In Federal Insurance Co. v. MBL, Inc., 219 Cal. App. 4th 29, [enhanced version available to lexis.com subscribers], the Sixth Appellate District held that a third-party defendant-insured in an environmental contamination action was not entitled to independent counsel because the insured failed to establish any conflict of interest as a result of its liability insurers’ agreement to defend subject to a reservation of rights on various issues. The insurers denied that their reservation of rights created an actual conflict of interest and filed an action seeking a declaration that they were not obligated to provide independent counsel to the insured. The trial court ruled in favor of the insurers on summary judgment.
On appeal, the MBL court affirmed the trial court’s decision and rejected the insured’s argument that the qualified (i.e., “sudden and accidental”) pollution exclusions and the existence of “per occurrence” limits in some of the subject policies entitled it to independent counsel. The court found that there was no actual conflict of interest because the insurers did not specifically reserve on the exclusion or on the policy limits. The court explained that the “general” reservations of rights asserted by the insurers did not entitle the insured to independent counsel because, at most, they only created a “theoretical, potential” conflict of interest.
The MLB court also held that the insurers’ specific reservations based on property damage occurring outside the respective policy periods and the “absolute” pollution exclusion (i.e., barring loss arising out of a government’s claim to remediate pollution) did not trigger the insured’s right to independent counsel. The court found that the issue of when the alleged damages occurred was irrelevant to a defense counsel that was jointly retained by multiple insurers, all of whom had an interest in defeating liability, and the insured provided no evidence to establish how defense counsel could have controlled the issue. Further, the court found that the defense counsel had no control over whether the absolute pollution exclusion barred coverage since that was strictly a contract interpretation issue.
Finally, the MBL court rejected the insured’s argument that the right to independent counsel was triggered as a result of the insurers agreeing to defend other third-party defendants in the underlying environmental contamination action. The court found that this did not create an actual conflict of interest since the insurers did not “defend both sides of the litigation” and the insured did not otherwise provide evidence of any adversarial litigation between it and the third-party defendants. The court also noted that the insurers had taken steps to avoid an actual conflict with the insured by using different claims adjusters and different law firms to defend the other insureds.
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