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March 2014

Insured Not Entitled to Independent Counsel Despite Insurers’ Reservation of Rights

The California Court of Appeal, Sixth Appellate District, recently held that a third-party defendant in an environmental contamination action was not entitled to independent counsel because the defendant-insured failed to establish any conflict of interest with its insurers as a result of their agreement to defend subject to a reservation of rights.

In Federal Insurance Co., et al. v. MBL, Inc., et al., the federal government sued the owners of a dry cleaning facility under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for the cost of remediating soil and groundwater contamination in the city of Modesto.  The defendants in the CERCLA action subsequently filed third-party actions seeking indemnity, contribution and declaratory relief against MBL, a supplier of dry cleaning products.

MBL tendered its defense in the third-party actions to its commercial general liability insurers, which agreed to defend subject to various reservations and appointed panel defense counsel.  MBL demanded independent counsel of its own choosing to defend it in the third-party actions citing an alleged conflict of interest with the insurers under California Civil Code §2860, which codified San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358.  Under §2860 and the Cumis decision, an insured may be entitled to select independent counsel to provide it with a defense in a pending lawsuit when the insurer has agreed to provide a defense subject to a reservation of rights and the reservation creates a conflict of interest between the insured and the insurer.  A conflict of interest may exist where defense counsel retained by the insurer can conduct the defense in such a way so as to influence the outcome of the coverage issue.    

All of the insurers (except one) refused MBL’s demand for independent counsel.  Those insurers then sued MBL seeking a declaration that they were not obligated to provide independent counsel.  The trial court agreed with the insurers and granted their motions for summary judgment.  The trial court also found that the one insurer that did agree to defend through independent counsel was not entitled to contribution.  The trial court was affirmed on appeal.

The appellate court rejected each of MBL’s arguments asserted in opposition to the insurers’ summary judgment motions.  While MBL argued that qualified (i.e., “sudden and accidental”) pollution exclusions and the existence of “per occurrence” limits in some of the subject policies entitled it to independent counsel, the court noted that the insurers issuing those policies never reserved rights based on this exclusion or limits provision.  The court also rejected MBL’s argument that the insurers’ reservations based on the “absolute” pollution exclusion and the requirement that property damage occur during the policy period triggered its right to independent counsel.  The court found that appointed panel counsel could not influence whether the absolute pollution exclusion applied or when certain damage occurred.  The court also found that the “general” reservation of rights asserted by the insurers did not entitle MBL to independent counsel because, at most, they only created a “theoretical, potential” conflict of interest.   

In addition, the court held that MBL was not entitled to independent counsel by virtue of the fact that the insurers had agreed to defend other third-party defendants in the CERCLA action.  Although a potential conflict of interest may have existed, the appellate court found no actual conflict because the insurers did not insure “both sides of the litigation” in the CERCLA action, i.e., the plaintiffs and defendants.  The court also observed that the insurers had taken steps to avoid an actual conflict with MBL by using different claims adjusters and different law firms to defend the other insureds. 

Lastly, the court of appeal affirmed the trial court in finding that the one insurer that did provide MBL with independent counsel was not entitled to seek equitable contribution from those insurers defending through panel counsel because there was no independent counsel obligation in the first instance. 

Click here for the opinion in Federal Insurance Co. v. MBL, Inc. (2013) 219 Cal.App.4th 29.

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Matthew S. Foy
Steven R. Inouye