Insurers: Calif. Court Decision Emphasizes Need for Timely Defense

The California Court of Appeal has ruled that an insured can recover full defense costs, when an insurer fails to respond with timely defense.

According to court documents in Intergulf Development v. Superior Court of San Diego County (Interstate Fire & Casualty Co.), Treo@KettnerHomeowners Association sued Intergulf Development LLC and others for alleged construction defects in a condo project in San Diego. Interstate Fire & Casualty Co. was Intergulf’s insurer for liability for bodily injury or property damage.

In March 2007, Intergulf demanded Interstate defend and indemnify Intergulf as an additional insured in policies issued to its subcontractor, and Interstate agreed to participate in Intergulf’s defense through its counsel. Intergulf then requested in writing that it wanted to select its own counsel, and Interstate did not respond to the request.

Three months later, Intergulf wrote to Interstate demanding payment for defense costs, noting Interstate had failed to follow-up on its defense request, and noting that Interstate had “failed to satisfy its defense obligations … which in turn ha[d] caused Intergulf severe hardship and expense.” Intergulf sued for bad faith, breach of contract and declaratory relief, seeking compensatory and punitive damages.

Five weeks before Intergulf’s scheduled trial, Interstate filed a petition to compel arbitration, adding that Intergulf’s independent counsel was charging excessive fees. The trial court granted Interstate’s petition to compel arbitration. But Intergulf argued that because Interstate breached its duty to defend, and the question of bad faith and conflict of interest had not been resolved, Interstate could not require arbitration.

The Court of Appeal said it agreed that the grievance centered on the complaint of bad faith and breach of contract, not a dispute over how much Interstate should pay for independent counsel. “Unreasonably delay in paying policy benefits or paying less than the amount due is actionable withholding of benefits, which may constitute a breach of contract as well as bad faith giving rise to damages in tort,” it wrote. “Breach of duty to defend also results in the insurer’s forfeiture of the right to control defense of the action or settlement, including the ability to take advantage of the protections and limitations set forth in [Civil Code] section 2860. By filing the action for breach of contract, bad faith and declaratory relief, Intergulf gave Interstate notice that it was treating Interstate’s failure to acknowledge Intergulf’s right to independent counsel and delay in paying policy benefits as a total breach of the duty to defend.”

The Court of Appeal said the trial court erred in granting Interstate’s petition to compel arbitration under Civil Code section 2860 before the parties had resolved the issues raised by Intergulf’s complaint. Intergulf is entitled to costs in the writ proceeding. But the Court of Appeal added that its decision does not prevent Interstate from pursuing remedies under section 2860 at a later time, as appropriate.

Source: Intergulf Development v. Superior Court of San Diego County (Interstate Fire & Casualty Co.)