Tuesday, September 24, 2013
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Court of Appeal Rejects Bad-Faith Suit Based on Cumis Issue
Panel Says Insurer No Longer Had to Pay Separate Counsel After It Withdrew Reservation of Rights
By KENNETH OFGANG, Staff Writer
An insurer who initially defends under a reservation of rights, leading its insured to hire separate counsel at the insurer’s expense, need not continue to pay that attorney after it withdraws the reservation, the Court of Appeal for this district ruled yesterday.
Affirming summary judgment in favor of State Farm General Insurance Company in its insured’s bad-faith action, Div. Seven said the provisions of Civil Code Sec. 2860 and San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 no longer apply once an insurer has eliminated the conflict of interest that make those provisions applicable in the first place.
Terry Ann Swanson’s suit against State Farm stemmed from a 2005 incident that resulted in her and her neighbors, Mark and Patricia Betetti, suing each other. The La Crescenta area where they lived had experienced heavy rainfall in late 2004, contributing to the collapse of the Betettis’ retaining wall and alleged injury to Swanson.
Swanson, represented by attorney Richard Blasco, sued the Betettis for negligent damage to her person and property. The Betettis cross-complained for premises liability and negligence, and Swanson tendered the defense of the cross-complaint to State Farm.
Agreed to Defend
The insurer initially agreed to defend under a reservation of rights, and tentatively to pay Blasco at an agreed-upon rate for those services. After some back-and-forth, it was agreed that Blasco’s fees for the defense would be $200 per hour, with $150 per hour coming from State Farm and the rest from Swanson.
Four months later, in early 2006, State Farm notified Blasco and Swanson that it was withdrawing its reservation of rights and assigning the defense of the action to the law firm of Procter, McCarthy and Slaughter. State Farm also advised Swanson that “elimination of the Cumis-triggering conflict” relieved it of its obligation “to pay for independent counsel.”
Swanson did not agree to have the Procter firm assume sole responsibility for the defense. With Blasco and the Procter firm as co-counsel, the case went to trial and resulted in a judgment for Swanson on the cross-complaint.
Blasco then sought payment of more than $60,000 for legal fees incurred in defense of the cross-complaint after the Procter firm entered the case. State Farm refused, and Blasco filed suit for breach of contract and bad faith on Swanson’s behalf.
Summary Judgment Granted
Los Angeles Superior Court Judge Laura Matz granted the company’s motion for summary judgment. Superior Court Judge John Segal, sitting on assignment in the Court of Appeal, yesterday said summary judgment was proper.
He wrote:
“[T]he duty to provide and pay for Cumis counsel arises only where a disqualifying conflict of interest exists....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.”
Counsel on appeal were Blasco for the plaintiff and Robie & Matthai’s Kyle Kveton for State Farm.
The case is Swanson v. State Farm General Insurance Company, 13 S.O.S. 4947.
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