Central District of California Holds that Insureds May, in Certain Circumstances, Appoint Multiple Defense Firms when Carrier’s Position Creates a Conflict of Interest
On August 7, 2014, the Central District of California held that, under certain circumstances, an insured may appoint multiple defense firms to serve as its Cumis defense counsel when a carrier’s reservation of rights creates a conflict of interest.
Signal Products, Inc. v. American Zurich Ins. Co. involves an underlying trade dress infringement matter filed by Gucci America, Inc. against several defendants, including Signal Products, Inc. (Signal). Upon receiving Signal’s tender of the underlying action, its primary CGL and umbrella carriers (collectively, “Zurich”) agreed to defend Signal under a reservation of rights. Signal and Zurich conceded that Zurich’s reservation of rights created a conflict of interest that provided Signal a right to independent counsel. Signal argued that it appointed two law firms – O’Melveny & Myers and Steptoe & Johnson – to defend it in the underlying action, and then informed Zurich about both of these appointments. Zurich took the position that it had no knowledge of Steptoe & Johnson’s involvement until after the conclusion of the underlying action.
When Zurich refused to reimburse Signal for the fees incurred by Steptoe & Johnson, Signal filed suit. After an initial round of summary judgment motions, Signal filed a second motion through which it sought, among other things, a ruling that Zurich may not refuse to reimburse it for the fees it paid to Steptoe & Johnson based on the position that an insured may not, pursuant to California Civil Code section 2860 (Section 2860), appoint multiple law firms as independent counsel.
The court ruled in Signal’s favor on this issue. In reaching its conclusion, the court noted that it was addressing an issue of first impression in California, but cited two cases from other jurisdictions supporting Signal’s position. (See, Watts Water Technologies, Inc. v. Fireman’s Fund Ins. Co.; Caterpillar, Inc. v. Century Indem. Co.) The court also noted that California courts have consistently held that Section 2860 allows an insured to appoint multiple attorneys within a single firm to serve as independent counsel, and from that fact extrapolated that “there does not appear to be any principled grounds for requiring as a matter of law that all of those attorneys need to be employed at the same law firm.”
However, the Signal court refused to grant Signal summary judgment regarding Zurich’s obligation to reimburse Signal for all of the fees incurred by Steptoe & Johnson. In this regard, the court noted that, despite the fact that, under certain circumstances, an insured entitled to Cumis counsel may appoint multiple law firms to serve as its defense counsel, “the retention of [multiple firms] is still subject to the general requirement that Cumis counsel fees must be ‘reasonable and necessary.’” The court further explained that “Signal has not established as undisputed that the retention of Steptoe as second Cumis counsel was reasonable and necessary for the defense of the [underlying] action.” In reaching this conclusion, the court suggested that an insured wishing to appoint two firms as its Cumis counsel must show that the actual appointment of the two firms was “reasonable and necessary” and not simply that the individual fees and costs incurred by the firms were “reasonable and necessary.”
Also noteworthy was the court’s ruling on Zurich’s motion for summary judgment regarding whether it could refuse to pay Steptoe & Johnson’s fees pursuant to the “No Voluntary Payments” (NVP) provision in its policy based on its position that Signal did not inform Zurich that it had retained Steptoe & Johnson. The court refused to grant summary judgment on this issue for two reasons. First, it held that there was an issue of fact regarding whether Zurich had been informed of Steptoe & Johnson’s retention. Second, and more importantly, the court held that, at least in the context of a policy that does not address a method for appointing Cumis counsel, a NVP provision does not apply to post-tender fees paid to Cumis counsel. In reaching this conclusion, the court cited to no case law, but instead curiously noted that “[g]iven the near-universality of NVP clauses in insurance policies, the absence of any cases even discussing the applicability of [such clauses] to post-tender Cumis counsel fees suggests that an insurer’s consent is not required before paying those fees.”
Signal is still pending in the Central District of California and the rulings discussed above may ultimately be appealed.
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