Thursday, June 6, 2002
C.A. Rejects Broad Attack on Use of In-House Counsel to Defend Insureds
By a MetNews Staff Writer
An employment relationship between a liability insurer and the attorneys who defend its insureds does not violate rules against the corporate practice of law and is not necessarily a conflict of interest requiring assignment of independent counsel, the Fourth District Court of Appeal ruled yesterday.
The court’s Div. One affirmed, in part, a San Diego Superior Court judge’s grant of summary judgment in favor of Travelers Property Casualty Corporation and its in-house Redlands law firm, Ponsor & Associates.
“We reject the notion that an insurance company’s mere employment of attorneys to represent its insureds constituted the practice of law by the insurance company itself,” Justice Terry O’Rourke wrote.
“When an insurance company in California arranges for a law firm to defend an insured under a contractual duty to do so under an insurance policy (regardless of whether that law firm is retained outside counsel or in-house counsel employed by the insurer), counsel is acting on the insurer’s behalf and representing the insurer’s own rights and interests as well as those of its insured,” the justice explained.
O’Rourke and his colleagues did, however, conclude that Travelers’ insured might be entitled to independent counsel under the facts of the specific case, overturning Judge J. Richard Haden’s ruling to the contrary.
The litigation resulted from a contract dispute between Gafcon, Inc. a construction management firm, and the Palm Desert Resorter Homeowners Association. After Gafcon sued for unpaid fees, the association cross-complained against Gafcon on various theories.
Gafcon tendered its defense of the cross-complaint to Travelers, which accepted the defense under a reservation of rights. The company suggested that the claims might fall under a policy exclusion for “Testing or Consulting Errors and Omissions.”
The Ponsor firm later learned of a potential conflict of interest and notified Gafcon it had retained an outside firm—Selski, Sturgeon and Wehbe—to represent the insured.
Less than a month later, however, Gafcon sued Travelers and the Ponsor firm, seeking damages along with a declaratory judgment recognizing its right to hire independent counsel under San Diego Federal Credit Union v. Cumis Ins. Society, Inc.(1984) 162 Cal.App.3d 358 and Civil Code Sec. 2860. The Ponsor firm later obtained an order relieving it as counsel for Gafcon.
Gafcon, represented by Stuart M. Eppsteiner and Neal A. Markowitz of Eppsteiner & Associates, argued that insurers’ use of house counsel constitutes unauthorized practice of law; that Gafcon had the right to hire its own counsel; and that insurers “derive an illegal profit from use of in-house counsel in representing insureds.”
Haden ruled that Gafcon’s legal contentions were not well taken and that it had raised no material issues of fact to show that Travelers or its law firm engaged in or aided the unauthorized practice of law or had a conflict requiring appointment of Cumis counsel.
O’Rourke, agreeing that the use of in-house counsel is neither unauthorized practice nor inherently conflicting, explained that the insured, the insurer, and defense counsel have a “tripartite” relationship, in which defense counsel has duties to both insurer and insured.
The justice distinguished the hiring of a lawyer by a corporation to represent a party from the practice of law by the corporation. He cited a 1936 state Supreme Court ruling that a county counsel was not violating the corporate-practice prohibition by representing the county’s public administrator, because the county was not practicing law.
It was, however, error for the trial judge to rule by way of summary adjudication that Gafcon was not entitled to Cumis counsel, O’Rourke concluded. The burden was on Travelers to show that there was no conflict of interest, the justice explained.
To carry that burden, O’Rourke elaborated, Travelers had to show that that the Ponsor firm had no ability to affect the question of coverage by its defense of the underlying action. Since it made no such showing, Gafcon is entitled to a trial on that issue, the jurist said.
Charles R. Grebing and Brian P. Worthington of Wingert, Grebing, Brubaker & Ryan represented Ponsor & Associates on appeal, while Theodore J. Boutrous, Jr., Meryl L. Young, Nicola T. Hanna and Deborah L. Shirley of Gibson, Dunn & Crutcher were counsel for Travelers.
The case is Gafcon, Inc. v. Ponsor & Associates, Inc., 02 S.O.S. 2787.
Copyright 2002, Metropolitan News Company