In Schaefer v. Elder, 2013 DJDAR 7434 (2013), the California Court of Appeal for the Third Appellate District decided an interesting case under the Cumis doctrine contained in California Civil Code Section 2860. The court of appeal confirmed that under the facts presented, conflicting positions on a “question of proof” create a conflict of interest between insurer appointed counsel and the insured. The existence of the conflict required the appointment of independent counsel for the insured under Civil Code Section 2860.

An individual (the “plaintiff”) contracted with Elder Construction (“Elder”) to build a home. The plaintiff thereafter sued the construction company, alleging causes of action for defects in construction as well as other claims. Elder tendered the defense of the action to its insurer, CastlePoint National Insurance Co. (“CastlePoint”), which appointed panel counsel to represent Elder, subject to a comprehensive reservation of rights.

The carrier also filed a declaratory relief (“DJ”) action against the construction company. The DJ sought a ruling from the trial court on whether its insurance policy covered the claims asserted by plaintiff. The construction company took the position that the reservation of rights and the DJ action created a conflict of interest between its interests and the lawyers selected by the carrier to defend the case. On that basis, Elder hired independent counsel and moved to disqualify the panel firm. The trial court granted the motion to disqualify.

The court of appeal affirmed the decision of the trial court. The court noted that under the applicable policy language, an insurer has the right to appoint counsel for the insured and control the defense. However, where the carrier’s reservation of rights results in “divergent interests,” the insured is entitled to independent counsel. The court concluded that the applicable insurance language did not cover “work” performed by independent contractors unless the construction company satisfied certain requirements. Thus, it was in the insured’s interest to argue that employees performed those tasks.

However, the carrier had an interest to argue that work was done by independent contractors. This could have resulted in a finding of no insurance coverage under the policy. The court of appeal concluded that there was a conflict of interest, which supported the trial court’s determination that Elder had a right to independent counsel.