Centex Homes v. St. Paul Fire and Marine Insurance Company

In Centex Homes v. St. Paul Fire and Marine Ins. Co., 237 Cal.App. 4th 23 (May 22, 2015), the California Fourth District Court of Appeal affirmed the trial court’s dismissal of the seventh and eighth causes of action alleged in a cross-complaint filed by Centex Homes against St. Paul Fire and Marine Insurance Company and St. Paul Mercury Insurance Company (collectively “Travelers”) in a construction defect lawsuit filed by homeowners in Riverside County Superior Court against Centex Homes. In response to the lawsuit, Centex Homes filed a cross-complaint against 57 subcontractors alleging six causes of action for breach of contract to indemnify, defend and obtain insurance, for equitable indemnity, and for contribution and repayment. Centex also filed a seventh cause of action against Travelers for declaratory relief alleging that Travelers breached its duty to defend by requiring a reservation of rights seeking to obtain full reimbursement of defense costs incurred in defending Centex against the construction defect lawsuit under the Travelers policy. Lastly, Centex alleged an eighth cause of action against Travelers requesting declaratory relief regarding Centex’s right to independent counsel pursuant to California Civil Code section 2860.

The parties’ dispute related to Centex’s status as an additional insured under a general liability policy issued by Travelers to a subcontractor, Oak Leaf Landscape, Inc. (“Oak Leaf”). Centex tendered the defense of the construction defect lawsuit to Travelers which accepted such tender subject to a reservation of rights based on the absence of property damage or a covered occurrence related to the work of its named insured, Oak Leaf.

Travelers demurred to the seventh and eighth causes of action alleged in the Centex cross-complaint based on: (1) the absence of a ripe controversy relative to the reimbursement of defense costs and (2) the absence of an actual present conflict of interest requiring independent counsel.

The trial court agreed with Travelers and sustained its demurrer to the seventh and eighth causes of action alleged by Centex without leave to amend.

In affirming the trial court’s order dismissing the seventh and eighth causes of action alleged by Centex against Travelers, the Court of Appeal characterized the parties’ dispute as follows:

Centex argues that, to the extent Travelers controls the defense of both the subcontractors and Centex, Travelers can manipulate the litigation against Centex's interests, creating an ethical conflict requiring independent counsel: “There is a large block of authority recognizing what also seems relatively obvious: when an insured is obligated to provide defenses for two or more insureds with adverse interests, there is a sufficient conflict of interest that the insurer must provide independent counsel for each insured at its own expense.” (14 Couch on Insurance (3d ed. 2014) § 202:24.) Additionally, Centex claims that, when Travelers seeks reimbursement of defense fees, its right to reimbursement and the issue of allocation must be resolved as part of the action against the subcontractors. Therefore, Centex maintains the trial court erred in sustaining the demurrer and finding that Centex could not amend its complaint to state a cause of action against Travelers.

In affirming the trial court’s order dismissing the seventh cause of action for declaratory relief regarding the allocation and reimbursement of defense costs, the Court of Appeal found as follows:

Centex identifies the following as disputed: (1) whether Travelers has the right to be reimbursed by Centex for all defense fees that relate to the work of subcontractors it did not insure; (2) whether Travelers has the right to be reimbursed for defense fees in proportion to the ultimate amount it pays for indemnity for the subcontractors it insures; and (3) whether Travelers has the right to reimbursement for all defense fees not related to property damage arising from the work of its named insured subcontractor, Oak Leaf.

When read carefully, Centex's claims are all anticipatory, not actual or ripe. It is still unknown whether Oak Leaf's work caused the property damage claimed by the Corona homeowners. The proportionate liability of all the subcontractors has also not been adjudicated. The amount of defense fees has not been established in the ongoing underlying litigation. Quite simply, there are not enough facts about liability, damages, or the cost of defense for the trial court to offer any declaration as to the rights and obligations of the parties. (Wilson v. Transit Authority (1962) 199 Cal.App.2d 716, 722 [19 Cal. Rptr. 59]; State of California v. Pacific Indemnity Co. (1998) 63 Cal.App.4th 1535, 1549 [75 Cal. Rptr. 2d 69]; County of San Diego v. State of California (2008) 164 Cal.App.4th 580, 588 [79 Cal. Rptr. 3d 489].) Therefore, the trial court correctly determined the seventh cause of action is not “ripe”—although Centex may certainly be able to renew its claims at a later date.

As respects Centex’s contention that it is entitled to the appointment of independent counsel to defend against the underlying construction defect lawsuit, the Court of Appeal affirmed the trial court’s decision that an actual conflict did not exist entitling Centex to independent counsel. The Court of Appeal reasoned as follows:

Centex alleges the interests of Centex, Travelers, and Oak Leaf are irreconcilably adverse to each other. Centex specifically alleges that Travelers will control Centex's defense in the underlying action to prejudice the present coverage dispute between Centex and itself. The express conflicts of interests include Travelers instructing the defense counsel (1) to sue Oak Leaf, the subcontractor insured by Travelers; (2) to retain and direct the work of experts; (3) to evaluate the contracts between Centex and Oak Leaf to determine what Oak Leaf should contribute towards any settlement with the Corona homeowners; (4) to allocate Centex's defense fees and costs among the subcontractors; (5) to negotiate settlements between Centex and the subcontractors; and (6) to ascertain whether the work performed by Oak Leaf caused property damage. In other words, Centex asserts that, to the extent panel counsel can challenge the liability of Oak Leaf, it creates a direct conflict of interest by enhancing Travelers's reimbursement claims against Centex. However, these anticipated circumstances have not occurred yet in the underlying litigation.

We conclude the facts alleged by Centex do not support its claim of a conflict of interest with Travelers. An insurer has the right to control a defense. (James 3 Corp. v. Truck Ins. Exchange, supra, 91 Cal.App.4th at pp. 1102–1103.) Centex argues Travelers will manipulate experts to its advantage without giving any explanation about how that will be accomplished. Similarly, Centex offers a host of allegations about how Travelers will control the litigation without describing how this is occurring in the underlying construction defect litigation. Centex is alleging conclusions without substance, not facts. As Gertrude Stein famously said about Oakland, there is no there there.

In Blanchard v. State Farm & Casualty Co. (1991) 2 Cal.App.4th 345 [2 Cal. Rptr. 2d 884], the appellate court stated that the insurance counsel had no incentive to attach liability to the insured and that it was in the interest of both the insurer and the insured to minimize the insured's liability. (Id. at p. 350.) Here, Travelers and Centex's interests may be slightly different because Travelers's liability is limited to Oak Leaf's work and Travelers claims a right to reimbursement against Centex for all defense fees unrelated to property damage caused by Oak Leaf. Centex asserts that, unlike counsel in Blanchard, Travelers's panel counsel has an incentive to control the defense so as to increase Travelers's reimbursement claim — a conflict which requires the appointment of independent counsel. We disagree because we do not perceive the interests of Centex and Travelers to be adverse. Depending on the eventual degree of liability among the subcontractors, Travelers may be liable for damages but Centex will receive coverage from Travelers or the other insurers covering the other subcontractors. Centex's liability is derivative and Travelers has the same interest in defending the underlying claim. These circumstances do not cause a conflict requiring independent counsel. (Foremost Ins. Co. v. Wilks (1988) 206 Cal.App.3d 251, 261 [253 Cal. Rptr. 596]; Blanchard, at p. 350.) The demurrer to the eighth cause of action was properly sustained—although these claims may also be renewed if they become actual and present.

As noted by the Court of Appeal, an actual conflict did not exist as Travelers’ and Centex’s interests were aligned because Centex’s ultimate liability in the underlying construction defect lawsuit was derivative such that Travelers had the same interest in defending the underlying construction defect lawsuit.