Rights and Duties of an Additional Insured Carrier: A Tale of Two Cases

It is widely known in the California construction defect community that Travelers and Centex are battling on the issue of the rights and obligations of an additional insured (“AI”) carrier where the Developer is seeking to utilize independently retained counsel as opposed to counsel retained by the “AI” carrier for the defense of Centex.

After having accepted an “AI” tender, Travelers generally contends it is (1) entitled to retain counsel to defend the Developer / Centex (separate from counsel retained to defend any named insured subcontractors); (2) it is entitled to control the defense if it so chooses (to enable the negotiation of scope of work releases on behalf of both its named insured and Developer as to its named insured’s scope of work), and (3) to the extent the litigation is resolved as to its named insured’s scope of work, it is entitled to withdraw its defense pursuant to the “AI”. It is further known Centex disagrees vehemently; rather, Centex generally contends Travelers is obligated to contribute to the defense fees and costs of its independently retained counsel, alleging a multitude of potential conflicts of interest. Centex further contends “AI” carriers are required to continue to defend the developer through the completion of the litigation, in its entirety. Travelers and Centex have filed a multitude of actions against each other throughout California arguing these issues. The real question is – how are the courts of California ruling on these cases? A brief analysis of rulings by two trial courts on these very issues follows:

Centex v. Ad Land Venture, et al. (April 1, 2015) County of Sacramento, Case No. 34-2011-00112151:

This matter arose out of two standard construction defect litigations (Van Loon and Redig) where Travelers accepted the “AI” tender by Centex. In the underlying matters, Centex argued Travelers (1) lost its ability to control the defense by not “immediately” agreeing to do so; (2) violated its contractual obligations and those under the implied covenant of good faith when it negotiated scope of work releases for its named insured(s) and Centex directly with counsel for the homeowners; (3) violated its contractual obligations and those under the implied covenant of good faith when it withdrew from the defense; and (4) violated its contractual obligations and those under the implied covenant of good faith when it refused to pay certain invoices relating to defense work performed by counsel retained directly by Centex.

In formulating its opinion, the trial court focused on the landmark case of Buss v. Superior Court (1997) 16 Cal.4th 35. The trial court cited to Buss, stating that to defend meaningfully, the carrier is required to defend immediately (citing Buss, supra, 16 Cal.4th at 49). In examining Buss, however, the trial court stated Buss expressly recognized the defense obligation can be extinguished prior to the conclusion of the action when it can be determined that no potentially covered claim remains (citing Buss v. Superior Court (1997) 16 Cal.4th 35 at 46; Ringler Associates Inc. v. Maryland Cas. Company (2000) 80 Cal.App.4th 1165; Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 279; St. Paul Mercury Ins. Co. v. Ralee Engineering (9th Cir. 1986) 804 F.2d 520, 522).

In the two underlying matters, Travelers negotiated scope of work releases for the scope of work of the named insureds as to the named insured and Developer. Travelers then withdrew its defense of Centex. Centex argued that, despite the execution of scope of work releases by the homeowners, the homeowners in the underlying matters continued to “assert” the existence of liability based upon the released claims. In this regard, Centex argued a continued need for a defense of those issues existed. In making this argument, Centex cited to the fact that references to the released claims remained in various documents, such as the defect list, cost of repair and Complaint. The trial court was not persuaded based upon the testimony of counsel for the homeowners. In light of the scope of work releases, the trial court found no “potentially covered claim” remained in the underlying cases. Thus, “under the law the defense obligations of Travelers and its affiliates were extinguished at that point.”

Centex further argued it was entitled to independent counsel as Travelers accepted the “AI” tender under a reservation of rights. Centex argued the reservation of rights created a coverage dispute the outcome of which could be controlled by counsel appointed by Travelers. After a lengthy discussion regarding the circumstances under which independent counsel is justified, the trial court found no conflicts existed which would necessitate the appointment of independent counsel.

Centex Homes v. Alan Crane, dba A.L. Drywall, et al. (February 27, 2015) County of Tulare, Case No. VCU 252502

Again, in each of the six cases in this matter, the underlying cases were construction defect matters in which Travelers accepted an additional insured tender on behalf of Centex. In each of the six cases, Centex sought a declaration Travelers was obligated to pay for independent counsel for Centex in each of the construction defect cases. On the other hand, Travelers sought a declaration by the Court that, where Travelers has accepted Centex’ tender of defense, Travelers has the right to control the defense, appoint counsel of its own choosing and that Travelers was not obligated to pay for independent counsel for Centex.

Centex’s practice when “AI” carriers appointed counsel was to allow the “AI appointed counsel” to associate as co-counsel with its chosen defense, with Centex retaining control of the litigation, including the selection of experts and vendors. In each of the cases, however, Travelers demonstrated an intent to settle out the “named insured” subcontractors as soon as possible so Travelers could claim a right to withdraw from any defense obligation of Centex. Travelers claimed to have a contractual right (and duty to its named insured subs) to settle their cases as early as possible without participation by, nor notice to, Centex to cut off its contractual defense obligation, leaving only a reimbursable Buss obligation.

Centex, on the other hand, argued the reservation of rights by the “AI” carrier necessarily created a conflict of interest, requiring retention of independent counsel for the following reasons:

  • Travelers appointed counsel could control the result on reserved issues regarding causation and time of occurrence, thereby depriving Centex of AI coverage;
  • Traveler’s alleged right to be reimbursed for defense costs for matters not potentially covered under the named insured subcontractor policy makes it impossible for Centex to settle with the subcontractors;
  • Travelers’ assertion of subrogation and contribution claims against the subcontractors compete with Centex’ claims against the same subcontractors.
  • Separate counsel, both of whom were appointed by Travelers, would represent both Centex and the subcontractors against whom Centex seeks recovery. In this regard, Centex objects to Travelers asserting the right to control the litigation as to both Centex and the subcontractors (through separate counsel);
  • Travelers’ “panel” counsel is too beholden to Travelers to effectively represent Centex;
  • Because the subcontractors insured by Travelers have small indemnity obligations, Travelers has no incentive to provide a full defense to Centex; rather Travelers intended to settle claims relating to its named insured subcontractors directly with Plaintiffs and withdraw its defense of Centex;
  • Travelers has filed numerous cases against Centex seeking a ruling that it has no obligation to defend Centex.

Practically speaking, Centex argued that, due to the very nature of construction defect litigation, in every construction defect case, independent counsel must be paid for by an AI carrier.

In defining the tri-partite relationship, the trial court indicates an attorney retained by an insurance company represents and owes a fiduciary duty to both the insurer and the insured and owes the same duties to the insured as if the insured had hired the attorney itself. Unless and until a conflict arises, the insurer has the right to control the defense and settlement of the action against its insured. Gafcon Inc. v. Ponser & Associates (2002) 98 Cal.App.4th 1388. The trial court disagreed with Centex and found that the reservation of rights does not necessitate appointment of independent counsel.

Furthermore, the trial court found Buss imposes an obligation at law, independent of contract obligations, to not only defend the entire action, but also to defend it to its conclusion, stating that anything less would not be defending the action in its entirety. The evidence presented showed Travelers intended to settle its named insured subcontractors as soon as possible. The trial court indicated that, while this tactic would serve to cut off Travelers’ contractual obligation to continue to defend Centex, it does not cut off its Buss obligation. Continuing under a Buss defense only then allows Travelers to seek reimbursement for all further defense costs.

Ultimately, the trial court ruled Travelers has an obligation to provide counsel for Centex to fully, completely and entirely defend Centex through completion of the construction defect action. Travelers’ appointed counsel has the right to control the defense and Travelers is not obligated to pay counsel retained directly by Centex for any defense costs incurred after Travelers accepted the defense and appointed counsel.

Conclusion:

The two trial courts discussed above agree on the following:

  • Travelers (or any “AI” carrier) has the right to appoint counsel and, if it does so, is not obligated to share in the cost of counsel retained directly by Centex;
  • Travelers has the right to control the defense of Centex and negotiate settlements on behalf of its named insured subcontractors.
  • Pursuant to Buss v. Superior Court (1997) 16 Cal.4th 35, Travelers has the right to seek reimbursement of defense fees and costs incurred in the defense of Centex for claims for which there is no possibility of coverage (specifically, claims unrelated to the scope of work of Travelers’ named insured subcontractors).

Importantly, however, the trial courts reached very different conclusions regarding whether Travelers (or any “AI” carrier) has the obligation to defend pursuant to an accepted “AI” through the completion of litigation. Based upon the above cases, however, it is clear that, to the extent an “AI” carrier resolves all claims relating to the scope of work of its named insured(s), any costs incurred after are potentially recoverable pursuant to Buss.

We will continue to report updates should either of the above decisions be appealed or if other trial courts provide decisions regarding these issues.

ABOUT THE AUTHOR: Elizabeth Terrill is an associate at Tyson & Mendes. Elizabeth specializes in the areas of construction defect and construction injury claims. Contact Elizabeth at 858.263.4113 or eterrill@tysonmendes.com.

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