Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caed-2_06-cv-02725/USCOURTS-caed-2_06-cv-02725-3/pdf.json

Parties Involved:
National Casualty Company
Defendant
Sovereign General Insurance Services, Inc.
Plaintiff

Document Text:

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1

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF CALIFORNIA

SOVEREIGN GENERAL INSURANCE

SERVICES, INC.,

No. 2:06-CV-2725-MCE-DAD

Plaintiff,

v. MEMORANDUM AND ORDER

NATIONAL CASUALTY COMPANY,

DOES 1 through 10, Inclusive,

Defendants.

----oo0oo----

Through the present action, Plaintiff Sovereign General

Insurance Services, Inc. (“Sovereign”) alleges that Defendant

National Casualty Company (“National”) breached its contractual

obligations under an errors and omissions insurance policy by

failing to appoint Cumis counsel to represent Sovereign. 

Jurisdiction is premised on diversity of citizenship pursuant to

28 U.S.C. § 1332. 

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 Because oral argument will not be of material assistance, 1

the Court orders this matter submitted on the briefs. E.D. Cal.

Local Rule 78-230(h). 

2

Presently before this Court is National’s Motion for Summary

Judgment, or in the alternative, Partial Summary Judgment. For

the reasons set forth below, that Motion will be GRANTED.1

BACKGROUND

Sovereign is licensed in California as a fire and casualty

broker-agent, a surplus line broker, and a special lines surplus

line broker. This licensure allows Sovereign to transact

insurance on property located, or operations conducted, in

California with foreign insurers that are not admitted by the

California Department of Insurance to transact insurance business

in this state. National is an insurance company which issued a

policy of errors and omissions insurance to Sovereign with a

coverage limit of $5 million. That policy was of the “wasting”

or “burning limits” variety, whereby funds expended on the

defense of a claim were charged against the policy limit,

reducing the amount available under the policy for

indemnification either by settlement or following an adjudication

on the merits. 

While the policy covering Sovereign was in effect, Lloyd’s of

London (“Lloyd’s”) instituted an arbitration proceeding against

Sovereign in London, England, for alleged violations of Lloyd’s

agreements with Sovereign. Lloyd’s was one of the non-admitted

insurers for whom Sovereign acted as a surplus lines broker. 

Case 2:06-cv-02725-MCE -DAD Document 24 Filed 02/15/08 Page 2 of 17
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3

Subject to binding authority agreements between Sovereign and

Lloyd’s, Sovereign placed insurance policies with California

insureds on Lloyd’s behalf. On or about March 20, 2001, counsel

for Lloyd’s advised Sovereign that Sovereign had breached the

terms of those agreements by acting in excess of its authority

with respect to certain Gross Written Premium Limits, by not

notifying Lloyd’s in connection therewith, and by failing to

comply with proper claims handling procedures. (See Exhibit 1 to

the Declaration of Stan Howard in Support of Defendant’s Motion).

National agreed to defend Sovereign against the claim by

Lloyd’s under a reservation of rights, whereby National reserved

the right to later determine if it in fact was liable to

Sovereign under the terms of its policy. National’s reservation

of rights letter, dated March 20, 2002, raised the potential of

non-coverage given 1) the territorial limits of its policy, and

whether or not that policy applied to a claim first brought

outside the United States; and 2) whether the policy’s exclusion

for claims resulting from an insured’s capacity as a Managing

General Agent or Underwriting Manager barred coverage for Lloyd’s

claims. Id. at Ex. 3. The March 20, 2002 letter further advised

Sovereign of its right to retain additional independent counsel,

in addition to the defense provided by National, in the event of

“certain conflict of interest situations. Id.

National ultimately settled Lloyd’s claims against Sovereign

for $1.4 million. By the time of that settlement, National had

paid over $2.6 million in legal fees to Charles Russell, the

London firm hired to defend the claims on Sovereign’s behalf and

represent it in the London arbitration proceedings. 

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4

The total paid by National, after factoring both defense and

indemnification costs, was therefore less than Sovereign’s $5

million policy limit. It is undisputed that Sovereign expressly

consented to this settlement. 

Before the settlement with Lloyd’s was reached, Sovereign

brought this action, alleging that National had failed to appoint

independent counsel to represent it, as required under California

law in certain circumstances where a conflict of interest is

present in the representation of both the insurer and the insured. 

This requirement of separate counsel was principally established

in the San Diego Federal Credit Union v. Cumis Insurance Society,

Inc. case, 162 Cal. App. 3d 358 (1984). The requirement was

subsequently codified in California Civil Code § 2860, and is

commonly referred to as the obligation to provide “Cumis” counsel.

Sovereign initially hired California based Aguilar Law

Offices (“Aguilar”) to help secure London counsel to represent

Sovereign in the English arbitration proceedings. Although

National paid some of Aguilar’s bills in connection with that

assistance, National never paid or authorized Aguilar to handle

the arbitration proceedings. To the contrary, Sovereign itself

chose Charles Russell to provide its representation in England.

Sovereign now claims, however, that National should nonetheless

be required to pay for the legal work performed during the

arbitration proceedings by Aguilar as Cumis counsel, despite the

fact that National advised Sovereign in three separate letters,

dated August 28, 2002, November 12, 2002, and April 7, 2003,

respectively, that National would not pay Aguilar in addition to

Charles Russell. (Def.’s Undisputed Fact No. 25).

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5

In addition to asserting breach of National’s obligation to

provide Cumis counsel, Sovereign’s complaint also alleges breach

of the implied covenant of good faith and fair dealing, citing

its concern at the time that the claim with Lloyd’s would not be

settled within the policy limits. (Compl., ¶ 22). In addition,

Sovereign seeks declaratory relief, asking this Court to declare

Sovereign’s entitlement to Cumis counsel, as well as its

entitlement to settlement within the available limits. Id. at

¶ 26. Finally, Sovereign requests injunctive relief, asking that

National be compelled to assert at arbitration that Sovereign was

precluded by California law from adjusting claims. Id. at ¶ 30-

31, 9:8-15). 

STANDARD

The Federal Rules of Civil Procedure provide for summary

judgment when “the pleadings, depositions, answers to

interrogatories, and admissions on file, together with

affidavits, if any, show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment

as a matter of law.” Fed. R. Civ. P. 56(c). One of the

principal purposes of Rule 56 is to dispose of factually

unsupported claims or defenses. Celotex Corp. v. Catrett, 477

U.S. 317, 325 (1986).

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6

Rule 56 also allows a court to grant summary adjudication on

part of a claim or defense. See Fed. R. Civ. P. 56(a) (“A party

seeking to recover upon a claim ... may ... move ... for a

summary judgment in the party’s favor upon all or any part

thereof.”); see also Allstate Ins. Co. v. Madan, 889 F. Supp.

374, 378-79 (C.D. Cal. 1995); France Stone Co., Inc. v. Charter

Township of Monroe, 790 F. Supp. 707, 710 (E.D. Mich. 1992).

The standard that applies to a motion for summary

adjudication is the same as that which applies to a motion for

summary judgment. See Fed. R. Civ. P. 56(a), 56(c); Mora v.

ChemTronics, 16 F. Supp. 2d 1192, 1200 (S.D. Cal. 1998). 

In considering a motion for summary judgment, the court must

examine all the evidence in the light most favorable to the nonmoving party. U.S. v. Diebold, Inc., 369 U.S. 654, 655 (1962). 

Once the moving party meets the requirements of Rule 56

by showing that there is an absence of evidence to support the

non-moving party’s case, the burden shifts to the party resisting

the motion, who “must set forth specific facts showing that there

is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 256 (1986). Genuine factual issues must exist that

“can be resolved only by a finder of fact, because they may

reasonably be resolved in favor of either party.” Id. at 250. 

In judging evidence at the summary judgment stage, the court does

not make credibility determinations or weigh conflicting

evidence. See T.W. Elec. v. Pacific Elec. Contractors Ass’n,

809 F.2d 626, 630-631 (9th Cir. 1987), citing Matsushita Elec.

Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

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7

ANALYSIS

1. Breach of Contract - Failure to Appoint Cumis Counsel

The requirement to provide Cumis counsel was originally set

forth in San Diego Navy Federal Credit Union v. Cumis Insurance

Society, Inc., 162 Cal. App. 3d 358 (1984). The California State

Legislature subsequently codified the result in Cumis by enacting

California Civil Code section 2860. That section states, in

relevant part:

(a) If the provisions of a policy of insurance impose a

duty to defend upon an insurer and a conflict of

interest arises which creates a duty on the part of the

insurer to provide independent counsel to the insured,

the insurer shall provide independent counsel to

represent the insured ...

(b) For purposes of this section, a conflict of

interest does not exist as to allegations or facts in

the litigation for which the insurer denies coverage;

however, when an insurer reserves its rights on a given

issue and the outcome of that coverage issue can be

controlled by counsel first retained by the insurer for

the defense of the claim, a conflict of interest may

exist. No conflict of interest shall be deemed to

exist as to allegations of punitive damages or be

deemed to exist solely because an insured is sued for

an amount in excess of the insurance policy limits.

Subdivisions (c) through (f) apply once a conflict of interest

triggers the requirement of Cumis counsel, and specify the

qualifications of such counsel, the duty of counsel to disclose

all non-privileged materials to the insurer, the method by which

the insured may waive its rights under the section, and counsel’s

right to participate fully in the litigation. Cal. Civ. Code

§ 2860.

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8

Per the statute, then, in order to trigger the obligation to

provide Cumis counsel, the insurer must make a reservation of

rights as to a coverage issue and the counsel first retained by

the insurer must be able to control the outcome of that issue. 

Cal. Civ. Code § 2860(b). This dual requirement has been

carefully prescribed. In James 3 Corp. v. Truck Insurance

Exchange, 91 Cal. App. 4th 1093 (2001), the court held that “not

every conflict of interest triggers an obligation on the part of

the insurer to provide the insured with independent counsel at

the insurer’s expense.” Id. at 1101. “The mere fact the insurer

disputes coverage does not entitle the insured to Cumis counsel;

nor does the fact the complaint seeks punitive damages or damages

in excess of policy limits.” Id. The court clarified that the

requirement of Cumis counsel “is not based on insurance law but

on the ethical duty of an attorney to avoid representing

conflicting interests.” Id. (quoting Golden Eagle Ins. Co. v.

Foremost Ins. Co., 20 Cal. App. 4th 1372, 1394 (1993).

An insured has no entitlement to Cumis counsel “where the

coverage issue is independent of, or extrinsic to, the issues in

the underlying action.” Dynamic Concepts, Inc. v. Truck Ins.

Exchange, 61 Cal. App. 4th 999, 1006 (1998). “A mere possibility

of an unspecified conflict does not require independent counsel. 

The conflict must be significant, not merely theoretical, actual,

not merely potential.” Id. at 1007.

In the instant case, it is undisputed that National reserved

its rights as to whether it was in fact liable to Sovereign for

insurance coverage against the Lloyd’s claim. 

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 There is much debate over whether Charles Russell, having 2

been chosen by Sovereign and Aguilar as the firm to defend the

Lloyd’s claim in London, was in fact insurer-retained counsel as

opposed by independent counsel selected expressly by the insured. 

For purposes of this Order, the Court assumes that Charles

Russell was not independent Cumis counsel for Sovereign.

9

It also appears from the facts that, pursuant to California Civil

Code section 2860, Charles Russell qualified as the “counsel

first retained” by National for defense of the claim. It is the 2

representation provided by Charles Russell, and the circumstances

surrounding that representation, that Sovereign cites as the

basis for the need for independent Cumis counsel to represent

their interests. From the above, then, the issue of whether

National owed Cumis counsel to Sovereign turns on whether Charles

Russell could control the determination of National’s obligation

to Sovereign under the terms of its policy.

The ability, or lack thereof, of Charles Russell to control

the coverage issue is therefore the dispositive question

surrounding Sovereign’s First Cause of Action. Arguments made by

both parties that do not focus on this issue are not helpful in

resolving that question. Even if, as Sovereign contends, Charles

Russell referred to National as its client, that description does

not equate to control of the coverage issue. In any event,

examination of the evidence shows that the alleged support for

that proposition stems from the retainer agreement itself, which

was between Charles Russell and National, as the party

responsible for payment of Russell’s defense fees under the

policy of insurance issued to Sovereign by National. 

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 See May 3, 2002 reservation of rights letter from Sidney 3

Hill, p. 9, attached as Exhibit 3 to the Declaration of Stan

Howard filed in support of this motion.

10

(See October 28, 2004 email from Stephen Carter to Fred Godinez,

Exhibit K to Godinez Declaration in Opposition to Motion for

Summary Judgment, see also Exhibit H). The same evidence goes on

to support a conclusion that the Stephen Russell attorney

involved in the case, Stephen Carter, was well aware of the

distinction between his role as defense counsel for the insured,

and National’s own dispute with Sovereign as to coverage. As

Mr. Carter states:

“My firm is not involved in [the coverage] dispute, in

connection with which National Casualty has retained

separate attorneys. Given that it is a US law and

jurisdiction policy nor do I see any prospect of our

involvement in it. Our role relates to the claims

brought by Lloyd’s underwriters relating to the binding

authorities not to any coverage issues.”

Ex. K to Godinez Decl.

Other issues raised by Sovereign are similarly unavailing to

establish that Charles Russell could have controlled the outcome

of the coverage dispute. The allegation that National failed to

sufficiently monitor the litigation costs incurred by the Russell

firm has no bearing on that issue. Additionally, the bare fact

that National’s reservation of rights letter provided for the

possibility of Cumis counsel under “certain conflict of interest

situations” does not mean that this particular case warranted 3

the appointment of independent counsel.

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28 See Plaintiff’s Opposition at 1:6-7, 1:11, 2:19, 5:14. 4

11

On National’s side, the fact that National repeatedly

advised attorney Aguilar that it would not continue to pay his

legal fees also does not in and of itself establish that National

was not obligated to do so. 

In its memorandum of points and authorities in opposition to

National’s Motion for Summary Judgment, Sovereign repeatedly

claims that Charles Russell had a conflict of interest.4

Sovereign contends that Charles Russell failed to provide a full

defense, that it was not capable of providing a full defense, and

that Aguilar was required to, and did, assist Charles Russell in

the litigation. The fact that a second set of attorneys may

have been beneficial, however, does not in and of itself create a

conflict of interest entitling Sovereign to Cumis counsel. The

pertinent issue is not competence, but instead whether a conflict

of interest was created by any ability, on the part of Charles

Russell as Sovereign’s defense counsel, to also affect the

outcome of Sovereign’s coverage dispute with National. The

utility of any advice Aguilar was able to provide is simply not

germane to whether that very narrowly defined conflict existed.

The most problematic allegation with respect to the

requisite conflict lies with Sovereign’s claim that Charles

Russell refused to assert that Sovereign was legally prohibited

from adjusting claims, and consequently could not have mismanaged

claims as contended by National. 

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12

Sovereign, however, does not allege, and has provided no evidence

to support, that Charles Russell, even if it did refuse to assert

the above described defense, was doing so to control the

determination of the coverage issue. The evidence does not

support Sovereign’s claim that Charles Russell unequivocally

refused to assert the defense. The Position Summary prepared by

Stephen Carter simply takes a small amount of the claims handling

issues into account in formulating a settlement assessment, with

Mr. Carter going as far as saying Lloyd’s had stopped short of

alleging that Sovereign had itself adjusted claims. (See Godinez

Decl., Ex. P, ¶2.2). That Mr. Carter was advocating some

consideration of that issue in formulating settlement does not

mean that he would not have pursued the defense that Sovereign

could not have managed claims had the matter actually gone to

arbitration. It must be noted that National, as the insurer,

stood to lose at least as much as Sovereign by failing to assert

a valid, liability reducing defense. Charles Russell’s alleged

refusal to assert the defense does not support an inference of a

conflict of interest, and even less a conflict over the coverage

issue, sufficient to trigger the requirement of Cumis counsel.

Although Sovereign’s President, Fred Godinez, claims that

Carter did not “respond” to suggestions posed by Godinez and

Aguilar concerning the invalidity of Lloyd’s claims handling

allegations (see Godinez Decl., ¶ 18), that is not the same as an

outright refusal to ultimately assert the defense, and Sovereign

has produced no evidence whatsoever that any such refusal on

Carter’s part ever occurred. 

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13

Even if Charles Russell did refuse to entirely discount Lloyd’s

claims handling allegations in evaluating the case for

settlement, the firm’s reasons for doing so could well have been

founded on any number of different considerations. There is no

evidence which suggests that Charles Russell was doing so to

affect the outcome of National’s coverage determination. There

similarly is no evidence that Charles Russell, in its handling of

Sovereign’s defense, had even the ability to color the facts upon

which coverage turned. In defending Sovereign against

allegations that it had exceeded premium limits set by Lloyd’s,

Stephen Russell’s representation could not possibly have

influenced the question of whether the Lloyd’s claims fell

outside the territorial limits of the policy. Neither could

Charles Russell impact the question of whether claims handling

falling outside the coverage of the policy had occurred– it

either did or did not.

The evidence provided by Sovereign indicates that Charles

Russell was not hired to litigate the matter of National’s

obligation to Sovereign under the errors and omissions policy,

but rather only to defend the Lloyd’s claim against Sovereign. 

As indicated above, attorney Carter was clear on this score in

stating the he saw “no prospect” of his firm’s involvement in the

coverage dispute. (See October 28, 2004 email from Stephen

Carter to Fred Godinez, Exhibit K to Godinez Declaration ). 

Moreover, Fred Godinez himself states that “it became necessary

for National Casualty to obtain English counsel to defend the

arbitration,” and that “Charles Russell acted as the London

solicitors in the London Arbitration.” 

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14

Godinez Decl., 5:3-4; 6:19. The fact that “the Charles Russell

firm utilized the services of Raul V. Aguilar to provide advice

and opinions on California insurance regulatory law,” Id. at

9:24-26, points toward a lack, not a presence, of a conflict of

interest in the representation of Sovereign by Charles Russell. 

If Aguilar performed work for or on behalf of Charles

Russell, they might well look to them for payment. But neither

such assistance, nor the need for it, equates to a conflict of

interest on the part of Charles Russell in their representation

of both Sovereign and National, and thus does not trigger the

statutory requirement for appointment of Cumis counsel.

From the facts as presented to this Court, Charles Russell

was hired to resolve the claims of Lloyd’s against Sovereign, and

not to determine whether National was liable for Sovereign’s

defense. Further, there is no allegation that Charles Russell

was retained to determine whether National owed insurance

coverage to Sovereign, nor is it likely that they could have been

retained for that purpose or otherwise affected the outcome of

that issue. Therefore, there is no evidence of a conflict of

interest regarding the representation provided by Charles Russell

as to whether National would provide coverage to Sovereign, and

thus no triggering of the statutory requirement of Cumis counsel.

There is an absence of evidence, then, that Charles Russell

could control the outcome of the coverage issue. Thus there is

no genuine issue of any material fact regarding whether Charles

Russell was involved in, or could otherwise significantly affect,

any determination of whether National owed Sovereign coverage

under the policy. 

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15

Summary adjudication in favor of National on Sovereign’s First

Cause of Action, for failure to appoint Cumis counsel, is

therefore appropriate, and National’s Motion will be GRANTED as

to that claim.

2. Breach of the Implied Covenant of Good Faith and Fair

Dealing

Sovereign’s claim for breach of the implied covenant is

specifically premised on National’s failure, as of the time of

the filing of the complaint, to settle the Lloyd’s claim within

the $5 million policy limits. See Compl., ¶ 22. Subsequently,

National did, in fact, settle the Lloyd’s claim entirely within

the coverage of the policy, therefore making that claim moot.

In opposition to National’s Motion for Summary Judgment,

Sovereign nonetheless attempts to restyle its breach of the

implied covenant claim based on National’s failure to appoint

Cumis counsel. That attempt is improper in the first instance. 

Sovereign cannot rely on unpled claims in order to defeat a

motion for summary judgment. See, e.g., Harris v. Secretary,

U.S. Dept. of Veterans Affairs, 126 F.3d 339, 341 (D.C. Cir.

1997). Sovereign fares no better, however, on the merits. For

the reasons set forth above, National was not under an obligation

to provide independent counsel to Sovereign for the defense of

the Lloyd’s claim. “Although an insurer's bad faith is

ordinarily a question of fact to be determined by a jury by

considering the evidence of motive, intent and state of mind,

‘[t]he question becomes one of law ... when, because there are no

conflicting inferences, reasonable minds could not differ.’” 

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16

Chateau Chamberay Homeowners Ass'n v. Associated Intern. Ins.

Co., 90 Cal. App. 4th 335, 350 (2001). Here, there are no valid

inferences supporting the argument that National acted in bad

faith by failing to provide Cumis counsel. There is also no

genuine issue of any material fact regarding the reasonableness

of National’s actions in the settling of Lloyd’s claims within

the policy limits; indeed, this was a key objective or

Sovereign’s in initially filing this claim as stated above. 

Summary adjudication of Sovereign’s claim for Breach of the

Implied Covenant of Good Faith and Fair Dealing is therefore

proper, and National’s Motion for Summary Judgment as to Second

Cause of Action is accordingly GRANTED.

3. Declaratory Relief and Injunctive Relief

Sovereign’s Complaint, filed prior to the settlement of

Lloyd’s claims, seeks declaratory relief, asking this Court to

declare Sovereign’s entitlement to Cumis counsel, as well as

injunctive relief, asserting that National must be compelled to

assert the defense that Sovereign could not have mismanaged

claims because it was barred by California law from adjusting

claims. Because the Court has already determined, as detailed

above, that Sovereign was not entitled to Cumis counsel,

declaratory relief in favor of Sovereign cannot be had. 

Additionally, given that the Lloyd’s claim is now settled,

mandatory injunctive relief to influence a proceeding that has

already concluded would also be inappropriate. 

///

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The matter is moot, and for injunctive relief to lie, there must

be a threat of ongoing harm which is not present here. Gafcon,

Inc. v. Ponsor & Assoc., 98 Cal. App. 4th 1388, 1403 n.6 (2002).

It must also be noted that Sovereign offers no specific

opposition to National’s request for summary adjudication as to

its Third and Fourth Causes of Action, for declaratory and

injunctive relief, respectively. Given that non-opposition as

well as the foregoing, National’s Motion for Summary Adjudication

on these claims is granted.

CONCLUSION

For the reasons set forth above, National’s Motion for

Summary Judgment is granted in its entirety. The Clerk of the

Court is accordingly directed to close the file.

IT IS SO ORDERED.

Dated: February 15, 2008

_____________________________

MORRISON C. ENGLAND, JR.

UNITED STATES DISTRICT JUDGE

Case 2:06-cv-02725-MCE -DAD Document 24 Filed 02/15/08 Page 17 of 17