Insurer Has No Duty to Pay for Independent Counsel and May Reassert Its Right to Control the Defense When the Insurer Withdraws the Reservation of Rights Triggering the Insured’s Right to Independent Counsel

Insurer Has No Duty to Pay for Independent Counsel and May Reassert Its Right to Control the Defense When the Insurer Withdraws the Reservation of Rights Triggering the Insured’s Right to Independent Counsel

Swanson v. State Farm General Insurance Co., 2013 Cal. App. LEXIS 759 [enhanced version available to lexis.com subscribers], presented an issue of first impression regarding whether an insurer has a duty to provide an insured with independent counsel, pursuant to California Civil Code section 2860 (“Section 2860”) [enhanced version available to lexis.com subscribers], after the insurer withdraws its reservation of rights that triggered the right to independent counsel in the first instance. The Swanson court ruled in favor of the carrier on this issue.

In Swanson, an insured tendered to its liability insurer an underlying action brought against the insured seeking covered damages for “bodily injury” and “property damage” caused by an occurrence. The insurer accepted the defense subject to a reservation of rights and allowed the insured to retain independent counsel at the insurer’s expense, pursuant to Section 2860. Several months later, the insurer amended its original reservation of rights and withdrew several policy defenses, eliminating the conflict of interest that gave rise to the insured’s right to independent counsel. The insurer proceeded to appoint a panel attorney to represent the insured and allowed her previously retained independent counsel to participate as co-counsel, but refused to make further payments to independent counsel. The insured then sued the insurer, alleging breach of contract and breach of the implied covenant of good faith and fair dealing.

The insurer moved for summary judgment, which the trial court granted. The trial court held that the insurer was relieved of its duty to pay for the insured’s independent counsel when it withdrew its reservation of rights that triggered the right to independent counsel. The trial court found that absent a statutory right to independent counsel, the terms of the policy explicitly gave the insurer the right to “provide a defense at its own expense by counsel of [its] choice.” The trial court rejected the insured’s argument that the insurer entered into a modified insurance agreement by previously agreeing on the independent counsel’s rate of reimbursement because, in doing so, the insurer was only satisfying a statutory obligation.

In affirming the trial court’s entry of summary judgment, the Second Appellate District held the insurer had no duty to pay for and provide independent counsel since it was undisputed that a disqualifying conflict no longer existed after the insurer withdrew its reservation of rights. In so holding, the court rejected the insured’s argument that the insurer relinquished the right to cease paying independent counsel because it modified its insurance agreement in its exchange of letters with the insured and her independent counsel. The court found that the letters were the means by which the insurer preserved its rights and fulfilled its duties under the policy and applicable law.

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