Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_12-cv-00371/USCOURTS-cand-3_12-cv-00371-17/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1332 Diversity-Insurance Contract

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United 

States District 

Court

For the Northern District of California 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

TRAVELERS INDEMNITY COMPANY OF 

CONNECTICUT; and ST. PAUL FIRE 

AND MARINE INSURANCE COMPANY,

 Plaintiffs, 

 v. 

CENTEX HOMES; and CENTEX REAL 

ESTATE CORPORATION, 

 Defendants. 

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Case No. 11-CV-03638-SC

ORDER GRANTING DEFENDANT'S 

MOTION FOR RECONSIDERATION 

On April 8, 2013 the Court issued an order granting in part 

and denying in part the above-captioned parties' cross-motions for 

partial summary judgment. ECF No. 170 ("Apr. 2013 Order"). With 

the Court's leave, Defendant Centex Homes ("Centex") now moves for 

reconsideration of the April 2013 Order. ECF No. 213 ("Mot."). 

The primary question raised by the Motion is whether an insurer 

loses its right to control the defense of its insured if it fails 

to provide the insured with a defense immediately after its duty to 

defend has been triggered, where the insurer subsequently accepts 

the insured's tender and offers to provide a defense, and where the 

insurer reimburses the insured for any legal costs incurred prior 

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to its acceptance of the insured's tender. The Motion is fully 

briefed, ECF Nos. 219 ("Opp'n"), 221 ("Reply"), and appropriate for 

determination without oral argument per Civil Local Rule 7-1(b). 

Having reviewed the arguments presented by the parties, the Court 

finds that its April 2013 Order as to Travelers' right to control 

Centex's defense in the Acupan and Conner actions was inconsistent 

with a case decided by the California Court of Appeal in May 2013, 

J.R. Mktg., L.L.C. v. Hartford Cas. Ins. Co., 216 Cal. App. 4th 

1444 (2013), and affirmed in relevant part by the California 

Supreme Court in August 2015, Hartford Cas. Ins. v. J.R. Mktg., 61 

Cal. 4th 988 (Aug. 10, 2015). Accordingly, the Court finds that 

its April 2013 Order as to Travelers' right to control Centex's 

defense in the Acupan and Conner actions was in error. Centex's 

motion for reconsideration is GRANTED. 

I. BACKGROUND 

 A. Factual Background 

Centex participates in the development of residential 

communities throughout California, though it does not perform any 

actual construction work. Instead, it hires subcontractors to 

build the homes it sells. These subcontractors include American 

Woodmark ("Woodmark"), Foremost Superior Marble ("Foremost"), West 

Coast Countertops ("West Coast"), Fresno Precision Plastics 

("Fresno"), and Executive Landscape ("Executive"). Each of these 

subcontractors purchased commercial general liability insurance 

from the above-captioned Defendants (collectively, "Travelers"), 

and the policies name Centex as an additional insured. 

/// 

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This case arises from a number of underlying construction 

defect lawsuits filed against Centex in California state court. 

These underlying suits include the Adkins, Garvey, Acupan, and 

Conner actions. Centex tendered each of these actions to Travelers 

pursuant to one or more of the insurance policies described above. 

It is undisputed that, in each of these actions, some time elapsed 

between Centex's tender and Traveler's decision to provide a 

defense subject to a reservation of rights. In the interim, Centex 

retained the law firm of Newmeyer and Dillion LLP ("Newmeyer") to 

defend it in the underlying actions. When Travelers finally agreed 

to provide a defense, it insisted on appointing its own counsel. 

Centex insisted on retaining Newmeyer, arguing that Travelers lost 

its right to control the defense by waiting too long to provide 

one. As the facts surrounding the tender of the Acupan and Conner 

actions are pertinent to the instant motion, the Court recounts 

them below. 

Centex first tendered the Acupan action to Travelers under the 

Fresno policy on April 8, 2010. On September 13, 2010, Travelers 

concluded that there was no potential for coverage under the Fresno 

policy and declined to provide a defense. ECF No. 148-14. Several 

months later, on June 28, 2011, Travelers reversed course and 

agreed to provide a defense pursuant to the Fresno Policy, subject 

to a reservation of rights. ECF No. 148-18. Centex also tendered 

the Acupan action under the West Coast policy on January 21, 2011. 

ECF No. 148-24. On June 1, 2011, after requesting and receiving 

additional information, Travelers agreed to participate in Centex's 

defense under the West Coast policy, subject to a reservation of 

rights. ECF Nos. 148-16, 148-26. 

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Centex tendered the Conner action to Travelers under the 

Executive policy on September 8, 2010. ECF No. 148-27. About two 

weeks later, on September 22, Travelers requested additional 

information. ECF No. 148-28. Centex responded to the request that 

very same day. ECF No. 146-11. On January 21, 2011, Travelers 

agreed to participate in Centex's defense in the Conner action 

under the Executive policy subject to a reservation of rights. ECF 

No. 148-29. 

B. Procedural History 

On July 25, 2011, Travelers filed the instant action against 

Centex. ECF No. 1. One month later Travelers filed a First 

Amended Complaint, which asserts causes of action for (1) 

declaratory relief, (2) breach of contract, (3) breach of the 

implied covenant of good faith and fair dealing, and (4) 

reimbursement. Among other things, Travelers seeks a judicial 

declaration that it had the right to control Centex's defense in 

the Garvey, Adkins, Acupan, and Conner actions. 

On May 10, 2012, the Court issued an order granting Centex's 

motion for partial summary judgment and partial judgment on the 

pleadings. ECF No. 56 ("May 2012 Order"). Among other things, the 

Court found that, since the duty to defend is immediate, Travelers 

lost its right to control the defense of the Garvey and Adkins 

actions when it declined to participate in the defense of those 

actions in late 2010 and early 2011. May 2012 Order at 9-10. The 

Court also rejected Travelers' argument that Centex needed to show 

that Travelers intended to waive its right to control the defense 

of Garvey and Adkins actions, reasoning: "[A] court need not 

/// 

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discern an insurer's intent to determine whether it has breached 

that duty. A delay is evidence enough." Id. at 13. 

The Court reconsidered and reversed this decision when it 

ruled on the parties' cross-motions for partial summary judgment on 

April 8, 2013. Centex had asked the Court to find that Travelers' 

delay in responding to Centex's tenders of the Acupan and Conner 

actions divested Travelers of its right to control the defense of 

those actions. April 2013 Order at 11. Travelers responded that, 

under Chase v. Blue Cross of California, 42 Cal. App. 4th 1142 

(Cal. Ct. App. 1996), an insurer could only lose a contractual 

right under theories of waiver, forfeiture, or estoppel. See id. 

The Court agreed, finding that "an insurer cannot lose its right to 

control the defense of its insured through delay alone. Rather, it 

may only lose that right through waiver, forfeiture, or estoppel, 

none of which have been proven by Centex." Id. at 13. The Court 

denied Centex's motion for summary judgment on the issue of whether 

Travelers had lost its right to control the defense of the Acupan 

and Conner actions, and vacated its prior decision that Travelers 

had lost its right to control the defense of the Garvey and Adkins 

actions. Id. at 16. The Court also found that there were triable 

issues of fact as to whether Travelers had a duty to defend the 

Garvey, Adkins, Acupan, and Conner actions. Id. at 6. 

Centex subsequently filed a motion for reconsideration 

concerning the Court's vacation of the May 2012 Order and the 

Court's findings with respect to the Garvey and Adkins actions. 

ECF No. 195. Centex also sought leave to file a motion for 

reconsideration on whether Travelers lost the right to control 

Centex's defense in the Acupan and Conner actions. Id. The Court 

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granted Centex's motion, finding that its April 2013 Order as to 

the Garvey and Adkins actions was inconsistent with the Court of 

Appeal's decision in J.R. Marketing, which was decided after the 

April 2013 Order. ECF No. 200. The Court also granted Centex's 

motion for leave to file a motion for reconsideration as to the 

Acupan and Conner actions. Id. Subsequently, Centex filed the 

instant motion for reconsideration concerning Travelers' right to 

control Centex's defense with respect to the Acupan and Conner 

actions. Before issuing an order on Centex's motion, however, the 

Court stayed the case pending the California Supreme Court's review 

of the Court of Appeal's decision in J.R. Marketing. The 

California Supreme Court affirmed in relevant part the Court of 

Appeal's decision on August 10, 2015, Hartford Cas. Ins., 61 Cal. 

4th at 997, and the Court subsequently lifted the stay in this 

case, ECF No. 233. Now before the Court is Centex's motion for 

reconsideration as to Travelers' right to control Centex's defense 

in the Acupan and Conner actions. 

II. LEGAL STANDARD 

A party may ask a court to reconsider and amend a previous 

order pursuant to Federal Rule of Civil Procedure 59(e) and Civil 

Local Rule 7-9. Rule 59(e) offers "an extraordinary remedy, to be 

used sparingly in the interests of finality and conservation of 

judicial resources." Carroll v. Nakatani, 342 F.3d 934, 945 (9th 

Cir. 2003) (quotations omitted). Civil Local Rule 7-9(b) provides 

that a party moving for reconsideration must generally show: (1) an 

intervening change in controlling law, (2) the emergence of new 

material facts, or (3) a manifest failure by the Court to consider 

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material facts or dispositive legal arguments. "Whether or not to 

grant reconsideration is committed to the sound discretion of the 

court." Navajo Nation v. Confederated Tribes and Bands of the 

Yakama Indian Nation, 331 F.3d 1041, 1046 (9th Cir. 2003). 

As Centex moves for reconsideration of a summary judgment 

order, the Court also employs the legal standard set forth in 

Federal Rule of Civil Procedure 56. Entry of summary judgment is 

proper "if the movant shows that there is no genuine dispute as to 

any material fact and the movant is entitled to judgment as a 

matter of law." Fed. R. Civ. P. 56(a). Summary judgment should be 

granted if the evidence would require a directed verdict for the 

moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251 

(1986). Thus, "Rule 56[] mandates the entry of summary judgment 

. . . against a party who fails to make a showing sufficient to 

establish the existence of an element essential to that party's 

case, and on which that party will bear the burden of proof at 

trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). "The 

evidence of the nonmovant is to be believed, and all justifiable 

inferences are to be drawn in his favor." Anderson, 477 U.S. at 

255. 

III. DISCUSSION 

In general, an insurer has the right to control the defense it 

provides to its insured. James 3 Corp. v. Truck Ins. Exch., 91 

Cal. App. 4th 1093, 1105 (2001). However, when an insurer breaches 

its duty to defend, the insurer forfeits its right to control the 

defense of the action. J.R Mktg., L.L.C. v. Hartford Casualty Ins. 

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Co., 216 Cal. App. 4th 1444 (2013); Intergulf Dev. v. Super. Ct., 

183 Cal. App. 4th 16, 20 (2010). 

In J.R. Marketing, the defendant insurer refused to defend or 

indemnify the plaintiff insured in an underlying lawsuit. 216 Cal. 

App. 4th at 1449. The insured hired the law firm of Squire Sanders 

L.L.P. ("Squire") to defend it in the underlying action and bring 

suit against the insurer for coverage. Id. The insurer then 

reconsidered its position and agreed to provide the insured with a 

defense, but the insurer refused to pay defense costs incurred 

prior to a certain date and insisted that its own counsel represent 

the insured in place of Squire, the insured's chosen Cumis 

counsel.1 Id. 

On summary adjudication, the trial court in J.R. Marketing 

found that the insured was entitled to Cumis counsel from the date 

it tendered the underlying action and that the insurer could not 

invoke the provisions of California Civil Code section 2860 that 

cap the amount of fees payable to Cumis counsel. Id. at 1449-50. 

The trial court found that section 2860's protections were 

unavailable since the insurer had breached and continued to breach 

its defense obligations by failing to pay all reasonable and 

necessary defense costs incurred by the insured, and by failing to 

provide Cumis counsel. Id. at 1450. The Court of Appeal affirmed, 

reasoning: "Where, as here, the insurer breaches its duty to defend 

the insured, the insurer loses all right to control the defense, 

including, necessarily, the right to control financial decisions 

such as the rate paid to independent counsel or the cost- 

 

1

 In California, an insured is entitled to independent counsel, 

a.k.a. Cumis counsel, where a conflict exists because of an 

insurer’s control over the litigation. See Cal. Civ. Code § 2860. 

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effectiveness of any particular defense tactic or approach." Id. 

at 1457. The California Supreme Court subsequently affirmed that 

portion of the Court of Appeal's decision. J.R. Mktg., L.L.C., 61 

Cal. 4th at 997; see also id. at 1002 ("where . . . the insurer 

wrongfully refused to defend the insured or to afford Cumis 

counsel, the insured may proceed as he or she deems appropriate, 

and the insurer forfeits all right to control the insured's 

defense, including the right to determine litigation strategy."). 

 J.R. Marketing stands for the proposition that an insurer 

loses its right to control the insured's defense upon breach of its 

duty to defend. Accordingly, the Court's holding in its April 2013 

Order that an insurer can lose its right to control the insured's 

defense solely "through waiver, forfeiture, or estoppel" was in 

error. April 2013 Order at 13. In its Order dated August 26, 

2013, the Court found that Travelers breached its duty to defend as 

to the Garvey and Adkins actions when it wrongfully denied Centex's 

tenders. ECF No. 200 at 11. Unlike the Garvey and Adkins actions, 

however, Travelers accepted Centex's tenders of the Acupan and 

Conner actions. Nevertheless, Travelers' response took 131 and 135 

days, respectively, during which time Centex hired its own counsel 

and incurred legal expenses (although Travelers subsequently 

reimbursed Centex for those expenses). The issue on the instant 

motion for reconsideration, therefore, is whether this delay 

constitutes a breach of Travelers' duty to defend such that 

Travelers lost its right to control Centex's defense. 

 Neither the parties nor the Court were able to find a case 

clearly delineating the point at which an insurer's delay amounts 

to a breach of its duty to defend. In general, to establish a duty 

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to defend, the burden is on the insured to make a prima facie 

showing that a third party claim potentially falls within the 

insuring provisions of its policy. Anthem Electronics, Inc., 302 

F.3d at 1054. In addition, an insurer's duty to defend will not 

ripen until a third party files a complaint against the insured. 

See Foster-Gardner, Inc. v. Nat'l Union Fire Ins. Co., 18 Cal. 4th 

857, 886 (1998). However, 

[t]his should not be understood literally to mean the 

instant the insurer receives the complaint filed against 

its insured and before any investigation is made. 

Rather, it probably means the point in time a liability 

insurer is required to act on the insured's behalf (e.g. 

when an answer to the complaint is due). 

Croskey, et al., Cal. Prac. Guide Ins. Lit. Ch. 7B-C (Rutter 2013). 

At that point, the insurer has an immediate duty to defend until it 

can show conclusively that the damages sought in the third party 

lawsuit are not covered under the policy. See Montrose Chem. Corp. 

v. Superior Court, 6 Cal. 4th 287, 295 (1993). ("Imposition of an 

immediate duty to defend is necessary to afford the insured what it 

is entitled to: the full protection of a defense on its behalf."); 

id. at 300 ("[T]he insured need only show that the underlying claim 

may fall within policy coverage; the insurer must prove it 

cannot.") (emphasis added). 

 Here, Centex tendered its defense in the Acupan action on 

January 21, 2011. It made a prima facie showing that the action 

potentially fell within its coverage by February 1, 2011 when it 

submitted copies of subcontracts and other documents at Travelers' 

request. However, the complaint in the Acupan action was not filed 

until April 19, 2011. In California, a responsive pleading is not 

due until 30 days after the complaint is filed. Cal. Rules of 

Court 3.110. Thus, Travelers' duty to defend was not triggered 

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until May 19, 2011. Travelers did not accept Centex's tender, 

however, until June 1, 2011. Thus, there were at least 13 days 

during which Travelers had a duty to defend Centex but did not 

provide a defense. As a result, Centex had to employ its own 

counsel. 

 Centex tendered its defense in the Conner action on 

September 8, 2010, at which point it had made a prima facie showing 

that the action potentially fell within its coverage. The 

complaint in the Conner action was not filed, however, until 

October 15, 2010. Travelers' duty to defend therefore arose on 

November 15, 2010, the date on which a responsive pleading was due 

from Centex. Travelers did not accept Centex's tender, however, 

until January 21, 2011. Its acceptance, therefore, was made 67 

days after its duty to defend was triggered. 

 Travelers argues that it did not breach its duty to defend 

because (1) it had a right to conduct a reasonable investigation 

before accepting Centex's tender and (2) it reimbursed Centex for 

legal costs incurred prior to accepting Centex's tender. The duty 

to defend imposes upon the insurer several responsibilities, 

including that it "employ competent counsel to represent the 

assured." Merritt v. Reserve Insurance Co., 34 Cal. App. 3d 858, 

882 (1973). A failure to provide counsel or to guarantee the 

payment of legal fees immediately after an insurer's duty to defend 

has been triggered constitutes a breach of the duty to defend, even 

if the insurer later reimburses the insured. See Montrose Chem. 

Corp., 6 Cal. 4th at 295, 300. After all, "[t]he insured's desire 

to secure the right to call on the insurer's superior resources for 

the defense of third party claims is, in all likelihood, typically 

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as significant a motive for the purchase of insurance as is the 

wish to obtain indemnity for possible liability." Id. at 295-96. 

Of course, an insurer is free to conduct an investigation beyond 

the point at which its duty to defend has been triggered. Such an 

investigation may lead to facts establishing that there is no 

possibility of coverage, thereby ending the insurer's duty to 

defend. An insurer may not, however, deprive an insured of the 

security implicit in the duty to defend -- specifically, "the right 

to [immediately] call on the insurer's superior resources" as 

opposed to having to marshal its own resources to mount a defense 

against a claim that possibly falls within the policy's coverage. 

Id. 

 Accordingly, the Court finds that Travelers breached its duty 

to defend by failing to provide Centex with a defense at least 30 

days after the complaints were filed in the Acupan and Conner 

actions. Upon breaching its duty to defend, Travelers also lost 

its right to control Centex's defense. See J.R Mktg., L.L.C., 216 

Cal. App. at 1457. 

IV. CONCLUSION 

 For the forgoing reasons, the Court GRANTES Centex's motion 

for reconsideration and finds that Travelers lost its right to 

control Centex's defense in the Acupan and Conner actions. 

 IT IS SO ORDERED. 

 

 Dated: October 7, 2015 

UNITED STATES DISTRICT JUDGE 

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