may help avoid these situations by making the company assert its position before it is prepared to take control of the entire case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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