Court Opinion

ID: 2803120
Source: CourtListenerOpinion
Date Created: 2015-05-22 21:03:26.865809+00
Date Added: 2024-06-11T11:46:13.253070
License: Public Domain

Filed 5/22/15

                           CERTIFIED FOR PUBLICATION

          IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                          FOURTH APPELLATE DISTRICT

                                    DIVISION TWO

CENTEX HOMES,

        Plaintiff and Appellant,                    E060057

v.                                                  (Super.Ct.No. RIC1306704)

ST. PAUL FIRE AND MARINE                            OPINION
INSURANCE COMPANY et al.,

        Defendants and Respondents.

        APPEAL from the Superior Court of Riverside County. Richard J. Oberholzer,

Judge. (Retired Judge of the Kern Super. Ct. assigned by the Chief Justice pursuant to

art. VI, § 6 of the Cal. Const.) Affirmed.

        Newmeyer & Dillon, Thomas F. Newmeyer, Joseph A. Ferrentino, Clayton T.

Tanaka and Christina K. Kazarian for Plaintiff and Appellant.

        The Aguilar law Group, A. Eric Aguilera and Raymond E. Brown for Defendants

and Respondents.

                                             1
                                                I

                                       INTRODUCTION

          This insurance coverage dispute arises from underlying construction defect

litigation in which Corona homeowners have sued the developer, plaintiff and appellant

Centex Homes (Centex), for work performed by Centex’s subcontractors. One of the

subcontractors, Oak Leaf Landscape, Inc. (Oak Leaf), is insured by defendants and

respondents, St. Paul Fire & Marine Insurance Company and St. Paul Mercury Insurance

Company (Travelers). Centex is named as an additional insured on the Travelers’s

policy.

          Centex appeals from an order and judgment sustaining without leave to amend

defendants’ demurrer to the seventh and eighth causes of action of the original complaint

filed by Centex. The seventh and eight causes of action for declaratory relief are about

insurance coverage and Centex’s right to independent counsel pursuant to Civil Code

section 2860. We agree with the trial court’s ruling that the claims are neither “ripe” nor

“actual” and affirm the judgment.1

                                               II

                     FACTUAL AND PROCEDURAL BACKGROUND

          The facts alleged in the complaint are taken as true for purposes of a demurrer.

          1
        We deny the request for judicial notice filed April 18, 2014. (Evid. Code,
§§ 452 and 459; Cal. Rules of Court, rule 8.252.)

                                                2
(Blank v. Kirwan (1985) 39 Cal. 3d 311, 318.) We do not “assume the truth of

contentions, deductions or conclusions of law.” (Aubry v. Tri-City Hospital Dist. (1992)

2 Cal. 4th 962, 967.)

       Centex alleges that it was a developer of single-family residences in Corona. In

May 2012, Centex was sued by Corona homeowners in Riverside County Superior Court

for construction defects. Centex tendered the defense to Travelers, which accepted the

defense subject to a reservation of rights, including the right to choose defense counsel.

The Riverside litigation was stayed pending the Corona plaintiffs’ compliance with the

prelitigation procedures of the Right to Repair Act, Civil Code section 895 et seq. In

April 2013, the Corona plaintiffs served Centex with a notice of violations.

A. The Complaint

       In June 2013, Centex filed the present action against 57 subcontractors, alleging

six causes of action for breach of contract to indemnify, defend, and obtain insurance, for

equitable indemnity, and for contribution and repayment. The complaint specifically

alleges that Centex “has incurred, is incurring, and will incur defense fees and costs” to

defend the Corona plaintiffs’ claims, all of which are recoverable through defense and

indemnity provisions in its agreements with its subcontractors and through various

insurers who named Centex as an additional insured under general liability policies

issued to the subcontractors.

       The seventh and eighth causes of action are for declaratory relief against

Travelers. In the seventh cause of action, Centex alleges that the Corona homeowners are

                                             3
suing for construction defects caused by subcontractors who were insured by Travelers

and that Centex is a named additional insured. Consequently, Centex asserts Travelers is

obligated to defend and indemnify Centex against the Corona homeowners’ claims and

Travelers breached its duty to defend by requiring a reservation of rights, seeking to

obtain full reimbursement from Centex. Centex articulates the dispute and controversy

with Travelers as follows: “. . . allocation . . . needs to be made . . . regarding the costs

and fees associated with Centex Homes’ defense in the Underlying Action. . . . [¶]

Declaratory judgment is both proper and necessary, so that the respective rights, duties,

and obligations of the Insurer Defendants, Centex Homes, and Subcontractor Defendants

as to the allocation of Centex’s defense fees and costs related to/arising from the

Underlying Action may be determined.”

       In the eighth cause of action, Centex alleges that Travelers breached its duty to

provide Centex “with a full, complete, immediate, and conflict free defense,” causing

Centex to incur defense costs. Centex further alleges that, by defending Centex under a

reservation of rights and appointing its own “panel defense counsel,” Travelers has

created a conflict of interest with Centex, triggering the right to independent counsel. In

particular, Centex contends Travelers is trying to limit the scope of its coverage to the

work of its named insured, Oak Leaf. Furthermore, Travelers denies there is any covered

“occurrence” or “property damage” under its policy. Centex argues Travelers is also

competing with Centex by seeking recovery or reimbursement from other subcontractors

and forcing Centex to share counsel with the subcontractors, while disadvantageously

                                               4
controlling and manipulating Centex’s defense, particularly the use of experts. For those

reasons, Centex alleges it has an immediate need for independent counsel.

B. The Demurrer

       In its demurrer, Travelers argued that Centex had not alleged any specific facts to

demonstrate Travelers is manipulating the defense, thus entitling Centex to independent

counsel. Furthermore, the allocation of defense costs and fees is premature because the

amount of fees, the parties involved, and the relevant facts are still unknown. Centex, of

course, adopted a contrary position. The trial court found that the seventh cause of action

“is not ripe and therefore no cause of action is stated.” As to the eighth cause of action,

the court found “no actual present conflict of interest requiring independent counsel.”

                                             III

                                       DISCUSSION

       Centex argues that, to the extent Travelers controls the defense of both the

subcontractors and Centex, Travelers can manipulate the litigation against Centex’s

interests, creating an ethical conflict requiring independent counsel: “There is a large

block of authority recognizing what also seems relatively obvious: when an insured is

obligated to provide defenses for two or more insureds with adverse interests, there is a

sufficient conflict of interest that the insurer must provide independent counsel for each

insured at its own expense.” (14 Couch on Insurance (3d ed. 2014) § 202:24.)

Additionally, Centex claims that, when Travelers seeks reimbursement of defense fees,

its right to reimbursement and the issue of allocation must be resolved as part of the

                                              5
action against the subcontractors. Therefore, Centex maintains the trial court erred in

sustaining the demurrer and finding that Centex could not amend its complaint to state a

cause of action against Travelers.

A. Standard of Review

       The appellate court conducts an independent review of the trial court sustaining a

demurrer. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal. 4th 412, 415; Hernandez v.

City of Pomona (1996) 49 Cal. App. 4th 1492, 1497.) All material facts are admitted as

true and the complaint is given a reasonable interpretation, reading it as a whole. (Blank

v. Kirwan, supra, 39 Cal.3d at p. 318.) If the complaint, as liberally construed, can state

a cause of action under any legal theory, it survives demurrer. (Hernandez, at p. 1497.)

The denial of leave to amend is reviewed under an abuse of discretion standard. (Id. at

pp. 1497-1498.) If there is a reasonable possibility that the complaint can be cured by

amendment, a trial court abuses its discretion in refusing to allow the amendment.

(Schifando v. City of Los Angeles (2003) 31 Cal. 4th 1074, 1081.)

B. The Seventh Cause of Action

       A cause of action for declaratory relief may adjudicate future rights and liability

between parties who have a relationship, either contractual or otherwise. (See Cardellini

v. Casey (1986) 181 Cal. App. 3d 389; Bachis v. State Farm Mutual Auto Ins. Co. (1968)

265 Cal. App. 2d 722.) The pleader need not establish it is also entitled to a favorable

judgment. (See Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal. App. 4th 592,

606.) To assert a cause of action for declaratory relief, Code of Civil Procedure section

                                             6
1060 requires that there be an “actual controversy relating to the legal rights and duties of

the respective parties,” not an abstract or academic dispute. (Connerly v.

Schwarzenegger (2007) 146 Cal. App. 4th 739, 746-747.) “However, the courts will

nevertheless evaluate in the context of a demurrer whether the factual allegations of the

complaint for declaratory relief reveal that an actual controversy exists between the

parties. (Alameda County Land Use Assn. v. City of Hayward (1995) 38 Cal. App. 4th
1716, 1721-1722.) ‘Sustaining a demurrer when the complaint reveals such a

controversy constitutes error. [Citations.] [¶] Before a controversy is ripe for

adjudication it “‘must be definite and concrete, touching the legal relations of parties

having adverse legal interests. [Citation.] It must be a real and substantial controversy

admitting of specific relief through a decree of a conclusive character, as distinguished

from an opinion advising what the law would be upon a hypothetical state of facts.’”

[Citations.]’ (Id. at p. 1722.)” (Otay Land Co. v. Royal Indemnity Co. (2008) 169
Cal. App. 4th 556, 562.)

       In Buss v. Superior Court (1997) 16 Cal. 4th 35, the California Supreme Court

ruled that an insurer’s right to reimbursement is limited: “[F]or what specific defense

costs may the insurer obtain reimbursement from the insured? [¶] The answer is:

Defense costs that can be allocated solely to the claims that are not even potentially

covered.” (Id. at p. 53.) Buss also held the insurer has the burden of proving that the

defense costs can be allocated to claims that are not even potentially covered. (Ibid.)

Based on Buss, Centex argues that how much, if any, reimbursement is ultimately

                                              7
ordered is irrelevant to the question of whether a cause of action for declaratory relief can

be stated in the complaint. Therefore, the controversy between Travelers and Centex is

“actual” and needs to be decided by the court.

       Centex identifies the following as disputed: (1) whether Travelers has the right to

be reimbursed by Centex for all defense fees that relate to the work of subcontractors it

did not insure; (2) whether Travelers has the right to be reimbursed for defense fees in

proportion to the ultimate amount it pays for indemnity for the subcontractors it insures;

and (3) whether Travelers has the right to reimbursement for all defense fees not related

to property damage arising from the work of its named insured subcontractor, Oak Leaf.

       When read carefully, Centex’s claims are all anticipatory, not actual or ripe. It is

still unknown whether Oak Leaf’s work caused the property damage claimed by the

Corona homeowners. The proportionate liability of all the subcontractors has also not

been adjudicated. The amount of defense fees has not been established in the ongoing

underlying litigation. Quite simply, there are not enough facts about liability, damages,

or the cost of defense for the trial court to offer any declaration as to the rights and

obligations of the parties. (Wilson v. Transit Authority (1962) 199 Cal. App. 2d 716, 722;

State of California v. Pacific Indemnity Co. (1998) 63 Cal. App. 4th 1535, 1549; County of

San Diego v. State of California (2008) 164 Cal. App. 4th 580, 588.) Therefore, the trial

court correctly determined the seventh cause of action is not “ripe”—although Centex

may certainly be able to renew its claims at a later date.

                                               8
C. The Eighth Cause of Action

       Centex also argues an actual and present controversy exists about whether a

conflict of interest with Travelers requires independent counsel. The trial court

concluded that no such conflict existed yet at the pleading stage. Centex asserts, in so

ruling, the court disregarded California’s strong public policy protecting the right to

independent counsel.

       Civil Code section 2860 (Section 2860) and California case law provide Centex,

as an insured, with the right to obtain independent counsel paid for by Travelers, as

Centex’s insurer, whenever their competing interests create an ethical conflict for

counsel. “[T]he insurer is required to provide its insured with independent counsel of the

insured’s choosing ‘who represents the insured, not the insurer.”’ (Long v. Century

Indemnity Co. (2008) 163 Cal. App. 4th 1460, 1469.) Where an insurer asserts a

reimbursement claim for defense costs, “[t]he potential for conflict requires a careful

analysis of the parties’ respective interests to determine whether they can be reconciled

. . . or whether an actual conflict of interest precludes insurer-appointed defense counsel

from presenting a quality defense for the insured.” (Dynamic Concepts, Inc. v. Truck Ins.

Exchange (1998) 61 Cal. App. 4th 999, 1007-1008; Federal Ins. Co. v. MBL, Inc. (2013)

219 Cal. App. 4th 29, 42.) An attorney’s duty of loyalty to the client is so strong that it

“forbids any act that would interfere with the dedication of an attorney’s ‘entire energies

to [the] client’s interests.’” (Flatt v. Superior Court (1994) 9 Cal. 4th 275, 289, quoting

Anderson v. Eaton (1930) 211 Cal. 113, 116.)

                                              9
       A reservation of rights by an insurer does not necessarily constitute a conflict of

interest requiring the insurer to provide independent counsel. The conflict must be

“significant, not merely theoretical, actual, not merely potential.” (Dynamic Concepts,

Inc. v. Truck Ins. Exchange, supra, 61 Cal.App.4th at p. 1007; Gafcon, Inc. v. Ponsor &

Associates (2002) 98 Cal. App. 4th 1388, 1421; James 3 Corp. v. Truck Ins. Exchange

(2001) 91 Cal. App. 4th 1093, 1101-1102; see Federal Ins. Co. v. MBL, Inc., supra, 219

Cal.App.4th at p. 42.) Nor is a general reservation of rights sufficient to trigger the right

to independent counsel: “Where the insurer has not expressly reserved its right to deny

coverage under a particular exclusion in its policy, there can be no actual conflict based

on the application of that exclusion during the pendency of the action.” (Federal Ins.

Co., at pp. 44, 47.) Independent counsel may be required, 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.” (Civ.

Code, § 2860, subd. (b); see Long v. Century Indemnity Co., supra, 163 Cal.App.4th at

1472.) In San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162
Cal. App. 3d 358, the court held, in such cases, the “insurer may be subject to substantial

temptation to shape its defense so as to place the risk of loss entirely upon the insured”

(id. at p. 368) and “[n]o matter how honest the intentions, counsel cannot discharge

inconsistent duties.” (Id. at p. 366.)

       Centex alleges the interests of Centex, Travelers, and Oak Leaf are irreconcilably

adverse to each other. Centex specifically alleges that Travelers will control Centex’s

                                             10
defense in the underlying action to prejudice the present coverage dispute between

Centex and itself. The express conflicts of interests include Travelers instructing the

defense counsel: (1) to sue Oak Leaf, the subcontractor insured by Travelers; (2) to

retain and direct the work of experts; (3) to evaluate the contracts between Centex and

Oak Leaf to determine what Oak Leaf should contribute towards any settlement with the

Corona homeowners; (4) to allocate Centex’s defense fees and costs among the

subcontractors; (5) to negotiate settlements between Centex and the subcontractors; and

(6) to ascertain whether the work performed by Oak Leaf caused property damage. In

other words, Centex asserts that, to the extent panel counsel can challenge the liability of

Oak Leaf, it creates a direct conflict of interest by enhancing Travelers’s reimbursement

claims against Centex. However, these anticipated circumstances have not occurred yet

in the underlying litigation.

       We conclude the facts alleged by Centex do not support its claim of a conflict of

interest with Travelers. An insurer has the right to control a defense. (James 3 Corp. v.

Truck Ins. Exchange, supra, 91 Cal.App.4th at pp. 1102-1103.) Centex argues Travelers

will manipulate experts to its advantage without giving any explanation about how that

will be accomplished. Similarly, Centex offers a host of allegations about how Travelers

will control the litigation without describing how this is occurring in the underlying

construction defect litigation. Centex is alleging conclusions without substance, not

facts. As Gertrude Stein famously said about Oakland, there is no there there.

                                             11
       In Blanchard v. State Farm & Casualty Co. (1991) 2 Cal. App. 4th 345, the

appellate court stated that that insurance counsel had no incentive to attach liability to the

insured and that it was in the interest of both the insurer and the insured to minimize the

insured’s liability. (Id. at p. 350.) Here, Travelers and Centex’s interests may be slightly

different because Travelers’s liability is limited to Oak Leaf’s work and Travelers claims

a right to reimbursement against Centex for all defense fees unrelated to property damage

caused by Oak Leaf. Centex asserts that, unlike counsel in Blanchard, Travelers’s panel

counsel has an incentive to control the defense so as to increase Travelers’s

reimbursement claim—a conflict which requires the appointment of independent counsel.

We disagree because we do not perceive the interests of Centex and Travelers to be

adverse. Depending on the eventual degree of liability among the subcontractors,

Travelers may be liable for damages but Centex will receive coverage from Travelers or

the other insurers covering the other subcontractors. Centex’s liability is derivative and

Travelers has the same interest in defending the underlying claim. These circumstances

do not cause a conflict requiring independent counsel. (Foremost Ins. Co. v. Wilks (1988)

206 Cal. App. 3d 251, 261; Blanchard, at p. 350.) The demurrer to the eighth cause of

action was properly sustained—although these claims may also be renewed if they

become actual and present.

D. Leave to Amend

       Public policy dictates that leave to amend be liberally granted. If there is any

reasonable possibility that the plaintiff can state a cause of action, it is error to sustain a

                                               12
demurrer without leave to amend. (Youngman v. Nevada Irrigation Dist. (1969) 70
Cal. 2d 240, 245; Sheehan v. San Francisco 49ers, Ltd. (2009) 45 Cal. 4th 992, 998.) As

an alternative, Centex requests a reversal to allow Centex the opportunity to amend its

complaint.

       Unfortunately, Centex did not request leave to amend from the trial court. On

appeal, it does not sufficiently propose how the seventh and eighth causes of action could

be amended to state a claim based on an actual, present, existing, or ripe controversy. For

that reason, we reject this argument. (Schifando v. City of Los Angeles, supra, 31 Cal.4th

at p. 1081.)

                                            IV

                                     DISPOSITION

       We affirm the judgment and order Travelers, the prevailing party, to recover its

costs on appeal.

       CERTIFIED FOR PUBLICATION

                                                               CODRINGTON
                                                                                          J.

We concur:

HOLLENHORST
          Acting P. J.

MILLER
                          J.

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