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Case Study

California Coverage Team Prevails in Breach of Contract and Bad Faith Litigation Over Reservation of Rights and Independent Counsel Fees

July 30, 2020

Goldberg Segalla’s California Insurance Coverage Team, led by partner Albert K. Alikin, successfully defended a large specialty insurance group in contentious litigation with a policyholder over a significant sum in Cumis/independent counsel fees.

The litigation arose after the policyholder was sued and sought coverage from two carriers. Both agreed to defend under a reservation of rights and jointly retained defense counsel. Despite no potential conflict arising from defense counsel’s retention and the reservation of rights issued, the policyholder retained its own independent counsel. After the underlying case settled, the policyholder sought full reimbursement for all of its independent counsel’s fees from both insurers. When both carriers refused, the policyholder filed suit for breach of contract and bad faith.

In Goldberg Segalla’s demurrer/motion to dismiss, Al and associate Landon J. Greene argued, in summary, that California law is clear that a general reservation of rights does not automatically trigger Cumis/independent counsel, but rather Civil Code section 2860 and applicable case law hold that (1) the reservation must be made on a specific given issue, and (2) that issue can be controlled by retained defense counsel. Among many arguments, the policyholder argued that the carriers’ general reservation specifically incorporated all the same exclusions that we later specifically reserved on by stating that we reserved “all rights,” which rights included those exclusions. Al and Landon rebutted this position with case law holding the opposite and identifying the flawed logic that such a rule would impose (because by the policyholder’s argument every general reservation would trigger Cumis/independent counsel).

After oral argument on July 16, 2020, the court agreed with the carriers’ position, sustained the demurrer/motion to dismiss, and will be entering judgment in favor of both insurers, saving them significant expense in independent counsel fees and potential bad faith exposure.