Expert Commentary

No Right to Independent Counsel

Since the California Court of Appeal decided San Diego Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal. App. 3d 358 (1984) ("Cumis"), a conflict between an insurer and its insured has been found to be sufficient to require an insurer to pay for independent counsel to defend its insured. If, however, there is no real conflict, the insurer has the absolute ability to control the defense of the insured and appoint counsel of its choice to defend the insured.


Claims Practices
January 2014

Marquis Acquisitions, Inc., appealed from a summary judgment rendered in favor of Steadfast Insurance Company on Marquis's claims for breach of contract, violations of the Texas Insurance Code, breach of the duty of good faith and fair dealing, and "aiding and abetting." In Marquis Acquisitions, Inc. v. Steadfast Ins. Co., 409 S.W.3d 808 (Tex. App. 5th Dist. 2013), the Texas appellate court resolved the dispute.

Factual Background

The claims in this case arise out of the legal defense provided by Steadfast Insurance Company to Marquis Acquisitions, Inc., and related entities in an underlying lawsuit brought by the Burks family in January 2007. The underlying suit was based on a fire at the Colonia Tepeyac Apartments in Dallas, Texas, that killed three members of the Burks family and injured several others. The Burks filed suit against multiple defendants with ownership or management interests in the apartment complex.

The defendants carried several layers of insurance. The first layer was a $30,000 self-insured retention policy administered by Innovative Risk Management (IRM). IRM agreed to provide a defense in the Burks suit subject to a reservation of rights and hired Joe Michael Russell as defense counsel. Counsel for Marquis, Mr. Shaw, wrote to IRM and stated that, if IRM was reserving its rights, his client had the right to "select its own defense counsel and require [IRM] to pay for that defense." IRM agreed to allow Shaw to take over the defense if the defendants consented in writing and Shaw was willing to work for the lower hourly rate charged by Russell. Shaw declined the offer.

On May 17, IRM informed Shaw that it was withdrawing its reservation of rights and providing all the insureds with an unqualified defense. The letter referenced apparent allegations by Shaw that a conflict of interest existed among the insureds, requiring that separate counsel be hired. The self-insured retention amount was exhausted, and IRM tendered the defense to Steadfast, which provided the second layer of insurance coverage.

Steadfast sent Shaw a letter informing him that Steadfast was providing the insureds with an unqualified defense in the Burks suit and was assigning Clay White as defense counsel. Shaw asserted that a conflict existed without providing any basis for the assertion. Relying on the alleged conflict, Shaw demanded that Steadfast hire him as counsel for Marquis. Shaw also sent an email to defense counsel White accusing White of wrongfully taking over Marquis's defense despite the company's request to have Shaw represent it. Shaw further stated that White's evaluation of the case was "past due."

The next day, White sent a written case evaluation to Steadfast with copies to Shaw. White stated that "if the jury believes precious seconds could have delayed the outcome and, if those seconds could have been added by the smoke detectors being placed in the bedrooms as required by the HUD statutes, the jury could make a finding of liability as to the management company or installation team."

White, in a second report, expanded upon his liability assessment and stated that the management entities had "potential liability as a result of failing to follow the proper regulations." White opined that it appeared clear that the apartment complex did not meet code requirements and that this was a source of liability for both the ownership and the management defendants.

Steadfast, noting the potential for a conflict in the future, hired separate counsel to represent the management entities. Steadfast did not authorize Shaw to represent Marquis in the case but instead hired different defense counsel.

Marquis immediately sued Steadfast and White claiming they had conspired, "aided and abetted," and were negligent in connection with the defense of the Burks suit. Because this suit created a conflict between White and Marquis, White withdrew as defense counsel in the Burks suit, and Steadfast hired new counsel to represent the management entities.

The ownership entity defendants settled with the Burks family before trial for $1 million. This settlement exhausted the Steadfast policy limits, and the defense was taken over by the excess coverage insurer. The case proceeded to trial in April 2008, and the jury found in favor of the Burks against the management defendants. The parties eventually settled for an amount within policy limits.

Following the trial, Marquis brought this suit against Steadfast "in an effort to recover the attorney's fees it expended in getting Steadfast to retain separate counsel for the owner group of insureds."

Analysis

Marquis alleged that Steadfast breached its insurance contract with Marquis when it "fail[ed] to appoint independent counsel for the owner group and the management group in order to avoid the clear conflict that arose between the two groups of insureds." Because it is undisputed that Steadfast appointed separate counsel for the owner and management defendants approximately 2 months after it assumed control of the defense, the appellate court construed Marquis's argument to be that Steadfast breached the contract by failing to employ separate counsel in a timely manner.

Marquis asked the court to conclude that an insurer's failure to appoint separate counsel immediately upon receiving notice of an unspecified conflict of interest from the insured would constitute a breach of contract. Steadfast provided summary judgment evidence showing that Russell indicated no conflict existed and Steadfast responded immediately to Marquis's allegations of a conflict by requesting information to evaluate the allegation. In contrast, Marquis never responded to Steadfast's request for information, nor did it ever specify the nature of the conflict it believed existed. Nevertheless, Steadfast informed Marquis that, if it was determined that there was a conflict among the insureds, separate counsel would be retained.

Within a few weeks, White was able to evaluate the case and determined there was a potential conflict between the ownership and management entities. Shortly thereafter, Steadfast hired separate counsel for the ownership entities. Obviously, Steadfast did not "disregard" notice of a potential conflict. Instead, it responded to the claim of conflict immediately. There is nothing in Texas law that requires an insurance company to immediately hire separate counsel for insured defendants based on an insured's unspecified and unsubstantiated allegations of a conflict of interest.

Marquis relied on the affidavit testimony of its insurance expert, Ben Ralph, who stated that Steadfast's conduct "violated the terms and conditions of the policy." Ralph's statement that the conduct violated the insurance contract is nothing more than a legal conclusion. Legal conclusions are not competent evidence.

Finally, even if Steadfast's actions could be held to constitute a breach of the insurance contract, the summary judgment evidence conclusively showed that Marquis suffered no damages as a result. Proof of actual damages is required to recover for breach of contract. All of the damages paid to the Burks were covered by insurance policies, and Marquis produced no summary judgment evidence to show that it was harmed in any way by the fact that Steadfast did not hire separate defense counsel to represent it immediately upon Shaw's request.

The only "damages" sought by Marquis in this case were the fees it paid Shaw for his efforts to force Steadfast to hire him as Marquis's defense counsel. But any recovery of attorney's fees must be in addition to the recovery of actual damages caused by the alleged breach of contract. The summary judgment evidence showed that any alleged delay in providing Marquis with separate counsel had no effect on the Burks lawsuit and did not result in any compensable damages to Marquis.

In this case, it is undisputed that Steadfast never denied or delayed Marquis's claim for a defense in the Burks litigation. Marquis asserts only that Steadfast was unreasonable in its "multiple denials" of Marquis's request for separate counsel.

Conclusion

This case is more about a desire to take advantage of the right to independent counsel first stated in Cumis than a claim of breach of contract. The insurer involved in this case provided a defense to its insureds for a very serious liability claim without reservation. It retained competent counsel to represent the insureds and responded promptly to demands of the insureds' counsel that he be allowed to defend the insured at the rate he demanded rather than at the lower rates charged by counsel appointed by the insurer. When the insurers properly refused to allow Shaw to defend, his client sued to get the fees he charged to try to get himself hired.

As the late Chick Hearn said with regard to basketball, the court ruled there was no harm and, therefore, no foul, no tort, and no real damage.

For a detailed review of the Cumis case and how it was abused, see the chapter in my book Insurance Claims: A Comprehensive Guide, available from Specialty Technical Publishers.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

Like This Article?

IRMI Update

Dive into thought-provoking industry commentary every other week, including links to free articles from industry experts. Discover practical risk management tips, insight on important case law and be the first to receive important news regarding IRMI products and events.

Learn More