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July 2013

Law Firm Cannot Simultaneously Represent Insurer and Insured With Conflicting Interests

The California Court of Appeal, Third Appellate District, recently affirmed the trial court’s order disqualifying counsel for the insurer.  Counsel represented the insurer and the insured simultaneously even though conflicts of interest existed between them.  Counsel could not continue to represent the insurer even after the insured retained separate counsel because the court assumed counsel had received confidential information from the insured during its representation. 

According to the June 12 opinion in Schaefer v. Elder, CastlePoint National Insurance Co. insured Kelly Elder, doing business as Elder Construction.  Elder contracted with Steve Schaefer to design and build a residence for Schaefer.  Schaefer subsequently sued Elder, alleging causes of action related to the design and construction of the residence.

Elder tendered the Schaefer action to CastlePoint, which accepted subject to a reservation of rights.  It appointed the law firm of Koeller, Nebeker, Carlson & Haluck to defend.  Among other things, CastlePoint reserved its right to deny coverage based on a “contractor’s special condition” in the CastlePoint policy that excluded coverage for work performed by independent contractors unless Elder first obtained an indemnity agreement and a certificate of insurance from the independent contractor.

CastlePoint filed a declaratory relief action against Elder asserting the contractor’s special condition and other grounds.  In doing so, CastlePoint raised the issue of whether the workers who did the allegedly defective work were Elder’s employees or independent contractors.  If independent contractors, the special condition would apply unless Elder satisfied the prerequisites for coverage.

Elder retained separate counsel to seek the appointment of independent defense counsel and to disqualify the Koeller firm.  The trial court granted Elder’s motion for independent counsel concluding an actual conflict existed between Elder and CastlePoint.  The trial court further granted Schaefer’s motion to disqualify the Koeller firm.

The Court of Appeal affirmed following CastlePoint’s appeal, holding the status of the workers created a conflict of interest.  In the Schaefer action, it was in Elder’s interest to argue the work was done by employees to avoid application of the contractor’s special condition.  It was in CastlePoint’s interest to argue the work was done by independent contractors.  The status of the workers and their relationship to Elder must be proven in the Schaefer action to resolve the nature and extent of Elder’s liability.  That determination impacted CastlePoint’s declaratory relief action.

The Court of Appeal further agreed with the trial court that the Koeller firm should be disqualified from continuing to be involved in the Schaefer action and could not appear as “counsel provided by the insurer,” pursuant to Civil Code §2860(f).  Section 2860(f) provides that counsel provided by the insurer and independent counsel selected by the insured “shall be allowed to participate in all aspects of the litigation” and “shall cooperate fully in the exchange of information that is consistent with each counsel’s ethical and legal obligation to the insured.”

The Court of Appeal assumed the Koeller firm received confidential information from Elder while it represented him, including responding to interrogatories regarding whether Elder hired subcontractors.  Because the Koeller firm simultaneously represented Elder and CastlePoint, it was disqualified from further participation in the litigation.

Click here for opinion.

The opinion in Schaefer v. Elder (June 12, 2013) ___ Cal.App.4th ___; 13 C.D.O.S. 5887 is not final. Though it has been certified for publication, it may be modified on rehearing, or granted review by the California Supreme Court. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

Insurance

Arthur Schwartz
Lyndy Stewart



Insurance

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