Truck Insurance Exchange insured International Patients Network under a business liability policy. IPN’s officers were additional insureds. IPN sued a former employee to recoup sums it had advanced. The employee then cross-complained against IPN for Labor Code violations and against two of IPN’s officers for fraud. The insureds hired their own defense counsel and never tendered the defense to Truck. Truck nevertheless learned about the cross-complaint and investigated. Because the cross-complaint also alleged facts creating a potential the insureds could be liable for covered bodily injury or false imprisonment, Truck agreed to defend each of the insureds under a reservation of rights. The insureds, however, refused to allow Truck’s appointed counsel to represent them and asserted that, given Truck’s reservations of rights, Truck was obligated to pay for their previously retained independent counsel. Truck disagreed.
After prevailing in the former employee’s cross-action, the insureds filed an action against Truck for breach of contract and bad faith. The trial court granted Truck’s motion for summary judgment, ruling (1) Truck’s reservation of rights did not give rise to an actual and significant conflict for appointed counsel, hence Truck had no obligation to pay for the insureds’ independent counsel, and (2) the insureds’ refusal to cooperate with Truck’s appointed counsel constituted a breach of the policy and a complete defense to the insureds’ own claim for breach. The insureds appealed and Truck retained Horvitz & Levy as appellate counsel.
In an unpublished opinion, the Court of Appeal affirmed the summary judgment, holding that because the cross-complaint’s claims for Labor Code violations and fraud could not result in covered liability in any event, Truck’s appointed counsel faced no actual conflict of interest in defending the insureds. “The fact that Truck reserved its rights on certain exclusions and limitations under the policy did not create a conflict of interest when there would be no coverage of the claims to begin with.” The possibility that the cross-complaint could be amended to plead potentially covered claims for bodily injury or false imprisonment created, at most, a potential conflict, but potential conflicts do not trigger an insurer’s duty to pay for independent defense counsel.
