Recent Decision for Insurers on Independent Defense Counsel Generates Controversy

In Federal Insurance Co., et al. v. MBL, Inc., the California Court of Appeal, Sixth Appellate District, held that a third-party defendant insured in an environmental contamination action was not entitled to independent counsel because it failed to establish the outcome of coverage issues could be controlled by insurer-retained defense counsel.

The federal government sued the owners of a dry cleaning facility under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) for the cost of remediating soil and groundwater contamination in the city of Modesto.  The defendants in the CERCLA action subsequently filed third-party actions seeking indemnity, contribution and declaratory relief against the insured. Its commercial general liability insurers agreed to defend MBL, a supplier of dry cleaning products, subject to various reservations including the “sudden and accidental” pollution exclusion and date of loss issues.  MBL demanded it be allowed to choose independent counsel citing alleged conflicts of interest arising from the insurers’ reservations per California Civil Code §2860, which codified San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358.  The trial and appellate courts held no conflict existed because the coverage outcomes were outside defense counsel’s control.

Policyholders and related groups attacked the Aug. 26, 2013, decision and asked the California Supreme Court to review or depublish it.  However, the Supreme Court denied all depublication and review requests.

Image courtesy of Flickr by Parker Knight