California Corner: Insurer’s Failure to Immediately Commence Defense Waives California Civil Code Section 2860 Rate Limitations for Independent Counsel

Julia K. Holt

California courts strictly enforce an insurer’s duty to immediately commence defending its insured. The insurer’s delay in doing so, even if the delay is short, constitutes a breach of this important duty. In fact, California imposes a 40-day time limit for an insurer to provide its written coverage position under the Prompt, Fair and Equitable Settlement of Claims requirements stated in Title 10 of the California Code of Regulations at Section 2695.7.

A breach in this regard results in a waiver of any claimed right of the insurer to control the defense of its insured. This includes a waiver of the insurer’s ability to seek to impose any Civil Code Section 2860 rate limitations for independent counsel. See Travelers Indem. Co. of Connecticut v. Centex Homes, No. 11-CV-03638-SC, 2015 WL 5836947, at *5 (N.D. Cal. Oct. 7, 2015), objections overruled, No. 11-CV-03638-SC, 2015 WL 6164429 (N.D. Cal. Oct. 8, 2015). In Centex Homes, the Court found “that Travelers breached its duty to defend by failing to provide Centex with a defense at least 30 days after the complaints were filed in the [noticed] actions . . . [and therefore] Travelers also lost its right to control Centex’s defense.” Id.

In so ruling, the Centex Homes court relied on the California Court of Appeal and Supreme Court rulings in J.R. Marketing, L.L.C. v. Hartford Casualty Insurance Co. See 216 Cal. App. 4th 1444, 158 Cal. Rptr. 3d 41 (Ct. App.), review granted and opinion superseded sub nom. Hartford Cas. Ins. v. J.R. Mktg., 308 P.3d 860 (Cal. 2013), and aff’d in part, rev’d in part, 61 Cal. 4th 988. In J.R. Marketing, as explained by the court in Centex Homes:

The trial court found that section 2860’s protections were unavailable since the insurer had breached and continued to breach its defense obligations by failing to pay all reasonable and necessary defense costs incurred by the insured, and by failing to provide Cumis counsel. Id. at 1450. The Court of Appeal affirmed, reasoning: “Where, as here, the insurer breaches its duty to defend the insured, the insurer loses all right to control the defense, including, necessarily, the right to control financial decisions such as the rate paid to independent counsel or the cost-effectiveness of any particular defense tactic or approach.” Id. at 1457. The California Supreme Court subsequently affirmed that portion of the Court of Appeal’s decision. J.R. Mktg., L.L.C., 61 Cal. 4th at 997; see also id. at 1002 (“where . . . the insurer wrongfully refused to defend the insured or to afford Cumis counsel, the insured may proceed as he or she deems appropriate, and the insurer forfeits all right to control the insured’s defense, including the right to determine litigation strategy.”).

Centex Homes, 2015 WL 5836947, at *4.

Significantly, an insurer’s delay in providing a coverage position and the rates it agrees to pay independent counsel, forces an insured to retain counsel and commence the defense on its own without any of the benefits it paid for when it purchased the insurance policy. As a result of these negative effects caused by the insurer’s delay, the insurer loses the protections of Section 2860, including any claimed right to pay anything other than reasonable fees incurred through the insured’s chosen defense counsel.