BEING DISSATISFIED WITH INSURER-APPOINTED DEFENSE COUNSEL DOES NOT CREATE A CONFLICT OF INTEREST PERMITTING INDEPENDENT COUNSEL

In Nede Management, Inc. v. Aspen American Insurance Co., 68 Cal. App. 5^th 1121 (2021), the Court ruled that just because an insured disagreed with the insurer-appointed defense counsel’s handling of its defense, or where the Complaint sought compensatory and punitive damages in excess of the policy limits, it did not entitle the insureds to independent counsel under California Civil Code §2860.

In Nede, the insureds were in control of a property where a fire occurred, killing one person and injuring others.  The victim sued, and the insureds defended the lawsuit, subject to two reservations of rights.  The first reservation of rights was for any judgment exceeding the policy limit.  The second reservation of rights involved the lack of punitive damage coverage.  The insureds argued that the assertion of the reservation of rights, in conjunction with an allegation that the insurer-appointed defense counsel had not properly defended the lawsuit, created a conflict of interest allowing the insureds to seek independent counsel under California Civil Code §2860.  In the Nede case, the insurer had settled the fire victim’s claims without the insureds contributing to the claims.  Notwithstanding this, the insureds sued the insurer for declaratory relief in the underlying litigation, asserting that the insureds were entitled to independent cumis counsel.  The trial court disagreed with the insurer’s position.  The California Court of Appeals rejected the Civil Code §2860 argument.  This left intact the insureds’ allegations that the insureds were entitled to independent counsel because the insurer-appointed counsel failed and refused to properly defend the insureds.

While recognizing that Civil Code §2860 is not an exclusive guide, merely alleging dissatisfaction with the performance of the insurer-appointed counsel did not create a conflict of interest.  The insurer’s right to control the defense would be gutted if the insured can create a conflict of interest merely by complaining about how the insurer-appointed counsel was handling the case.