Schaefer v. Elder ( 2013 )

Filed 5/16/13; pub. order 6/12/13 (see end of opn.)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(El Dorado)
----
STEVE SCHAEFER, C068229
Plaintiff and Respondent, (Super. Ct. No. PC20070686)
v.
KELLY ELDER,
Defendant and Respondent;
CASTLEPOINT NATIONAL INSURANCE
COMPANY,
Intervener and Appellant.
This is a case in which an insurer provided representation to an insured, with a
reservation of rights, for an action brought by a third party. The trial court (1) determined
that, because of a specific conflict of interest, the insured in this case has a right to
independent counsel rather than counsel provided by the insurer and (2) disqualified
counsel that had represented the insured and insurer simultaneously. The insurer appeals,
contending that (1) the insured is not entitled to independent counsel and (2)
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disqualification of counsel that had represented both the insured and the insurer was
error. We conclude that the trial court did not err and therefore affirm the court‟s order.
FACTS AND PROCEDURE
Plaintiff Steve Schaefer contracted with defendant Kelly Elder, doing business as
Elder Construction, to design and build a residence for Schaefer in El Dorado County.
Later, Schaefer sued Elder, alleging causes of action for breach of contract, negligence,
breach of implied warranty, strict liability, money lent, diversion of funds, failure to enter
into a written contract, and excessive down payment.
Elder tendered the defense of the action to his insurer, CastlePoint National
Insurance Company (formerly known as SUA Insurance Company), and CastlePoint
appointed counsel of its choice, the law firm of Koeller, Nebeker, Carlson & Haluck to
represent Elder, subject to a reservation of rights. CastlePoint also filed separately a
declaratory relief action against Elder to determine whether the insurance policy provided
coverage for the claims Schaefer made against Elder.
Elder hired a different law firm to move to disqualify the Koeller firm and to
determine Elder‟s right to independent counsel. CastlePoint opposed the motion. The
trial court granted Elder‟s motion, disqualifying the Koeller firm and determining that
Elder has a right to independent counsel.
CastlePoint appeals.
DISCUSSION
I
Motion to Strike Schaefer’s Brief
In response to CastlePoint‟s appellant‟s opening brief, not only Elder but also
Schaefer filed a respondent‟s brief. CastlePoint filed a motion to strike Schaefer‟s
respondent‟s brief. We deny the motion because CastlePoint provided no authority to
support the motion.
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Unless a law otherwise provides, a moving party always has the burden of
establishing that the facts and law favor the moving party‟s position. (See
ComputerXpress, Inc. v. Jackson (2001) 93 Cal.App.4th 993, 1020 [burden on party
seeking attorney fee award to establish entitlement to fee]; Wilson v. Nichols (1942) 55
Cal.App.2d 678, 682-683 [burden on moving party to establish illegality of challenged
cost items].)
Rule 8.54 of the California Rules of Court requires a party filing a motion in the
appellate court to “stat[e] the grounds and the relief requested and identify[] any
documents on which the motion is based.” (Cal. Rules of Court, rule 8.54(a)(1).) But the
rule also requires the moving party to file a “memorandum.” (Cal. Rules of Court, rule
8.54(a)(2).) Even though the rule does not use the wording of the former rule, which
required “points and authorities” (former Cal. Rules of Court, rule 41(a) [amended and
renumbered as rule 8.54 on Jan. 1, 2007]), there can be no mistaking that the required
memorandum must establish that the law and facts support the moving party‟s argument.
CastlePoint‟s motion to strike Schaefer‟s respondent‟s brief states that the trial
court ruled that Schaefer had no standing to move to disqualify counsel provided to Elder
by CastlePoint. Therefore, concludes CastlePoint, we should strike Schaefer‟s brief on
appeal. No cited statute. No cited case.
We are not inclined to act as counsel for CastlePoint and go in search of authority
for or against its position. (See Mansell v. Board of Administration (1994) 30
Cal.App.4th 539, 545-546.) Accordingly, the motion to strike Schaefer‟s respondent‟s
brief is denied.
One more matter related to CastlePoint‟s motion to strike Schaefer‟s respondent‟s
brief requires our attention before we address the merits of the appeal. Schaefer
requested judicial notice of documents filed in the trial court to support his opposition to
CastlePoint‟s motion in this court. While documents filed in the trial court would
normally be the proper subject of augmentation or judicial notice on appeal, the request
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for judicial notice is rendered moot by our determination that CastlePoint failed to
support its motion with authority and our consequent denial of the motion. Therefore, we
deny Schaefer‟s request for judicial notice as moot.
II
Motion to Disqualify Counsel for CastlePoint
Relying most prominently on Blanchard v. State Farm Fire & Casualty Co.
(1991) 2 Cal.App.4th 345 (Blanchard), CastlePoint contends that the issues raised by
Schaefer‟s complaint against Elder and CastlePoint‟s own reservation of rights and
declaratory relief action did not require appointment of independent counsel. The
contention is without merit because there is an actual conflict of interest between Elder
and CastlePoint.
An insurer may, by the terms of the insurance contract, have the right to appoint
counsel for the insured and control the defense. In such circumstances, counsel “owes
both [the insured and the insurer] a high duty of care [citation] and unswerving allegiance
[citation].” (San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162
Cal.App.3d 358, 374 (Cumis).) However, if there are “divergent interests” between the
insurer and the insured, the insured is entitled to independent counsel. (Id. at p. 375.) If
a conflict arises, “brought about by the insurer‟s reservation of rights based on possible
noncoverage under the insurance policy, the insurer must pay the reasonable cost for
hiring independent counsel by the insured. The insurer may not compel the insured to
surrender control” of the defense. (Ibid.)
The Blanchard court described the facts underlying the Cumis holding as follows:
“In [Cumis], there was a possible conflict of interest between the insurer and the insured,
because the underlying suit against the insured contained allegations in part that the
conduct of the insured was intentional, conduct which would not be covered under the
insurance policy. The appellate court perceived clearly divergent interests operating on
the attorney selected by the insurer, since a finding of intentional conduct would be
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excluded from coverage while nonintentional conduct would be included. [Citation.] In
those circumstances the court held the insurer must pay the reasonable cost of hiring
independent counsel for the insured. [Citation.]” (Blanchard, supra, 2 Cal.App.4th at p.
349.)
The Blanchard court continued: “Subsequent case law and statutory codification
of Cumis have made clear, however, that not every reservation of rights creates a conflict
of interest requiring appointment of independent counsel. It depends upon the nature of
the coverage issue, as it relates to the issues in the underlying case. If the issue on which
coverage turns is independent of the issues in the underlying case, Cumis counsel is not
required. [Citations.] A conflict of interest does not arise unless the outcome of the
coverage issue can be controlled by counsel first retained by the insurer for the defense of
the underlying claim. (Civ. Code, § 2860, subd. (b).).” (Blanchard, supra, 2 Cal.App.4th
at p. 350.)
The holding in Cumis has been codified: “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” unless the insured
waives its right to independent counsel. (Civ. Code, § 2860, subd. (a).) A conflict of
interest may arise “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); Blanchard, supra, 2
Cal.App.4th at p. 350.)
The Blanchard court concluded that independent counsel was not required in that
case because the insured had “produced no evidence to show in what specific way the
defense attorney could have controlled the outcome of the damage issue to [the insured‟s]
detriment, or had incentive to do so.” (Blanchard, supra, 2 Cal.App.4th at p. 350.)
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Here, the focus of Elder‟s motion in the trial court was on a provision in the
insurance contract referred to as the contractor‟s special condition. It provided that the
policy would not cover work performed by independent contractors unless Elder first
obtained from those independent contractors an indemnity agreement and a certificate of
insurance.1 In its declaratory relief action, CastlePoint alleged this contractor‟s special
condition, among other provisions, as a reason the policy does not cover the claims
alleged by Schaefer. This provision, and CastlePoint‟s reliance on the provision in the
declaratory relief action, raises the question of whether the workers who did allegedly
defective work on Schaefer‟s residence were Elder‟s employees or independent
contractors. If they were employees, the contractor‟s special condition would not apply.
Schaefer alleged in his complaint that Elder acted through his employees, thus
raising the issue of respondeat superior. However, in answers to interrogatories prepared
by the Koeller firm, Elder stated that he “primarily contracted with the subcontractors to
construct the subject property.” That answer may invoke the contractor‟s special
condition with respect to whether the policy covers the damages alleged by Schaefer. In
any event, to prove that Elder is liable for problems on the property, Schaefer would have
to establish that the problems were caused by (1) one of Elder‟s employees (respondeat
superior) or (2) an independent contractor retained by Elder.
1 The provision stated: “As a condition precedent to coverage for any „suit‟ based,
in whole or in part, upon work performed by independent contractors, the insured must
have prior to the date of the „occurrence‟ giving rise to the „suit:‟
“(1) received a written indemnity agreement from the independent contractor
holding the insured harmless for all liabilities, including costs of defense, arising from the
work of the independent contractor; and
“(2) obtained certificates of insurance from the independent contractor indicating
that the insured is named as an additional insured and that coverage is maintained with
minimum limits of $1,000,000 per occurrence.”
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This question of proof causes the conflict of interest between Elder and
CastlePoint, as it was identified by the trial court. It is in Elder‟s interest to argue that the
work was done by employees because the insurance policy would apply even if Elder did
not comply with the contractor‟s special condition. On the other hand, it is in
CastlePoint‟s interest to argue that the work was done by independent contractors so that,
in the declaratory relief action, CastlePoint could argue that Elder is not covered because
he failed to comply with the contractor‟s special condition. Therefore, there was a
conflict of interest for the Koeller law firm.
CastlePoint, however, argues that there is no actual conflict because Elder is liable
for Schaefer‟s damages, assuming Schaefer establishes liability, regardless of whether it
is established that the work was done by an employee or an independent contractor. But
this argument avoids rather than resolves the question of whether there is a conflict. To
establish liability, Schaefer will have to establish that someone did something at Elder‟s
bidding. Whether it was an employee or an independent contractor, which implicates two
different paths for Schaefer to establish liability, one or the other must be proven.
CastlePoint also argues: “The status of the hired persons or entities will not be
determined in the construction-defect action.” Again, we disagree. Schaefer must
establish that those who provided the defective workmanship were related, in a business
sense, to Elder. The determination of that relationship will impact, later in the
declaratory relief action, whether the contractor‟s special condition comes into play.
Put simply, the Koeller firm had an ethical duty to Elder to try to establish that the
workers were employees and, at the same time, had an ethical duty to CastlePoint to try
to establish that the workers were independent contractors. That conflict supported the
trial court‟s determination that Elder has the right to independent counsel.
Given this conclusion, we need not consider CastlePoint‟s additional assertion that
the mere filing of the declaratory relief action did not create a conflict.
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III
Disqualification of the Koeller Firm
CastlePoint contends that, even if the trial court correctly determined that Elder
was entitled to independent counsel, it erred by disqualifying the Koeller firm.
According to CastlePoint, the Koeller firm should still be able to represent CastlePoint.
For this position, CastlePoint relies on subdivision (f) of Civil Code section 2860,
which states: “Where the insured selects independent counsel pursuant to the provisions
of this section, both the counsel provided by the insurer and independent counsel selected
by the insured shall be allowed to participate in all aspects of the litigation. Counsel shall
cooperate fully in the exchange of information that is consistent with each counsel‟s
ethical and legal obligation to the insured. Nothing in this section shall relieve the
insured of his or her duty to cooperate with the insurer under the terms of the insurance
contract.”
We disagree with CastlePoint‟s contention. The Koeller firm simultaneously
represented Elder and CastlePoint. Therefore, the proper course was to disqualify that
firm. (Flatt v. Superior Court (1994) 9 Cal.4th 275, 284.) Here, we must assume that the
Koeller firm received confidential information from Elder when assisting Elder in, among
other things, responding to the interrogatories concerning whether Elder hired
subcontractors. If the Koeller firm had not simultaneously represented Elder and
CastlePoint, but instead represented CastlePoint only, it might be allowed to further
participate in the litigation pursuant to Civil Code section 2860, subdivision (f). But that
was not the case here. Accordingly, the trial court did not err by disqualifying the
Koeller firm.
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DISPOSITION
The order disqualifying counsel is affirmed. Schaefer and Elder are awarded their
costs on appeal. (Cal. Rules of Court, rule 8.278(a).)
NICHOLSON , J.
We concur:
BLEASE , Acting P. J.
DUARTE , J.
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CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(El Dorado)
----
STEVE SCHAEFER, C068229
Plaintiff and Respondent, (Super. Ct. No. PC20070686)
v. ORDER OF
PUBLICATION
KELLY ELDER,
Defendant and Respondent;
CASTLEPOINT NATIONAL INSURANCE
COMPANY,
Intervener and Appellant.
APPEAL from a judgment of the Superior Court of El Dorado County, Nelson
Keith Brooks, Judge. Affirmed.
Grant, Genovese & Baratta, James M. Baratta, Lance D. Orloff, and Michael S.
Frey for Intervener and Appellant.
Palmer J. Swanson, Leo L. Ashley III, Law Office of Eugene P. Haydu, and
Eugene P. Haydu for Plaintiff and Respondent.
Murphy, Campbell, Guthrie & Alliston, George E. Murphy, George A. Guthrie,
and Jon Douglas Durham for Defendant and Respondent.
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THE COURT:
For good cause it now appears that the opinion in the above-captioned case filed
herein on May 16, 2013, should be published in the Official Reports. It is so ordered.
FOR THE COURT:
BLEASE , Acting P. J.
NICHOLSON , J.
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