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Vol. 7, Iss. 1
January 31, 2018

Court Simply And Clearly Explains Why ROR Does Not Justify Independent Counsel

Sometimes insureds are quick to waive the independent counsel flag as soon as they hear that the defense being provided to them is pursuant to a reservation of rights (i.e., we don’t want panel counsel). Sure, sometimes a reservation of rights can entitle an insured to be defended by independent counsel -- and at the insurer’s expense. But lots of times the reservation of rights does not give rise to such scenario. Simply put, to trigger independent counsel, the reservation of rights must create a conflict of interest for panel counsel.

Tokio Marine Specialty Insurance Co. v. City of Laguna Beach, No. 17-277 (C.D. Cal. Dec. 18, 2017) provides a simple example, with a clear explanation, of a reservation of rights that did not create a conflict of interest to justify independent counsel. This is a departure from some cases on this issue, which can be quite lengthy and complex. The simplicity and clarity of City of Laguna Beach makes it a possibly attractive decision for courts confronting the issue.

In 2017, the owners of property located in Laguna Beach, California filed suit against the City of Laguna Beach for damages arising from a 2016 sewer backup. The complaint alleged that the City “created a dangerous condition of public property and acted with general negligence in managing its property by negligently failing to establish, operate, inspect, manage, maintain, repair, and clean its sewer lines causing a blockage to occur on the City-owned sewer line on Hillview Drive, Laguna Beach, California.”

Laguna Beach sought coverage from Tokio Marine under a commercial liability policy that provided environmental coverage insurance for “remediation expense resulting from contamination migrating from and beyond the boundaries of your insured location.” “Insured location” was a lengthy definition and it included “sanitary sewer trunk lines.”

The insurer undertook the City’s defense under a reservation of rights, including on the following basis: “[T]he claims ‘do not arise out of ‘contamination on, under or migrating from your insured location.’ Specifically, ‘[n]either the Residence where the contamination occurred, nor the lateral line to which the Residence was connected, constitutes ‘your insured location’ under the Policy.’ Moreover, there is no potential coverage if the damage arose from a clog in the sewer main line, ‘which does not constitute ‘your insured location’ because it is not a ‘sanitary sewer trunk line.’”

Despite the reservation of rights, Tokio Marine concluded that there was no conflict of interest that would require it to provide independent counsel to the City under Civil Code Section 2860. This is California’s so-called Cumis Statute, which provides that a conflict of interest arises, which creates a duty on the part of the insurer to provide independent counsel, “when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer.”

The court noted that California case law has explained that “[a] mere possibility of an unspecified conflict does not require independent counsel. Rather, the conflict must be significant, not merely theoretical, and actual, not merely potential. Moreover, a reservation of rights by an insurer does not necessarily constitute a conflict of interest requiring the insurer to provide independent counsel. Rather, such a conflict arises only when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case.”

The court held, for several reasons, that the reservation of rights did not create a conflict to obligate the insurer to allow the insured to be defended by independent counsel:

“The City does not show how Tokio Marine’s reservation of rights as to the definition of the insured location would require appointed counsel to assert factual or legal theories which undermine or are contrary to the positions that the City wishes to assert in the Underlying Action. The focus of the Underlying Action is the City’s liability, i.e. whether a City-owned line was involved in causing the sewer backup. Thus, a reasonable defense would advocate that none of the City-owned sewer lines caused the backup, regardless of its type. Indeed, the parties agree that their interests are aligned relative to a defense that targets the property owners’ private lateral line.”

“For an actual conflict to materialize, Tokio Marine’s appointed counsel would have to advocate that a blockage in the main line, rather than a trunk line, was the causal factor leading to the backup. Such a position would necessarily concede the City’s liability. The City provides no evidence to support why appointed counsel would take such a position when a defense that denies the City’s liability would both align with the interests of the City and Tokio Marine and fulfill counsel’s fiduciary duties to both clients.”

“[I]t is not apparent that the facts on which coverage depends will be ruled on judicially in the underlying lawsuit. It is immaterial to the liability determination whether the blockage occurred in the main line or a trunk line; liability turns only on whether the homeowners’ lateral line was involved. In other words, while the Underlying Action may resolve whether any of the City’s lines is responsible for the backup, it is not likely to resolve which of the City’s lines was responsible. Thus, the City is not correct that the ‘outcome of [the] coverage issue can be controlled by the insurer’s retained counsel,’ because the coverage issue is not relevant to the liability issue.”

The City of Laguna Beach decision is a clear example of California’s principle that “[a] mere possibility of an unspecified conflict does not require independent counsel. Rather, the conflict must be significant, not merely theoretical, and actual, not merely potential.”


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