Insured Lost Both Defense and Indemnity Coverage when It Refused to Allow the Insurer to Control its Defense
In Travelers Property v. Centex Homes, No. C 10-02757 CRB (N. D. Cal. April 1, 2011), Centex, a general contractor, was sued in certain construction defect litigation. Pursuant to a reservation of rights, Travelers agreed to defend Centex, an additional insured under its policy. Centex refused to allow counsel retained by Travelers to defend it or to associate in its defense. The court held that under the policies, Travelers had the “right and duty to defend” suits seeking damages to which the policies apply. Upon being provided a defense, Centex had no right to interfere with Travelers’ right to control the defense.
The court agreed that for an insurer to be excused from its duty to defend and indemnify after an insured’s breach of the cooperation clause, the insurer must show that it suffered substantial prejudice from the insured’s breach. It recognized, however, that the California Supreme Court had held that prejudice may be presumed where it “naturally, inherently and necessarily exists.” It also noted Ninth Circuit authority holding that when an insured refuses an insurer’s choice of counsel, the insured not only violates the duty to cooperate, but also interferes with the insurer’s right to conduct a defense. This breach provides sufficient grounds to deny the insured’s claims for defense costs and indemnification.
Centex asserted that Travelers had a conflict in controlling its defense as Travelers insured both Centex and its named insured subcontractors in the construction defect actions, and Centex had filed cross-complaints against the subcontractors. The court rejected this argument on the ground that Centex’s cross-complaints against the subcontractors were for indemnification. Centex’s liability in the actions would be derivative of the liability of the subcontractors who performed the work. The court recognized that Travelers would have the same interest in defending both its named insured subcontractors and Centex against the plaintiffs’ claims in both lawsuits. Centex also argued that Travelers’ reservation of rights to deny an indemnity obligation for property damage occurring outside of the Travelers’ policy periods created a conflict of interest. The court rejected that argument, noting that a conflict exists only “when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel… retained by the insurer for the defense of the claim.” The court found that independent counsel was not required under California Civil Code Section 2860 as Travelers’ reservation did not give rise to a conflict of interest because the timing of the property damage was a factual issue outside of defense counsel’s control.
