Swanson v. State Farm General Insurance Company

In Swanson v. State Farm General Ins. Co., 219 Cal.App.4th 1153 (September 23, 2013), the California Second District Court of Appeal affirmed the trial court’s entry of summary judgment in favor of State Farm in connection with an underlying lawsuit for breach of contract filed by Swanson based on State Farm’s refusal to pay Swanson’s personal counsel’s attorneys’ fees. The parties’ dispute arose out of Swanson’s tender of defense of a cross-complaint under a homeowner’s liability policy issued by State Farm to Swanson. The underlying cross-complaint was filed in response to a lawsuit filed by Swanson against her neighbors involving failure of a retaining wall in January 2005, after substantial rainfall in December 2004.

Initially, State Farm issued a comprehensive reservation of rights regarding issues related to “property damage,” “bodily injury” and “occurrence” as those terms were defined in the State Farm policy as well as various exclusions in such policies. As a result of State Farm’s initial reservation of rights, State Farm acknowledged Swanson’s right to independent counsel pursuant to California Civil Code section 2860 (i.e., “Cumis counsel”). State Farm agreed to utilize the services of Swanson’s personal counsel who had been prosecuting Swanson’s complaint against his neighbors. State Farm acknowledged that Swanson’s personal counsel met the requirements of Civil Code section 2860. However, State Farm declined to pay personal counsel’s hourly rate of $200 an hour. Rather, State Farm offered to pay counsel its panel rate of $150 an hour to defend against the cross-complaint. The parties resolved the issue of independent counsel’s hourly rate when Swanson agreed to pay the difference between the rate paid by State Farm and his personal counsel’s normal hourly rate (agreed to pay $50 an hour making up the difference in the hourly rates).

Subsequently, State Farm amended its original reservation of rights and withdrew certain policy defenses that it had previously asserted in such reservation of rights. As a result, State Farm’s withdrawal of the subject reservations eliminated the Cumis-triggering conflict. Thereafter, State Farm informed Swanson that it had chosen and retained panel attorney to take over the defense of the cross-action. State Farm also advised Swanson that the elimination of the Cumis-triggering conflict relieved it of its obligation to continue to pay for independent counsel. Swanson subsequently agreed to add State Farm’s panel counsel as co-counsel without removing her personal counsel as defense counsel.

Notwithstanding State Farm’s position that it was no longer obligated to pay Swanson’s personal counsel, such counsel continued to bill State Farm for his work on defense of the cross-complaint. Subsequently, the entire lawsuit went to trial and personal counsel, along with panel counsel, obtained a defense verdict in favor of Swanson. Thereafter, Swanson demanded that State Farm pay her personal counsel’s fees and expenses incurred after State Farm advised her that it was retaining panel counsel due to the withdrawal of reservations generating a right to independent counsel.

State Farm refused to pay Swanson’s personal counsel’s fees. As a result, Swanson filed a complaint for breach of contract seeking damages in the amount of $60,384.76 for post April 11, 2006 attorneys’ fees billed by her counsel for the defense of the cross-complaint (i.e., date after which State Farm had retained panel counsel to defend Swanson). Subsequently, State Farm filed a motion for summary judgment regarding Swanson’s complaint. In granting State Farm’s motion, the trial court concluded that when State Farm ultimately withdrew its Cumis-triggering reservations, plaintiff insured was no longer entitled to independent Cumis counsel. Hence, State Farm did not breach its contract by refusing to pay such counsel after the withdrawal of reservations creating a right to independent counsel.

In affirming the trial court’s decision, the Court of Appeal held as follows:

Swanson and State Farm agree that once State Farm waived its Cumis-triggering defenses on April 11, 2006, the disqualifying conflict of interest no longer existed. Swanson and State Farm also agree that under Swanson's Policy, “in the absence of any obligation to provide independent counsel of the insured’s choosing, State Farm had the right to “provide a defense at our expense by counsel of our choice.’” Swanson and State Farm further agree that, pursuant to the Policy provisions regarding the duty to defend, State Farm at any time could appoint counsel of its choice to represent Swanson and State Farm.

As explained above, the duty to provide and pay for Cumis counsel arises only where a disqualifying conflict of interest exists. (Civ. Code, § 2860; Long v. Century Indemnity Co., supra, 163 Cal.App.4th at pp. 1468-1471; Cumis, supra, 162 Cal.App.3d at p. 375; see Musser v. Provencher (2002) 28 Cal.4th 274, 282-283.) Otherwise, “‘insurer owes no duty to provide independent counsel . . . because the Cumis rule is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests.’” (James 3 Corp. v. Truck Ins. Exchange,supra, at p. 1101, quoting Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1394.) Thus, when the ethical bar to dual representation does not exist, the insurer has no duty to provide and pay for Cumis counsel. We are not aware of any authority, and Swanson cites none, holding that once an insurer provides and pays for Cumis counsel, the insurer cannot take over control of the litigation and cease paying Cumis counsel if the disqualifying conflict ceases to exist later in the litigation. Here, it is undisputed that the disqualifying conflict of interest between State Farm and Swanson ceased to exist on April 11, 2006. After that date, State Farm did not have a duty to continue to provide and pay for Cumis counsel.

The Court of Appeal also rejected Swanson’s arguments that State Farm had modified the policy terms and provisions by issuing detailed reservations of rights letters. Further, the Court of Appeal held that State Farm did not waive its right to re-take control of the defense of the cross-action once it withdrew the reservations generating a right to independent counsel.