Janopaul + Block Companies, LLC (“Janopaul”) and its counsel Golub & Morales, LLP (“Golub”) sought a writ of mandate to overturn the trial court’s order compelling them to arbitrate pursuant to Civil Code Sction 2860 (c) with St. Paul Fire & Marine Insurance Company (“St. Paul”).
Janopaul was the owner of a historic San Diego hotel, which Janopaul planned to restore. In 1998 Janopaul contracted with St. Paul's insured The Sundt Companies, Inc. (“Sundt”) to serve as the general contractor for the hotel project. In the contract, Sundt agreed under an express indemnity provision to defend Janopaul for claims arising from Sundt's work.
In January 2006, the hotel’s owners association filed suit against Janopaul for construction defects at the project. Janopaul timely requested that Sundt defend and indemnify it in the action. When Sundt failed to do so, Janopaul cross-complained against Sundt for breach of express indemnity, among other causes of action.
Janopaul retained Golub to represent it. In May 2006, Golub tendered Janopaul's defense and indemnity in the underlying action to St. Paul. St. Paul acknowledged receipt of the Janopaul tender in May 2006 but stated it was investigating the matter and was then unable to "either decline or accept all or part of this tender." In connection with its investigation, St. Paul requested Janopaul provide it with additional information which Janopaul did two months later, and then provided St. Paul follow-up correspondence to St. Paul in December, 2006, October 2007, and May 2008, regarding Janopaul's defense and indemnity.
In July 2008, Janopaul informed St. Paul that it intended to file a bad faith complaint against St. Paul because of its “complete failure" to respond to Janopaul's defense and indemnity tender. Janopaul included a draft complaint against St. Paul allegedly asserting tort and contract causes of action, which Janopaul threatened to file if St. Paul did not respond conclusively to the tender within 30 days.
Three days later, St. Paul agreed to defend Janopaul under a reservation of rights. St. Paul agreed to provide Janopaul "Cumis counsel" in light of the allegations of intentional conduct. St. Paul further stated in its reservation of rights letter that it was not obligated to reimburse Janopaul for any fees and costs incurred pursuing any "affirmative claims" against Sundt or any other party in the underlying action; that it only agreed to pay costs and fees that were "reasonable and necessary" to Janopaul's defense in the underlying action; and demanded Golub segregate its billing entries so that tasks performed in defense of potentially covered claims were delineated from those associated with the uncovered and affirmative claims.
In August 2009, St. Paul notified Golub that it was in the process of reviewing invoices Golub had submitted. St. Paul noted its concerns over Golub's "objectionable billing practices," including "excessive hourly rates, block billing entries and tasks which did not appear reasonable and/or necessary to the defense of Janopaul." St. Paul also disputed the billing rates Golub charged to defend Janopaul in the underlying action.
St. Paul invoked its right to arbitrate under Civil Code 2860 (c) claiming there was a dispute concerning attorney fees between the parties. St. Paul initially requested Janopaul and Golub voluntarily agree to arbitrate and suggested any such arbitration be stayed pending resolution of the underlying action in order for Golub to focus solely on Janopaul's defense. When Janopaul and Golub refused to arbitrate, St. Paul filed a petition to compel arbitration.
In response, Golub filed a motion to dismiss the petition to arbitrate, which Janopaul later joined. Among other things, they argued that because St. Paul waited more than two years to respond to the tender of defense and indemnity and reserve its rights, St. Paul had breached the insurance contract(s) and engaged in bad faith, and forfeited and/or was estopped to assert its alleged right to compel arbitration and select and set rates for independent counsel. St. Paul in turn moved to enforce its petition to compel arbitration.
Before final ruling on the motions, Janopaul filed a "bad faith" action against St. Paul alleging causes of action for breach of contract, tortious breach of the implied covenant of good faith and fair dealing and declaratory relief. Janopaul sought compensatory and punitive damages against St. Paul for the latter's alleged breach of contract/bad faith in connection with, among other allegations, St. Paul's unreasonable delay in accepting the tender of defense.
The trial court denied Janopaul and Golub’s motion to dismiss the arbitration petition and granted St. Paul's competing motion to compel arbitration. The trial court stayed the action pending completion of arbitration.
Janopaul challenged the trial court's ruling by filing a petition for writ of mandate. The appellate court vacated the trial court’s rulings on the motions and ordered the trial court to deny St. Paul’s motion to compel arbitration.
The Court rejected St. Paul's argument that Janopaul filed a "retaliatory bad faith complaint” to avoid arbitration and insulate Golub's excessive fees from judicial scrutiny. The Court concluded that Janopaul’s complaint raised issues and claims substantially broader than a dispute over the amount of attorney fees, including breach of the insurance contracts and bad faith.
The Court reconciled two important California decisions regarding enforcement of § 2860’s arbitration mandate: Compulink v. Management Center, Inc. v. St. Paul Fire & Marine Ins. Co., 169 Cal.App.4th 289, 296 (2008), holding that “Cumis” fee disputes are subject to mandatory and exclusive arbitration even in the face of non fee related issues such as bad faith allegations or other breach of contract claims, and Intergulf Development LLC v. Superior Court (2010) 183 Cal.App.4th 16, which held that an exception to Compulink’s rule existed where a total breach of the duty to defend is alleged. In that situation § 2860’s mandate for judicial arbitration’s exclusive jurisdiction over the fee dispute may not apply.
Significantly, the Court balanced the two decisions as follows:
“We agree with Compulink and Intergulf that to the extent there is a dispute between the parties concerning the amount of Cumis counsel fees owed in the defense of an insured in a third party suit, that dispute ultimately must be resolved by arbitration as required by subdivision (c) of section 2860. (See also Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1474 [subdivision (c) of section 2860 does not confer jurisdiction on courts to hear disputes concerning Cumis fees].)
However, when, as here and as in Intergulf, an insured raises in a bad faith action the duty to defend, breach and bad faith by an insurer, those issues must be resolved first in the trial court before any subdivision (c) arbitration because a determination of one or more of those issues in favor of the insured may eliminate altogether the need for arbitration under section 2860.”
The Court then held that Janopaul’s filing of the bad faith action put St. Paul on notice that Janopaul was treating St. Paul's delay in accepting Janopaul's tender as a total breach of the duty to defend. Because issues regarding the breach of the duty to defend and bad faith in connection with Janopaul's tender must first be decided in the trial court and because these issues had not been resolved before the trial court granted St. Paul's motion under Civil Code 2860 (c), the trial court erred when it prematurely stayed the instant case and ordered the parties to arbitrate their "fee dispute."
When an insured raises in a bad faith action a breach of the duty to defend and bad faith by an insurer, those issues must be resolved first in the trial court before any subdivision (c) arbitration because a determination of one or more of those issues in favor of the insured may eliminate the need for arbitration under Civil Code 2860.
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