Interpretation of Policy Archives - Page 5 of 7

In actions brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), two roads diverge in federal court—and the court’s choice regarding the applicable standard of review can make all the difference in the scope of permissible evidence. If the court applies the abuse of discretion standard of review, the court more typically (but not always) only considers evidence received by the insurer in time for its decision and limits its review to the “administrative record” to determine whether the insurer’s denial was an abuse of discretion. Alternatively, the court may review a case “de novo,” and may consider documents not previously provided to the insurer to determine whether the insured is entitled to benefits.

Prior case law holds a district court must review a plan administrator’s decision de novo, “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). The Ninth Circuit Court of Appeals expanded upon this holding, by defining what constitutes the “benefit plan.” The Ninth Circuit clarified that where a Summary Plan Description (“SPD”) which was not defined as an official plan document unambiguously granted discretionary authority to a plan administrator to decide claims, but an insurance certificate, an official plan document, did not grant discretionary authority, the official plan document governed. Because the governing plan document, the insurance certificate, did not grant the insurer discretionary authority, the district court was required to review the case de novo. Prichard v. Metropolitan Life Ins. Co., 2015 U.S. App. LEXIS 6553 (9th Cir. Apr. 21, 2015). Prichard is significant as the de novo standard is arguably more favorable to insureds, because it not only provides a less deferential standard of review, but insureds may be able to conduct discovery and supplement the administrative record to offer evidence that administrators acted with bias or to bring in additional medical evidence to support a disability.

Prichard involved a fairly standard ERISA claim by Matthew Prichard, an insured, against Metropolitan Life Insurance Company (“MetLife”) for his long-term disability insurance benefits. Prichard’s policy contained a 24-month benefits period for mental limitations. Prichard filed for, and received, benefits for his psychiatric disability for a period just shy of 24 months. Subsequently, MetLife requested additional information demonstrating Prichard was disabled due to non-limited conditions, received his updated medical records and decided there was insufficient medical evidence to support his claim. Prichard appealed unsuccessfully, then brought suit for a continuation of his ERISA benefits under 29 U.S.C. section 1132(a)(1)(B).

The district court addressed whether the applicable standard of review was de novo or abuse of discretion. MetLife pointed to unambiguous language in its SPD granting the plan fiduciary “discretionary authority to interpret the terms of the Plan,” and argued for the abuse of discretion standard of review. Prichard argued the Supreme Court holding in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) stating the terms of plan summaries may not be enforced as the plan itself precluded MetLife from asserting that the SPD language was the Plan language. Prichard further argued that no other plan documents conferred discretionary authority on MetLife, and therefore the district court should review the case de novo. The district court found the SPD was a governing plan document which unambiguously granted MetLife discretionary authority to determine claims and benefit eligibility. Applying an abuse of discretion standard of review, the district court held that MetLife did not abuse its discretion in denying Prichard disability benefits. Prichard timely appealed.

The Ninth Circuit Court of Appeals reversed, explaining that a district court must review a plan administrator’s denial of benefits de novo, unless the benefit plan gave the administrator discretionary duty to determine eligibility for benefits. The Court noted that Amara involved a dispute in which there was an SPD and a written plan instrument, and the plan administrator sought to enforce the SPD’s terms over those of the plan instrument. MetLife sought to enforce the SPD as the one and only formal plan document. It argued that previous federal court decisions have accepted the SPD as the formal plan document where the terms of the SPD did not add to, or contradict, the terms of existing Plan documents. In light of these decisions, the Court explained that the SPD terms do not govern if they conflict with governing plan documents, and similarly, the SPD cannot create terms beyond those in the governing plan documents. However, the Court rejected MetLife’s argument that the SPD and the plan “are one and the same.” The Court determined that the SPD clearly stated the only plan documents are 1) a Group Policy (including the certificate), 2) IBM’s application and 3) any amendments or endorsements to the Group Policy. The Court noted that while the insurance certificate was plainly listed as a plan document, “[c]onspicuously absent from this exclusive list was the SPD.” Further, MetLife carried the burden of providing other official plan documents, such as a document containing the discretionary language, but failed to do so. As such, the SPD was the only plan document provided to the Court, and it did not grant discretionary authority to MetLife. The court also noted that “the SPD itself declares ‘official plan documents. . . remain the final authority’ and ‘shall govern’” if the SPD terms conflict with official plan documents. Finally, the Court of Appeal stated:

Because the official insurance certificate contains no discretion-granting terms, we will not, consistent with Amara, hold that the SPD’s grant of discretion constitutes an additional term of the Plan.

Accordingly, the Court held the district court erred in reviewing MetLife’s denial under the abuse of discretion standard of review, and remanded for a de novo review.

While Prichard turned on a technical distinction—what constitutes an official plan document, it affirms the idea that an insurer does not have discretionary authority absent clear language in official plan documents. Therefore, unless an insurer establishes it has discretionary authority under such documents, a court must apply a de novo standard of review. This de novo standard can be outcome determinative.

In California, courts have long held that where a policy provision is ambiguous because it is susceptible to multiple interpretations, the reasonable expectation of the covered party governs. But which parties’ objectively reasonable expectations should govern where there are both a named insured and an additional named insured claiming coverage? In its significant decision in Transport Insurance Company v. Superior Court of Los Angeles County, __ Cal. App. 4th __, 2014 Cal. App. LEXIS 28 (Jan. 13, 2014), the Court of Appeal of California held that it is the objectively reasonable expectation of each party seeking coverage that is applied in determining the meaning of language within an insurance contract as it applies to that party, even where it is an additional insured who is not a party to the contact.

In Transport, Vulcan Materials Company was issued a commercial excess and umbrella liability insurance policy by Transport Insurance Company (“Transports Policy”). A provision of the Transport Policy named R.R. Street & Co. as an additional insured with respect to the distribution or sale of certain industrial products. The Transport Policy provided that Transport would have a duty to defend any covered claim if it was not covered by the “underlying insurance” or if the “underlying insurance” were exhausted. The Transport Policy’s schedule of underlying insurance policies identified nine contracts.

Claims were brought against both Vulcan and R.R. Street in several underlying pollution and environmental contamination actions. National Union Insurance Company defended R.R. Street in these actions under a general liability insurance policy. In Legacy Vulcan Corp. v. Superior Court, 185 Cal. App. 4th 577 (2010), a prior coverage litigation before a different court of appeal, Transport brought a declaratory relief action concerning its duty to defend Vulcan under the Transport Policy. A key issue before the court concerned the meaning of the phrase “underlying insurance” and whether it included only the scheduled insurance contracts in the Transport Policy or all primary insurance contracts in effect during the continued loss period. Vulcan argued that the term should only encompass the insurance contracts identified in the Transport Policy in order to maximize the scope of Transport’s potential duty to defend. The court of appeal in the case held that the term “underlying insurance” in the policy provision was ambiguous and that absent, any conflicting extrinsic evidence, the ambiguity should be reasonable based on the reasonable expectations of the named insured- Vulcan. The trial court held in Vulcan’s favor in interpreting “underlying insurance” to include only the policies identified in the Transport Policy.

Subsequently, in Transport, an action was brought by Transport against R.R. Street, and its general liability insurer National Union, seeking a declaration that it did not have a duty to defend R.R. Street as an additional insured in the underlying claims against R.R. Street and Vulcan. R.R. Street then brought a motion for summary adjudication arguing that Transport was collaterally estopped by the decision in Legacy Vulcan from arguing that “underlying insurance” meant anything other than the policies identified in the Transport Policy and as such, Transport had a primary defense obligation to R.R. Street because it was not an insured under any of those policies. Thus, R.R. Street argued that the umbrella portion of the Transport Policy provided primary coverage for Street for the underlying actions and required Transport to provide a defense.

The trial court granted R.R. Street’s motion on the basis of collateral estoppel. The Court of Appeal disagreed. Based on the assumption that the term “underlying insurance” is ambiguous as to R.R. Street, the court found that it is the objectively reasonable expectation of the party claiming coverage, in this case R.R. Street, that must be applied in determining the meaning of ambiguous insurance provision. The court reasoned that this is true even if the party claiming coverage is, like R.R. Street, not a party to the insurance contract because “the intent of the named insured in requesting the added coverage is directly dependent on the bargain that the additional named insured made with the named insured.” In this case, the court asserted, R.R. Street’s intention may well differ from those of Vulcan because R.R. Street arguably would not expect coverage under the Transport Policy to take precedent over its own commercial liability policies. The court found that, because the Legacy Vulcan case did not address R.R. Street’s objectively reasonable expectations, the trial court was not bound by Legacy Vulcan’s findings based on the named insured’s reasonable expectations. As such, the Court of Appeal directed the trial court to vacate its order granting R.R. Street’s motion for summary adjudication and enter a new order denying the motion.

This decision is significant in that it clearly establishes that it is not only the reasonable expectations and intentions of the named insured that are relevant in interpreting ambiguous language and provisions in an insurance policy. Where additional insureds are involved, even where they are not parties to the insurance contract, courts in California will analyze ambiguous policy language in light of the reasonable expectations of the party actually claiming coverage.

In a highly anticipated decision, a unanimous United States Supreme Court held that insureds with employer-sponsored plans are contractually bound by the limitations periods set forth in their plan documents. These limitations periods, which specify when insureds must file any legal actions under the Employee Retirement Income Security Act of 1974 (“ERISA”), are enforceable so long as they are not unreasonably short. The Court held in Heimeshoff v. Hartford Life & Accident Insurance Co. and Wal-mart Stores, Inc., __ U.S. __ , 2013 U.S. LEXIS 9026 (Dec. 16, 2013), that the Plan’s contractual limitations period governs when a participant/beneficiary may file a legal action. The Court concluded that the Plan’s contractual statute of limitations period was enforceable and that the time spent in the administrative claims process did not toll the running of the statute.

Heimeshoff involved plaintiff Julie Heimeshoff (“Heimeshoff”), a Senior Public Relations Manager for Wal-Mart, who sought long-term disability benefits from her employer-sponsored plan issued by Respondent Hartford Life & Accident Insurance Co (“Hartford”) to Wal-Mart employees. The Plan imposed a three-year statute of limitations from the date proof of claim is due for legal action brought against the Plan, which commenced on the date proof of loss was to be submitted. Hartford required Heimeshoff’s proof of loss by December 2005, but she failed to submit the requisite documents and Hartford denied her claim. Hartford issued its second denial in November 2006, and denied her final appeal in November 2007. Heimeshoff brought suit to recover her benefits in November 2010 within three years after the final denial, but almost six years after the proof of loss was due. The district court dismissed her suit, finding the Plan terms explicitly prohibited legal action beyond the three-year limitations period. The Second Circuit Court of Appeals affirmed.

The Supreme Court granted certiorari to determine whether the Plan’s limitations provision, which began before the administrative review process ended, was enforceable. Prior to Heimeshoff, the majority rule, including in the Ninth Circuit, was the statute of limitations begins to run when the cause of action “accrues,” which was typically when the appeal was denied. In ERISA actions, a claimant cannot file suit until he or she has exhausted the plan’s internal administrative process. While ERISA imposes requirements on plans to respond and decide claims within certain periods of time, practical obstacles, such as difficulties obtaining medical information or proof of loss, can delay this process.

Heimeshoff first argued that the Plan’s limitations provision would undermine the internal review process because participants will sacrifice the benefits of internal review to preserve time for filing suit. However, the Court rejected this contention because participants failing to develop evidence during the first review run the risk of forfeiting use of that evidence at trial. Secondly, the Court believed participants are unlikely to prioritize judicial review over internal review.

Next, Heimeshoff contended that permitting plans to initiate limitations periods prior to completion of the review process endangers judicial review. However, the Court noted ERISA regulations require administrators to act in good faith and take prompt action in their internal reviews. If administrators fall short, the participant can directly seek judicial review. Furthermore, if administrators unreasonably delay, participants can raise equitable defenses to the statute of limitations. In addition, the United States argued, as amicus curiae, that if the limitations provision is enforced, good faith administration will also diminish the availability of judicial review. The Court disagreed, stating the three-year limitation provision is required by most states and no significant evidence showed the provision impedes judicial review. Importantly, the Supreme Court reassured claimants that lower courts can apply waiver, estoppel or equitable relief if claimants are stalled in the internal review process. The Court explained:

Moreover, even in the rare cases where internal review prevents participants from bringing §502(a)(1)(B) actions within the contractual period, courts are well equipped to apply traditional doctrines that may nevertheless allow participants to proceed. If the administrator’s conduct causes a participant to miss the deadline for judicial review, waiver or estoppel may prevent the administrator from invoking the limitations provision as a defense. See, e.g., Thompson v. Phenix Ins. Co., 136 U. S. 287, 298–299 (1890); LaMantia v. Voluntary Plan Adm’rs, Inc., 401 F.3d 1114, 1119 (CA9 2005). To the extent the participant has diligently pursued both internal review and judicial review but was prevented from filing suit by extraordinary circumstances, equitable tolling may apply. Irwin v. Department of Veterans Affairs, 498 U. S. 89, 95 (1990) (limitations defenses “in lawsuits between private litigants are customarily subject to ‘equitable tolling’”).

The Court quickly addressed two additional arguments. First, it rejected Heimeshoff’s argument that the limitations period should be tolled during internal review, stating this constituted contract revision. Next, the Court rebuffed Heimeshoff’s argument that state law should toll the limitations period during the internal process. In doing so, the Court explained the parties clearly “agreed” [this is a misnomer as ERISA plans are classic contracts of adhesion] to a limitations period and did not seek to borrow the State’s limitations period. Ultimately, the Court ruled that Plan’s limitations provision controlled the question of when a claimant could pursue litigation.

Certainly, the Court’s decision favors insurance companies and other plan/claim fiduciaries who have the ability to delay processing claims. However, ERISA imposes strict timelines on actions by insurance companies and other plan/claim fiduciaries and as a result, these rules will serve to mitigate the potentially harsh consequences of this decision. Furthermore, the Court clearly limited its holding to limitations provisions which are reasonable.

The best part of this decision for plan participants and beneficiaries who typically have life, health and disability insurance claims, as discussed above, the Court explicitly reserved for their use traditional equitable remedies including equitable tolling, waiver and estoppel to ensure Heimeshoff does not cause harsh results when the actions of insurance companies and other plan/claim fiduciaries cause delays or their actions otherwise result in unfairness to plan participants. As long as claimants and their attorneys act promptly to hold insurance companies and other plan/claim fiduciaries accountable to the timelines applicable to the claim review process and/or if they otherwise act diligently, Heimeshoff will not act as a bar to their litigation. Indeed, administrators are required by ERISA regulations governing the internal review process to take prompt action, and the penalty for failure to meet those deadlines is immediate access to judicial review for plan participants. See 29 CFR §2560.503–1(l).

Insurers providing general liability insurance cannot shirk their duty to defend insureds at the outset of litigation by relying on self-insured retention (SIR) provisions in those policies unless the policies expressly and unambiguously make the insurer’s duty to defend contingent upon the SIR. So held the Fourth District Court of Appeals in American Safety Indemnity Company v. Admiral Insurance Company, __ Cal. App. 4th ___, 2013 Cal. App. LEXIS 779 (2013). The court’s decision in American Safety is highly favorable to insureds because it substantially limits the ability of insurers to circumvent their obligation to pay first-dollar for the defense of their insured by arguing that the SIR has not been exhausted.

American Safety involves an underlying claim brought by homeowners against several defendants, including a developer and grading contractor, for damages caused by landslides allegedly caused by defendants’ grading work done in relation to the construction of new homes. The grading contractor was insured by American Safety Indemnity Company under a commercial general liability policy. The developer was insured by Admiral Insurance Company and was also an additional insured under the grading contractor’s policy with American Safety. After American Safety initially rejected the developer’s claim for defense costs for the underlying lawsuit, the developer brought a bad faith claim against American Safety. The case ultimately settled and American Safety paid the defense costs of the developer and two of the developer’s related entities who were represented by the same law firm.

In the case before the court in American Safety, American Safety sued Admiral for equitable subrogation of defense costs alleging that American Safety was entitled to reimbursement of defense costs from Admiral because the developer was insured under the Admiral policy and its related entities were named insured on the Admiral policy. Admiral’s primary defense against American Safety’s claim was the SIR provision in the policy, which stated “[o]ur total liability for all damages will not exceed the limits of liability as stated in the Declarations and will apply in excess of the insured’s self-insured retention (the ‘Retained Limit’). ‘Retained Limit’ is the amount shown below, which you are obligated to pay, and only includes damages otherwise payable under this policy.” The “Retained Limit” in the policy was $250,000. Admiral argued that, because the SIR had not been exhausted, it owed no duty of defense to the insured entities and American Safety, by extension, was not entitled to reimbursement of its defense costs. In essence, Admiral asserted that its duty to defend was contingent upon the SIR.

At trial, the district court held that Admiral’s duty to defend the insured entities was independent of the SIR, and thus, American Safety was entitled to reimbursement of defense costs paid and interest. On appeal, Admiral again argued that the SIR relieved it of its duty to defendant and that it was essentially an excess insurer that owed no duty to the insured entities. The Court of Appeal upheld the trial court’s ruling and rejected Admiral’s contention. In reaching its decision, the court relied heavily on the holding in Legacy Vulcan Corporation v. Superior Court 185 Cal. App. 4th (2010). The court first noted that the face of the Admiral policy identified it as providing primary coverage, and its coverage is excess only when other insurance was available to its insured or “when the insureds are named as additional insured on another party’s policy.” Citing Legacy Vulcan, the court distinguished primary insurance contracts from excess insurance contracts in terms of the reasonable expectations of the insured. Whereas an excess insurer does not have a duty to defend until the primary insurance is exhausted and the insured has no reasonable contrary expectations, insureds under primary policies with a SIR provision do have a reasonable expectation that they will receive a defense. The court specifically noted the reasoning behind the Legacy Vulcan decision that requiring exhaustion of a SIR “before an insured will have a duty to defend would not ensure that the defense obligation rests on the insurer receiving premiums for the risk, but instead would result in no insurer providing a defense prior to exhaustion.”

Thus, the court concluded that, a SIR provision does not automatically relieve a primary insurer of its duty to pay first-dollar in defending its insured. Instead, the court affirmed that the policy must expressly and unambiguously make the insurer’s duty to defend subject to the SIR. The court found that Admiral’s policy did not make its duty to defend the insured entities expressly contingent upon the SIR. In fact, as the court notes, the Admiral policy does the opposite by expressly stating that the “Retained Limit” only includes damages otherwise payable under the policy. As such, the Court of Appeal found that the trial court had not erred in determining that the insured entities were not required to satisfy the SIR as a condition of receiving a defense from Admiral.

This decision provides an insured with a powerful retort to insurers attempting to deny providing a defense by asserting that SIR provision of their policy has not been met. In the absence of express and unambiguous language in the policy conditioning the provision of a defense on exhaustion of the SIR, insureds are entitled to the insurer’s participation in their defense at the outset of litigation even if the SIR has not been exhausted.

Commercial property owners may recover lost rental income from their insurer if they are unable to rent out damaged property, absent clear policy exclusions. The California Court of Appeal recently held the owner of commercial property has a reasonable expectation of coverage for loss of rent, even if the property was not leased out at the time the damage occurred. Ventura Kester, LLC v. Folksamerica Reinsurance Company, 2013 DJDAR 12253 (September 11, 2013). The court explained that if insurers want to limit loss of rent coverage to leases in force at the time of the damages occur, such limitations must be plainly stated in the policy. Ventura is significant because it limits insurers’ abilities to take advantage of ambiguous policy language as a means to deny coverage.

The case involved a commercial building owner, Ventura Kester, LLC (“Ventura”), whose property and casualty insurance policy covered up to $2.76 million for structures and $552,000 for loss of rents resulting from damage to the covered structure. The insurance company, Folksamerica Reinsurance Company (“Folksamerica”), agreed to cover “net loss of rental income” and “rents accrued but rendered uncollectible by reason of a covered loss.” At the time the policy was issued, the commercial building was leased to a tenant. The tenant later vacated, and Ventura sought prospective tenants, including OfficeMax, Equinox Fitness Club and Crunch fitness club. However, before Ventura could execute a lease agreement, thieves broke into the building and stole copper wire and pipes. Adjusters discovered additional vandalism and estimated the total cost of repair to be $1 million. In addition, a construction company estimated the repairs would take up to one year.

Based on these assessments, Folksamerica provided Ventura with two checks for $383,989.90 and $128,973.71 to repair the damage. However, Ventura could not begin repairs until the claim was paid in full. Folksamerica paid Ventura $414,460.42 for property damage claims, but denied Ventura’s claim for loss of rents because no lease was in effect at the time of loss.

Following the denial, Ventura filed an action against Folksamerica for breach of contract and breach of the covenant of good faith and fair dealing. Ventura claimed Folksamerica’s failure to pay the entire claim caused a total loss of rent in the amount of $3.8 million. Folksamerica filed a motion for summary judgment, claiming Ventura could not establish it lost rent due to the property damage. Ventura opposed the motion, arguing that the policy did not require an executed lease, and also that whether the lost rent was due to property damages was a triable issue of fact. The trial court granted summary judgment for Folksamerica, stating the policy language did not provide coverage for lost rent when a building was vacant.

Ventura appealed the summary judgment, arguing the policy covers lost rents due to property damage, regardless of whether there was a tenant. Folksamerica again asserted that Ventura was required to have a tenant in place to recover lost rent under the policy. The California Court of Appeal reversed lower court, and awarded Ventura its costs on appeal, stating that:

If the insurer had wanted to limit the recovery or calculate the rents based on existing tenants at the time of the building damage, it clearly could have written the policy to provide that.

In its decision, the Court of Appeal noted that policy was ambiguous, and a reasonable policyholder would expect to recover lost rents due to property damages. The court further explained that if an insurer wanted to limit loss of rents to periods when the property was leased, and exclude periods where the property was vacant, the insurer should have expressly stated that in the policy. The court cited Whitney Estate Co. v. Northern Assurance Co. of London, 155 Cal. 521, 522 (1909), which permitted contracting parties to stipulate a reasonable method for computing loss of rents due to damaged and vacated property. In Whitney, the insurance policy calculated coverage based on covered “actual loss of rent.” Calculations of actual loss was limited to the period when the damage occurred until repairs made the building was “tenable,” and profits from rentals in place at the time of damage. The court also recognized the validity of vacancy provisions, and noted such provisions were absent in the present policy. Therefore, Folksamerica could not rely on MDW Enters. V. CNA Ins. Co., 4 A. D. 3d 388 (N.Y. App. Div. 2004), where an insurer’s policy clearly excluded coverage when the building had been vacant for over sixty days before the occurrence. The Court of Appeal noted that Folksamerica’s policy did not specify such express limitations or methods of calculating loss. Finding that the policy language failed to clearly limit coverage, the court applied a reasonable interpretation of the policy and rejected the limitation.

The Court of Appeal also determined that whether Ventura could establish actual loss of rents was a triable issue of fact. On one hand, Folksamerica presented evidence that Ventura’s potential tenants declined to rent the building due to reasons other than property damage. In contrast, Ventura presented evidence of a long-term lease in place prior to the damage, a list of prospective tenants, and OfficeMax’s decline to rent was due in part to the delay in resolving the insurance claim. A trier of fact could have determined that but for the property damages, Ventura would have secured a tenant. Therefore, the court determined summary judgment was inappropriately granted.

Ventura is an important decision because it prevented insurers from denying coverage absent clearly stated exclusions. Although the court recognized the validity of exclusionary provisions and calculations limiting recovery, the court refused to apply Folkamerica’s broad reading of its policy. The court’s decision adheres to established contact law principles by construing ambiguous language against the drafting party, or insurer.

In a recent ruling, the California Court of Appeal held that an insurer’s general reservation of rights to deny coverage of damages outside its policy does not create a conflict of interest with the insured, such that the insured in entitled to Cumis counsel. The decision in Federal Insurance Co. v. MBL, Inc. __ Cal. App. 4th __, 2013 Cal. App. LEXIS 679, 2013 WL 4506149 (August 26, 2013) follows California precedent denying insureds the right to select independent counsel at the insurer’s expense absent an actual conflict of interest.

The case arose out of United States v. Lyon, an action by the Federal government against Halford’s Cleaners, for soil and groundwater contamination. Halford’s, a dry cleaning facility, filed third party actions against the suppliers of dry-cleaning products, including defendant MBL, Inc. (“MBL”). MBL’s insurers retained counsel for MBL, but asserted a general reservation of rights to deny coverage for damages occurring beyond the policy period and in excess of the policy amount. However, the reservation of rights did not address any specific policy exclusions. MBL alleged that their insurers’ reservation of rights created a conflict of interest such that MBL was entitled to choose an independent counsel (known as Cumis counsel) at the expense of the insurer. The trial court granted summary judgment in favor of the insurers, finding there was no actual conflict of interest. On appeal, MBL contended the trial court erred in finding the insurers were entitled to declaratory relief.

The Court of Appeals affirmed, analyzing and rejecting each of MBL’s arguments that a conflict of interest existed requiring Cumis counsel. The Court explained that:

Without an express reservation of a right under the policy, there can be no conflict of interest based on the application of that exclusion or policy term during the pendency of the action. (Emphasis added.)

First, the court rejected MBL’s contention that a general reservation of rights creates a conflict of interest, stating at most, they create a theoretical, potential conflict of interest, which is not sufficient to trigger the right to Cumis counsel. Next, MBL argued the policy exclusions create a conflict because the appointed counsel would have an interest in establishing policy exclusions, such as when the damages occurred. The Court rejected this argument, holding that MBL and the insurers’ interests were aligned because it is in the interest of both parties’ interest to avoiding liability, and defense counsel could not control the issue of when such damages occurred. Furthermore, no conflict exists because insurer’s retained counsel has no control over whether exclusions apply.

Finally, that Court found that, although MBL and select third party plaintiffs in Lyons shared the same insurance company, there was no per se conflict of interest because the insurer’s interest ultimately remained in indemnifying their insureds against judgment. The court noted the insurers retained different law firms for these plaintiffs, assigned different claims adjusters and ensured the adjusters did not have access to each other’s files.

The trial court granted declaratory relief for the insurers stating that absent a conflict, insurers were not obligated to provide independent counsel. Furthermore, MBL’s refusal to accept appointed counsel relieved the insurers of their contractual obligation to defend MBL.

Ultimately, the California Court of Appeal agreed that MBL failed to establish a significant and actual conflict of interest, and their insurers’ were therefore not obligated to retain independent counsel. A general reservation of rights is not enough to create a conflict of interest; instead, the parties’ interests must be analyzed to determine whether the interests can be reconciled. The ruling therefore affirms the San Gabriel Valley Water Co., 82 Cal. App. 4th 1230 (2000) decision that insured parties are not entitled to Cumis counsel absent a showing of an actual conflict of interest with the insurer.

Insurers Do Not Have Discretionary Authority, Absent Clear Language in Official Plan Documents

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