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Federal Insurance Co. v. MBL Inc.

In Federal Ins. Co. v. MBL, Inc., 219 Cal.App.4th 29 (August 26, 2013), the California Sixth District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of Federal Insurance Company (“Federal”), Centennial Insurance Company (“Centennial”), Atlantic Mutual Insurance Company (“Atlantic”), Nationwide Indemnity Company (“Nationwide”), Utica Mutual Insurance Company (“Utica”) and Great American Insurance Company (“Great American”), (hereinafter collectively, “Insurers”) in connection with consolidated declaratory relief actions arguing that insured, MBL, Inc., (“MBL”) was not entitled to the appointment of independent counsel pursuant to California Civil Code section 2860 with respect to the defense of underlying third-party complaints and cross-complaints filed against MBL for contamination of soil and groundwater underlying a dry cleaning business located in Modesto, California. Each of the insurers had reserved their rights regarding potential coverage of MBL for third-party complaints alleging property damage that did not occur during their policy periods. Further, each insurer generally reserved its rights regarding potential coverage of the third-party complaints. Lastly, Nationwide also reserved its rights to contend that the absolute pollution exclusion in its policy applied to bar coverage of the third-party complaints.

Based on MBL’s refusal to accept the insurers’ appointment of defense counsel to defend MBL against the underlying actions, the insurers filed complaints for declaratory relief (complaint filed by Great American and another complaint filed by all of the other insurers) seeking an adjudication that MBL was not entitled to independent counsel to defend against the underlying third-party pollution claims. The trial court agreed with the insurers and found that MBL was not entitled to the appointment of independent counsel.

In affirming the trial court’s judgment, the Court of Appeal noted that MBL could not manufacture a conflict of interest based on non-existent reservations. In particular, MBL argued that application of the qualified pollution exclusion in Federal’s and Utica’s policies created a coverage issue capable of being adjudicated in the underlying third- party actions. However, neither Federal nor Utica reserved their rights regarding application of the qualified pollution exclusion (includes “sudden and accidental” exception). Hence, the Court of Appeal rejected MBL’s argument based on the qualified pollution exclusion. MBL attempted to argue that Federal’s and Utica’s general reservation of rights incorporated a reservation related to the qualified pollution exclusion. However, the Court of Appeal rejected this argument and held that a general reservation of rights does not trigger a right to independent counsel.

The Court of Appeal also rejected MBL’s argument that Nationwide’s reservation of rights to apply the absolute pollution exclusion in its policy to bar coverage of the underlying third-party complaints created a right to independent counsel. Rather, the Court of Appeal held that such reservation did not create a conflict, as defense counsel could not control the outcome of the coverage issue. Rather, the exclusion would apply based on whether MBL contributed to the pollution of the site in connection with the supply of PCE to the lessee of the dry cleaning business.

Similarly, the Court of Appeal rejected MBL’s argument that the insurer’s general reservation of rights created a conflict relative to the number of occurrences triggered by the underlying claims. Again, because the insurers did not specifically reserve their rights relative to the number of occurrences, a conflict of interest did not exist entitling MBL to independent counsel. In addition, the Court of Appeal held that reservations of rights relative to the absence of coverage for damages taking place outside of the insurer’s respective policy periods did not entitle MBL to the appointment of independent counsel. The Court of Appeal stated as follows:

MBL asserts that the Insurers’ reservation of the right to deny coverage for damages occurring outside their various policy periods gave rise to a conflict of interest. Those reservations created a divergent interest in establishing the timing of any potentially covered losses.

We think it is clear where the coverage issue in question relates only to the timing of damages, there is no conflict under section 2860. (Blanchard, supra, 2 Cal.App.4th at p. 350.) As the court explained in a similar situation in Blanchard, “Insurance counsel had no incentive to attach liability to appellant. Respondent recognized its liability for certain damages flowing from appellant’s liability; thus it was to the advantage of both appellant and respondent to minimize appellant’s underlying liability.” (Ibid.)

Here, as in Blanchard, it is in the interest of both the Insurers and MBL to defeat liability. MBL provided no evidence to establish how defense counsel could have controlled the issue of when certain damages occurred. Defense counsel could not control the facts at issue below, such as when MBL delivered solvents to the dry cleaning facility, or when the seepages and resulting environmental contamination occurred. Furthermore, the point in time the alleged damages occurred would not be relevant to defense counsel jointly retained by multiple insurers, who together issued policies providing coverage to MBL over a period of approximately 20 years.

Lastly, the Court of Appeal rejected MBL’s argument that Federal’s, Nationwide’s, and Great American’s defense of other third-party defendants in the underlying action created a conflict of interest entitling it to independent counsel. The Court of Appeal reasoned as follows:

Even if this argument is properly raised on appeal, Federal did not, as MBL claims, insure both sides of the litigation. It did not insure the property owners or the owners of the dry cleaning facility at issue, the third-party plaintiffs in the Lyon action. Merely because Federal may have represented another third-party defendant in that action does not per se mean that there was a conflict of interest which entitled MBL to independent counsel.

Furthermore, Federal retained different law firms to defend MBL and the other insured as well as assigned different claims adjusters to the files. These claims adjusters had no access to each other’s files, did not discuss the claims and there is no evidence that the defense of either insured would have been affected in any way.

Nationwide argues that there was no conflict even though it insured one of the parties against which MBL brought a cross-claim for contribution. Nationwide agreed to defend that party under a reservation of rights and provided separate counsel. Nationwide’s agreement to defend MBL under a reservation of rights does not obligate Nationwide to cover the costs incurred by MBL in asserting affirmative claims against other parties. Furthermore, there is no evidence of any adversarial litigation activity between MBL and McGraw-Edison that could have created a conflict of interest for defense counsel retained by the insurers.

Great American claims that MBL failed to show that it controlled the defense of the other insured; rather, the record reflected that different counsel represented the City of Modesto in the Lyon action and Great American assigned different claims adjusters to the separate insureds.

We agree with the Insurers. MBL failed to present evidence below to show that the Insurers’ representation of other parties in the Lyon action gave rise to a “significant, not merely theoretical, actual, not merely potential” conflict of interest. (Dynamic Concepts, supra, 61 Cal.App.4th at p. 1007.) MBL’s reliance on “O’Morrow v. Borad (1946) 27 Cal.2d 794 to support its arguments on this issue is misplaced. O’Morrow arose out of an automobile accident involving two vehicles and the drivers of those vehicles happened to both be insured by the same insurance company.

The insureds were thus direct adversaries in the litigation. However, that at the time O’Morrow was decided, contributory negligence was a complete bar to recovery. If each driver was shown to be at least partly to blame for the collision, the insurer would pay nothing to either of them. Since O’Morrow was decided, we have moved to a system of comparative negligence, in which responsibility for the loss is apportioned between and among wrongdoers based on the degree of their respective fault.

In this case, the Insurers could only avoid liability by establishing that a particular insured had no responsibility for the pollution at issue, not that each of its insureds was partially responsible for the loss. Ultimately, the Insurers would potentially have to indemnify all of their respective insureds against any judgment that might be entered and thus would have no incentive to shift liability among them.

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