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Clarification of the Tripartite Attorney-Client Privilege as between and Insurer, its Insured, and Counsel.

February 6, 2013

Bank.jpgBank of America N.A. v. Superior Court (Pacific City Bank) - 4th District Court of Appeal, Jan. 15, 2013.

Fidelity National Title Insurance Co. ("Fidelity") was insurer for Bank of America N.A. ("BOA") under a lender's title policy, which insured a deed of trust on residential real property. BOA made a clam under the policy, which prompted Fidelity to hire a law firm to prosecute an underlying lawsuit for equitable subrogation, injunctive relief, declaratory relief, and fraud against Pacific City Bank ("PCB"). In turn, PCB served a Subpoena Duces Tecum on Fidelity seeking, among other things, communications between the law firm and Fidelity related to the litigation. BOA moved to quash the subpoena arguing the communications were attorney-client privileged. Trial court denied the motion to quash, prompting BOA to petition for a writ of mandate.

Petition was granted. The appellate court overturned the ruling holding that in California an attorney who is hired by an insurance company to defend its insured, or in this case prosecute an action, under the insurer's contractual obligation, represents and owes a duty to both the insurer and the insured, creating a "tripartite attorney-client relationship". This result seems obvious, right? Or at least consistent with the practice of the majority of California attorneys representing insurance companies and their insureds. So, what was the basis of the trial court's ruling?

It appears the crux of the trial court's denial was that the court drew a distinction between an insurer hiring a law firm to prosecute an action rather than defend an action. The trial court opined that because the law firm was retained to prosecute the action, Fidelity was did not have a "favored position" or "sacred role" in the litigation and the communications were not privileged. The appellate court called the distinction an error as matter of law.

The appellate court cited Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264-1265, holding that the language of the policy, which allowed Fidelity to prosecute such actions in the name of the insured (the court noted this provision is present in both ALTA and CLTA policies) controls; and that "To distinguish between defending an action and prosecuting one would deny a tripartite attorney-client relationship from ever forming in many situations in which a title insurer takes action to protect its insured's title."

By G. Andrew Slater

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Landlord's claim against its restaurant tenant's insurance policy is not barred by the policy's interinsured exclusion

December 13, 2012

insurance policy.jpgIs an "insured" not an "insured" excluded by a policy clause that excludes coverage for a claim of one insured against another insured? As oxymoronic as this question may sound, such are the type of contractual interpretation inquiries that frequently occur when it comes to insurance coverage and exclusion issues. In Gemini Insurance Co. v. Delos Insurance Co., B239533 (filed December 5, 2012), the Court of Appeal, Second Appellate District, Division Five, determined in its published opinion that the interinsured exclusion did not bar coverage for a landlord's claim against its tenant.

The tenant restaurant's insurance policy included an additional insured endorsement which made the restaurant's landlord an additional insured for coverage of potential vicarious liability for the tenant's conduct. Tenant's negligence caused a fire that damaged the landlord's property, and landlord sought recovery of its damages from the tenant. Landlord made a claim on its own property insurance. That insurance (through instant plaintiff Gemini) paid the claim. Gemini then sued the tenant in this subrogation action to recover what it had paid. Tenant thought it was covered by its Delos policy. Delos denied coverage relying on the interinsured exclusion clause. The trial court found that the landlord was never an "insured" under the Delos policy, and Gemini was awarded judgment against Delos. The Court of Appeal affirmed.

The appellate court pointed to the express provisions of the Delos policy. Delos was correct that the "Additional Insured" endorsement included the landlord. Under the policy's "Who is an Insured" section, had the landlord been sued for its vicarious liability arising out of the tenant's acts in operating the leased premises, landlord would be an insured for this purpose. Here, no one sought to hold the landlord liable for the fire. Accordingly, the interinsured exclusion did not apply.

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Where party fails to prove insurance coverage or that alleged insurer waived right to contest coverage, party is not entitled to jury instruction on bad faith

Contract fail.jpgErica Howard suffered severe injuries as a result of a car accident when she was being driven home from a New Year's Eve party by Paul Peterson, who had become intoxicated at the party put on by Donald DeWitt. The location of the party was an apartment complex, where DeWitt served as the on-site manager. Lisa Capelletti owned the apartment complex; she insured herself for $1 million per occurrence under a policy provided by Monterey Insurance Company.

Howard settled her claim against Peterson for $250,000 (policy limit) and her claim against Cappelletti for $50,000 (under the Monterey policy). Prior to these settlements, DeWitt was denied coverage by Monterey, which declined to provide him with a defense. Howard got a default judgment against DeWitt in the amount of $4.7 million. Monterey unsuccessfully tried to get this default judgment set aside, and eventually negotiated a settlement with Howard for $3.5 million in satisfaction of the judgment.

In DeWitt v. Monterey Insurance Co. (filed March 13, 2012) 2012 DJDAR 3311, DeWitt's claim of bad faith against Monterey resulted in a defense jury verdict. DeWitt appealed claiming the trial court erred in denying his request that the jury be instructed in CACI No. 2334, which sets forth the elements of bad faith when an insurer assumes the duty to defend but fails to accept a reasonable settlement offer. The Court of Appeal, Fourth Appellate District, Division One, affirmed.

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E.coli outbreak not an insured event for faultless marketer who sustains consequential losses

Ecoli blog.jpgThere are few consumer warnings that strike more fear in the public's mind than the announcement of an E. coli outbreak. The potential consequence of eating a seemingly wholesome yet contaminated food item is deadly. No less fearful of such an announcement are marketers of the produce in question. Even if an investigation into the source of the contamination later absolves a particular party of placing any of the contaminated items into the marketplace, the damage may already have been done to the innocent company. So how does such a company protect itself against such a situation? The common answer is to seek insurance. As the below discussion explains, Fresh Express insured itself, but to no avail.

The FDA issued an alert in 2006 warning consumers to not eat bagged fresh spinach because of an outbreak of E. coli 0157: H7. Two weeks later, this advisory notice was withdrawn, as the source of the outbreak was identified. Fresh Express, the world's largest bagged spinach producer (Dole being the only other producer with a large market share), suffered significant business losses even though it was not the source of the outbreak. Fresh Express had insured itself (at an annual cost of $300,000) under an "Accidental Contamination" policy that provided business loss coverage for "[e]rror by [Fresh Express]" in the preparation or distribution of its products while in its care which "causes Fresh Express to have reasonable cause to believe that the use or consumption of the products" would lead to bodily injury or death. The insurer denied coverage and Fresh Express sued for the policy limit of $12 million.

In Fresh Express, Inc v. Beazley Syndicate (filed Sept. 8, 2011, certified for publication October 4, 2011) 2011 DJDAR 14972, the California Court of Appeal, Sixth Appellate District reversed the Monterey Superior Court court-trial judgment for $12 million in favor Fresh Express. The appellate court disagreed with Fresh Express's claim (accepted by the trial court) that all the policy required was that Fresh Express committed an error that was sufficiently serious to link it to the E. coli outbreak. Rather, stated the court, the policy restricts recoverable losses to those arising out of and because of an error by Fresh Express, causing it to believe use of the product would cause injury to consumers.

The appellate court does not question that there was substantial evidence that Fresh Express had made errors within the meaning of the policy: evidence that it had made spot purchase during the relevant time period from suppliers not food-safety-audit certified by Fresh Express. For example, Fresh Express's certification policy was to not permit produce grown within 1 mile of a cattle yard because cattle are a primary source of E. coli. Two days after the FDA advisory was issued E. coli infected individuals implicated Fresh Express as a possible source of spinach they had eaten. Fresh Express only learned its product was not the source of the outbreak 15 days after the advisory was issued.

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Condominium construction work excluded in liability insurance policy: looks can be deceiving

During my time on the trial court bench, I would often hear the following analogy argued concerning the concept of circumstantial evidence: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck." I doubt that poet James Whitcomb Riley, when he first coined this phrase in about 1884, could have imagined he was providing attorneys with trial argument material.

In California Traditions, Inc. v. Claremont Insurance Co. (filed June 21, 2011, certified for publication on July 11, 2011) 2011 DJDAR 10405, the project developed by plaintiff consisted of 146 separate residences with no shared walls, halls, roofs or plumbing or electrical lines. But to avoid minimum set-back requirements for non-condominium single family homes and to allow higher density, the project was developed, marketed and sold as condominiums. Plaintiff hired Ja-Con Systems to do the rough framing work. Ja-Con was insured under a comprehensive general liability policy issued by defendant. That policy provided an exclusion for work on condominium and townhouse projects. In a separate action homeowners sued for defective construction; plaintiff developer obtained a $2 million judgment on its indemnity cross complaint against Ja-Con and now seeks to satisfy that from the policy.

The San Diego Superior Court granted defendant's motion for summary judgment based on the undisputed fact that the condominium exclusion precluded recovery. Plaintiff had argued that Ja-Con had a reasonable expectation of coverage because the units gave the outward appearance of non-condominium detached homes.

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