Schaefer v. Elder

(General Contractor Entitled to Appointment of Independent Counsel Based on a Conflict Created By Discovery Responses Prepared By Defense Counsel Which Could Be Used in Companion Declaratory Relief Action)

In Schaefer v. Elder, 217 Cal.App.4th 1 (June 12, 2013), the California Third District Court of Appeal held that the general contractor, Kelly Elder, dba Elder Construction (“Elder”), was entitled to independent counsel based on a conflict relating to potential coverage of an underlying construction defect lawsuit filed against Elder in connection with the design and construction of a residence for the underlying plaintiff, Steve Schaefer (“Schaefer”). The Court of Appeal went one step further and affirmed the trial court’s disqualification of panel counsel retained by Elder’s insurer, CastlePoint National Insurance Company (“CastlePoint”), from remaining in the underlying Schaefer lawsuit as defense counsel. The trial court reasoned that, since panel counsel was privy to confidential information giving rise to the coverage conflict, he could not remain in the case as defense counsel appointed by CastlePoint.

The parties’ dispute arose out of an underlying construction defect lawsuit filed by Schaefer against Elder in connection with the design and construction of a residence for Schaefer in the El Dorado County. The complaint filed by Schaefer alleged, multiple claims, including causes of action for breach of contract, negligence and strict liability. Elder tendered the defense of the action to CastlePoint. In response, CastlePoint appointed panel counsel, the law firm of Koeller, Nebeker, Carlson & Haluck (“the Koeller firm”) to represent Elder subject to a reservation of rights. Such reservation of rights included a reservation to decline coverage based on a “contractor special condition” provision in the CastlePoint policy which barred coverage of work performed by independent contractors unless Elder first obtained from those independent contractors an indemnity agreement and certificate of insurance. Subsequently, CastlePoint filed a declaratory relief action against Elder seeking to establish the absence of coverage for Elder for the Schaefer lawsuit.

In response to CastlePoint’s reservation of rights and declaratory relief action, Elder hired a different law firm to move to disqualify the Koeller firm and to establish Elder’s right to independent counsel. Elder noted that the underlying Schaefer complaint alleged that Elder used “employees” to construct his home. However, in answers to interrogatories prepared by the Koeller firm, Elder stated that he “primarily contracted with subcontractors to construct the subject property.” Such response supported application of the contractor’s special condition coverage defense asserted by CastlePoint in its declaratory relief action. The Court of Appeal noted that it was in Elder’s best interest to establish that construction of the Schaefer home was performed by employees, whereas, it was in CastlePoint’s best interest to establish that such work was performed by subcontractors. Hence, according to the Court of Appeal, a coverage conflict existed entitling Elder to independent counsel.

Notably, the Court of Appeal rejected CastlePoint’s arguments that: (1) there was no actual conflict because Elder is liable for Schaefer’s damages regardless of whether it is established that the work was done by an employee or independent contractor; and (2) the status of the hired persons or entities will not be determined in the construction defect action. According to the Court of Appeal, Schaefer must establish that those who provided the defective workmanship were related, in a business sense, to Elder. Such determination would impact the CastlePoint declaratory relief action.

The Court of Appeal concluded as follows:

“Put simply, the Koeller firm had an ethical duty to Elder to establish that the workers were employees and, at the same time, had an ethical duty to CastlePoint to establish that the workers were independent contractors. That conflict supported the trial court’s determination that Elder has the right to independent counsel.”

The Court of Appeal went on to affirm the trial court’s disqualification of the Koeller firm because the firm simultaneously represented Elder and CastlePoint. The Court of Appeal assumed that the Koeller firm received confidential information from Elder when assisting Elder in responding to interrogatories regarding whether Elder hired subcontractors to perform work on the Schaefer residence. Given this disclosure of confidential information, the Koeller firm could not remain in the case as CastlePoint’s appointed defense counsel.