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October 2012

Insurer Forfeits Right To Control Counsel When It Initially Refuses To Defend

By Christine D. Barker of the Orange County Office

A Northern District of California federal court held that because a liability insurer initially refused to defend its insured in two underlying construction defect lawsuits, it forfeited its right to control the defense, including the right to appoint counsel.  In the underlying lawsuit, although the insurer initially declined coverage, after its insured sued, Travelers offer to defend under a reservation of rights.  The court held that because Travelers initially denied coverage, it lost its right to control the defense of the suits. Travelers Property Casualty Company of America v. Centex Homes, (“Centex II”) No. 11-3638 2012 U.S. Dist. LEXIS 65834 (N.D. Cal. May 10, 2012).

Thus far, there have been two decisions in a line of lawsuits between Travelers and its insured Centex Homes, concerning control over Centex’s defense in two underlying construction defect lawsuits.  Traveler’s prevailed in the first decision, but Centex came out on top in the most recent decision. 

In Travelers v. Centex, No. C10-02757CRB (“Centex I”) 2011 U.S. Dist. Lexis 36128 (N.D. Cal. Apr. 1, 2011), a federal court found that Centex owed a duty to cooperate with Traveler’s appointed counsel, and, when it failed to do so, it lost its right to coverage under the policy.  The court held that even though Travelers had an immediate duty to defend, it only delayed in responding to Centex’s tender because Centex failed to “promptly provide the reasonably requested information to facilitate [the] investigation.”  Thus, the court in Centex I found that even though Travelers delayed in accepting Centex’s tender, Travelers  retained its right to control defense of the case and appoint counsel.  Moreover, Centex’s refusal to accept defense counsel appointed by Travelers, was deemed a breach of the policy’s cooperation clause.  As a result, Travelers had no duty to defend or indemnify Centex in the underlying construction defect lawsuits.  Round one, Travelers.

Centex II involved similar issues, but a different set of facts, and this time the court sided with the insured.  In Centex II, Centex again tendered its defense to Travelers in two underlying construction defect lawsuits. Travelers initially denied the coverage, but reserved all rights under the policy.  Following the denial of coverage, Centex retained its own counsel, Newmeyer & Dillion, to defend it in the underlying construction defect actions.

Centex then filed a bad faith lawsuit against Travelers, which was dismissed without prejudice when Travelers reconsidered its denial of coverage and agreed to defend Centex.  Upon agreeing to defend, Travelers appointed different counsel to handle the defense of Centex, claiming Newmeyer & Dillion engaged in dubious billing practices in the past, including two other actions tendered by Centex to Travelers.  Centex refused to allow Travelers to appoint new counsel, claiming the appointment of new counsel would be “reckless and wasteful to change horses mid-stream.”

In a separate lawsuit, Travelers, along with several of other insurance companies, filed a declaratory relief action against Centex, claiming similar to the situation in Centex I, Centex’s refusal to allow the appointment of new counsel in Centex II was a breach of the cooperation clause, and thus voided coverage. 

This time the court sided with Centex.  In Centex II, the court found that Travelers waived its right to control Centex’s defense in the underlying construction defect lawsuits when it initially denied its duty to defend in those actions.  The court cited, Einger v. Worthington, which held that, “[w]hen an insured wrongfully refuses to defend, the insured is relieved of his or her obligation to allow the insurer to manage the litigation and may proceed in whatever manner is deemed appropriate.”  (1997) 57 Cal.App.4th 188, 196.  Following this holding, the court in Centex II found that Travelers lost its right to control the defense when it initially declined to participate in the defense.  Indeed, the court found that Travelers only agreed to participate in the defense after its insured sued.  The court in Centex II distinguished the findings in Centex I, stating that there was no indication in the instant case that Travelers’s delay in defending was due to Centex’s failure to provide requested information, as was the situation in Centex I

In Centex II, the court found that “an insurer’s duty to defend is an immediate one,” and by failing to abide, Travelers waived its right to control the defense of the underlying lawsuits.  The court found Travelers’s reliance on the holding in Centex I unpersuasive, as Travelers’s initial denial of coverage was not because of a Centex’s delay in providing requested information.  As such, the court found Centex did not breach its duty to cooperate by refusing to be defended by Travelers’s appointed counsel. 

Christine D. Barker



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