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April 2011

The Housing Group v. PMA Capital Insurance Company ? Insurers' Partial Payment of Defense Fees Following Insureds' Settlement of Third-Party Litigation Construed as Denial of Defense Obligations

Civil Code Section 2860(C), Which Provides For Compelled Arbitration Between Insurers and Insureds in Cumis Fee Disputes, Does Not Apply When Insurer Reserves Its Rights By Expressing Future Intent To Reimburse

(March 25, 2011) ___ Cal.App.4th ___; 11 C.D.O.S. 3623

The California Court of Appeal, First Appellate District, affirmed the trial court's decision that Civil Code Section 2860(c), which requires arbitration between insurers and insureds in Cumis counsel fee disputes, does not apply if an insurer reserves its rights by merely expressing a future intent to reimburse Cumis fees.

On July 10, 2007, The Housing Group and other plaintiffs (the "insureds") filed suit against PMA Capital Insurance Company as successor in interest to Caliber One Indemnity Company, and Caliber One Management Company ("Caliber One").  The complaint sought damages for Caliber One's "failure and refusal to defend" the insureds in connection with certain third-party actions (the "underlying litigation").  Caliber One petitioned the trial court to compel arbitration pursuant to section 2860(c) because the action involved a dispute regarding Cumis counsel fees.

The insureds argued that Caliber One could not invoke section 2860(c) because Caliber One  failed to offer any evidence that it "agreed to defend" the insureds in the underlying litigation, as required by the statute.  The insureds argued that 2860(c) is only applicable if the insurer actually accepts tender of the defense or pays Cumis fees during the underlying litigation.  The trial court agreed and Caliber One appealed.

On appeal, Caliber One first argued that it satisfied its duty to defend because it sent two reservation of rights letters in which it acknowledged receipt of the insureds' tender of the defense and, to the extent coverage was found to exist, Caliber One agreed that the insureds could defend the underlying litigation using their chosen counsel.  The Court of Appeal disagreed and held the trial court properly interpreted the two letters as only an "expression of Caliber One's future intent to comply with its duty to defend, and not an actual acceptance or agreement to provide a defense or to appoint plaintiffs' chosen counsel as Cumis counsel."

Caliber One next argued that the trial court incorrectly found there was no evidence that Caliber One failed to defend because it actually paid defense fees and costs in excess of $35,000 after the insured settled the underlying claims.  The Court of Appeal observed that section 2860(c) requires that the insurer pay defense costs to the insured during the underlying litigation.   Caliber One's decision to withhold payment of defense fees until the end of the litigation was "the equivalent of a defense denial." 

Finally, the Court of Appeal held that Caliber One's reliance on Compulink Management Center, Inc. v. St. Paul Fire & Marine Ins. Co. (2008) 169 Cal.App.4th 289 was misplaced because, in Compulink, the characterization of the insurer's payment of defense fees as Cumis fees was undisputed.  Here, there was an actual dispute as to whether the fees paid by Caliber One were Cumis fees.  The Court reasoned "[t]he parties' characterization of the payments as defense fees does not render them Cumis fees."  Thus, section 2860(c) is inapplicable.

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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

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Christopher R. Wagner