Sequoia Ins. Co. v. H.C. Makabe &
Son
Filed 5/20/13 Sequoia Ins. Co. v. H.C. Makabe & Son
CA2/7
California Rules of Court, rule 8.1115(a), prohibits courts
and parties from citing or relying on opinions not certified for publication or
ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for
publication or ordered published for purposes of rule 8.1115
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
SEVEN
SEQUOIA INSURANCE COMPANY,
Plaintiff, Cross-defendant and
Respondent,
v.
H.C. MAKABE & SON, LLC,
Defendant, Cross-complainant and
Appellant.
B235532
(Los Angeles
County
Super. Ct.
No. LC085202)
APPEAL from
a judgment of the Superior Court
of
County, Michael B. Harwin, Judge. Affirmed.
Zakariaie
& Zakariaie, Jack M. Zakariaie and Niloufar A. Zakariaie for Defendant,
Cross-complainant and Appellant.
Archer
Norris, GailAnn Stargardter and Ioana R. Mondescu for Plaintiff,
Cross-defendant and Respondent.
_______________________
Defendant and cross-complainant H.C. Makabe & Son,
LLC (Makabe) appeals from a summary
judgment entered in favor of plaintiff and cross-defendant Sequoia
Insurance Company (Sequoia). We affirm.
FACTS
Makabe owns
a shopping center at 18663 Ventura Boulevard
in Tarzana. The center is managed by Bob
Wall (Wall). In June 2007, Makabe leased
space in the center to Steadfast in Commitment, Inc. dba Re/Max Grand Central
(Steadfast).
Makabe’s
operation of the shopping center was insured by Sequoia under a businessowners
insurance policy, effective November 2007 through November 2008.
On October 30, 2008, Steadfast filed a
complaint against Makabe and Wall, seeking declaratory relief and damages for
of quiet enjoyment and possession, intentional infliction of emotional
distress, and breach of written contract.
The gravamen of the complaint was that Wall engaged in a course of
conduct which interfered with Steadfast’s use and enjoyment of the property,
caused distress to Steadfast’s personnel, and was serious enough to rise to the
level of constructive eviction.
Makabe
forwarded the summons and complaint to its insurance agent, who sent it to
Sequoia on November 5. Sequoia did not
believe there was coverage “as there was no specific incident nor any property
damage or bodily injury alleged.†It
nonetheless referred the matter to its coverage counsel, Rand L. Chritton
(Chritton) of Archer Norris, to make a coverage determination.
On November
18, Sequoia wrote to Makabe that Sequoia would be investigating the matter and
was referring the matter to its coverage counsel. It stated that Sequoia did not expect to have
an opinion on coverage prior to the time Makabe would be required to file its
answer to Steadfast’s complaint. He
further stated: “If Sequoia has an
obligation to assume the defense, we will reimburse your reasonable defense
costs incurred from the date of tender of this suit to Sequoia Insurance Company. [¶]
Sequoia Insurance Company expressly reserves all right to assert any and
all policy forms and conditions and does not waive any rights by conducting
this investigation.â€
On December
3, Chritton notified Sequoia that some of the claims asserted in the Steadfast
lawsuit were potentially covered by Sequoia’s policy. Because there was potential coverage, he
recommended that Sequoia tender defense of the lawsuit subject to a reservation
of rights. He added, “However, if the
reservation of rights addresses the issue of occurrence and/or the expected or
intended injury exclusion, the raising of such issues would create an
impermissible conflict which would obligate Sequoia to provide independent
counsel pursuant to Civil Code [section] 2860.[
our recommendation that Sequoia not reserve rights on those issues.â€
On December
5, Sequoia wrote to Makabe that it was accepting the tender of defense of both
Makabe and Wall, “reserv[ing] its right to assert that there is neither a duty
to defend or indemnify all or a part of the subject litigation.†Sequoia stated that it “does not believe that
the issuance of the reservation of rights creates an impermissible conflict which
triggers the application of Civil Code [section] 2860.†In discussing coverage issues, Sequoia noted
that the “litigation is covered under the Business Liability policy only to the
extent that it presents a claim for damages against an insured in an insured
capacity, damages consisting of bodily injury or property damage caused by an
occurrence and pursuant to the other terms and conditions of the policy.†It stated that many of the damages claimed in
the lawsuit did not fall within the definitions of bodily injury and property
damage. It also stated that many of the
claims in the lawsuit did not fall within the definition of personal and
advertising injury included within the policy.
Sequoia
assumed that both Makabe and Wall qualified as insureds, reserving the right to
contest that assumption. It also
“reserve[d] the right to resolve any coverage issues between itself and the
insured by a suit for declaratory or other relief. In the event it is determined that some or
all of the claims in the subject litigation are not covered under Sequoia’s
policy of insurance, Sequoia reserve[d] its right to allocate between covered
and non-covered claims any payment of settlement, judgment and/or defense costs
and to seek reimbursement for any such payments and costs.â€
Sequoia
appointed attorney Normand A. Ayotte (Ayotte) to represent Makabe and
Wall. He had represented Makabe in two
prior lawsuits. After discussing the
matter with Sequoia, which had been informed by Wall that the allegations in
the Steadfast complaint were untrue and that Makabe intended to file a
cross-complaint for rent due, Ayotte concluded there was no conflict of
interest which prevented him from representing Makabe and Wall in the Steadfast
litigation.
On December
8, Makabe’s counsel, Zakariaie & Zakariaie (Zakariaie), responded to
Sequoia’s letter, asserted that a conflict of interest existed and therefore
Sequoia was required to appoint independent counsel under Civil Code section
2860. The bases of the assertion were
Sequoia’s reservation of the right to allocate costs between covered and
non-covered claims; Sequoia’s reservation of the right to claim there was no
“occurrence†and the loss was caused by willful acts of the insured; and
Sequoia’s refusal to appoint counsel to prosecute a cross-complaint.
Chritton
responded on December 18 that Sequoia’s reservation of the right to allocate
costs did not trigger the duty to appoint independent counsel. Additionally, “Sequoia’s reservation of
rights . . . does not reserve the issue of occurrence or with respect
to the issue of intent†and thus did not trigger Civil Code section 2860. Finally, Sequoia did not have a duty to
provide independent counsel to prosecute an affirmative claim. Chritton reiterated: “The issues on which Sequoia has reserved
rights are whether there is a claim of bodily injury or property damages as
well as the application of both the Professional Services and Owned Property
exclusions.â€
Zakariaie
responded to Chritton on December 19 that “our argument that an impermissible
conflict exists is clearly premised on the fact that the complaint asserts a
claim for Intentional Infliction of Emotional Distress, and that Sequoia’s
reservation of rights letter expressly provided that coverage is provided only
to the extent that (1) the litigation presents a claim ‘for damages
consisting of bodily injury
. . . caused by an
‘pursuant to the other terms and conditions of the policy,’ which presumably
would include the ‘expected or intended’ exclusion of the policy.†Counsel stated that Chritton was wrong in
asserting that Sequoia had not reserved its rights with respect to the issues
of occurrence and intent.
Zakariaie
further stated, “Even if I could assume from your letter that Sequoia has now
elected to forego both such reservations, and has expressly waived any right to
deny an obligation to fully defend or indemnify the insured based on a lack of
‘occurrence’ or pursuant to the ‘expected or intended’ exclusions, which I
surely cannot make such an assumption, your argument still fails.†He went on to explain that “Insurance Code
section 533[, which precludes coverage for willful torts,] essentially mandates
that Sequoia reserve its rights as to the question of intent—the determination
of which is determinative of Sequoia’s indemnity obligation. This mandated reservation of rights —
appointment of independent counsel under Civil Code [section] 2860.†Zakariaie demanded that Sequoia furnish
Makabe with independent counsel by December 23.
Archer
Norris responded on December 24 that “for the reasons set forth in Sequoia’s
reservation of rights letter of December
5, 2008 and Mr. Chritton’s correspondence of December 18, 2008, your demand is not well taken.†The letter went on to explain why independent
counsel was not required and to urge Makabe to cooperate with Ayotte in the
defense of the Steadfast litigation.
On January 27, 2009, Sequoia wrote to
Zakariaie regarding its understanding that Zakariaie had not permitted an
association with Ayotte for the purpose of defending the Steadfast
litigation. “Sequoia Insurance Company
has accepted the defense of that action subject to Reservation of Rights that
does not trigger a Cumis[
obligation. There are several letters in
the file from the Archer Norris firm, stating our position. [¶]
There is no requirement that the insured accept our defense, but if he
does not, he cannot expect to be reimbursed for monies expended in defense of
this claim. Nor will he be entitled to
reimbursement for any monies paid in settlement as any such payment would be
considered a voluntary payment pursuant to the policy and not subject to
payment by the carrier. [¶] Under no circumstances will Sequoia Insurance
be paying any of your fees. Nor will
Sequoia prosecute an affirmative action on behalf of the insured.†Sequoia warned that Makabe’s failure “to
comply with the provisions of the policy may jeopardize any coverage available
under the policy.â€
Zakariaie
responded on February 23 that it was “at a loss†as to why Sequoia and Chritton
had “taken this clearly erroneous position.
Indeed, your December 24, 2008
letter does not address any of our
arguments, and rather relies on positions and legal authority having no bearing
on Sequoia’s duties here. It is readily
apparent that Sequoia is intent on acting in bad faith by denying our clients
the rights to which they are clearly entitled, in clear derogation of Sequoia’s
contractual and statutory duties.†After
reiterating its arguments, Zakariaie concluded, “We are thus left no choice but
to vigorously defend our clients in this case, and if Sequoia insist[s] on not
granting independent counsel to its insured, at the conclusion of this action
we will immediately file a separate suit against Sequoia for its bad faith
denial of appropriate coverage, and its patent breach of the duty of good faith
and fair dealing.â€
Chritton
responded on February 27, reviewing the correspondence back and forth and
reiterating, “Again, to avoid confusion on this issue, Sequoia has not reserved
its right to contend that the claims asserted within the Steadfast In Commitment, Inc. litigation arise out of an
‘occurrence’. Sequoia will not assert
the ‘expected or intended’ exclusion included within Coverage A to the Sequoia
policy.†Chritton further stated that
“Sequoia again reiterates its acceptance of the tender of defense, albeit
pursuant to a reservation of rights, but a reservation of rights that does not
create the impermissible conflict required to trigger the application of Civil
Code [section] 2860. Please reconsider
your clients’ position in this regard based on the clarification of Sequoia’s
position.â€
Zakariaie
responded on March 4, “stat[ing] our position for the last time in the simplest
way I can.†Their position was that
“Sequoia has reserved as to the issue of ‘occurrence,’†based on Sequoia’s December 5, 2008 letter. And even if Sequoia had not reserved its
right to claim there was no occurrence, an impermissible conflict of interest
arose under Insurance Code section 533.
“You keep ignoring this last issue. If you choose to ignore this issue again, I
will not bother to reply to you again.â€
Chritton
wrote back on March 6, explaining that Insurance Code section 533 did not require
independent counsel, because Civil Code section 2860, subdivision (b), declares
that “a conflict of interest does not exist as to allegations or facts in the
litigation for which the insurer denies coverage,†and “[n]o conflict of
interest shall be deemed to exist as to the allegations of punitive damages,â€
i.e., willful conduct by the insured.
Chritton again urged Zakariaie to reconsider its position.
Zakariaie
responded on April 24, 2009,
again explaining its position. Zakariaie
urged Chritton to reconsider Sequoia’s position.
PROCEDURAL BACKGROUND
Archer
Norris on behalf of Sequoia filed a complaint for declaratory relief against
Makabe and Wall on April 17, 2009. It sought a declaration “that no
impermissible conflict of interest under Civil Code section 2860 has arisen
between SEQUOIA and Defendantsâ€; “that SEQUOIA has a right to defend MAKABE and
WALL in the Underlying Complaint pursuant to counsel of Sequoia’s choosingâ€;
and “that SEQUOIA has the right to control the defense of the Underlying
Complaint under the terms of the Sequoia Policy.â€
Zakariaie
filed an answer on behalf of Makabe and Wall on August 3, denying the
allegations of the complaint and asserting 15 affirmative defenses, including
failure to state a claim, the statute of limitations, estoppel, laches, failure
to mitigate damages, unclean hands, waiver, and unknown defenses.
Concurrently
with the answer, Zakariaie filed a cross-complaint for breach of contract and
breach of the implied covenant of good faith and fair dealing. These claims were based generally on
Sequoia’s refusal to provide independent counsel for Makabe and Wall.
Sequoia
moved for a judgment on the pleadings or, in the alternative, bifurcation of
trial of the legal issues raised in its complaint from the factual issues
raised in the cross-complaint. Makabe
and Wall opposed the motion, arguing that there were factual issues with
respect to the complaint, and the issues raised by the complaint and
cross-complaint were so intertwined that bifurcation was inappropriate.
The
parties’ appendices do not reveal what occurred with respect to Sequoia’s
motion. On May 21, 2010, both the complaint and cross-complaint were
dismissed as to Wall.
Makabe
filed a motion for summary adjudication on February 11, 2011.
It sought an order adjudicating that Sequoia had a duty to provide
independent counsel to Makabe in the Steadfast litigation, and therefore there
was no merit to Sequoia’s complaint for declaratory relief, and Sequoia had no
defense to Makabe’s cause of action for breach of contract.
Sequoia
filed its own motion for summary judgment or, in the alternative, summary
adjudication on February 28. It sought
summary judgment on both the complaint and the cross-complaint on the ground it
had no duty to provide Makabe with independent counsel.
On May 18,
the trial court granted Sequoia’s summary judgment motion and denied Makabe’s
motion. It found that “Sequoia’s initial
reservation of rights letter dated December
5, 2008 reserved its rights with respect to the issue of
occurrence.†However, “Sequoia withdrew
its reservation of rights on the issue of occurrence on December 18, 2008. [¶]
. . . As a result, there was no impermissible conflict of
interest between counsel appointed by Sequoia to defend the underlying litigation
and Makabe.†Therefore, “Sequoia was not
required to appoint independent counsel to represent Makabe.†Sequoia was entitled to summary judgment in
its behalf on its declaratory relief complaint and a judgment of dismissal on
the cross-complaint. Judgment was
entered in Sequoia’s favor on June 22.
DISCUSSION
A. Standard
of Review
Summary
judgment properly is granted if the evidence submitted in support of and
opposition to the motion establishes that there is no material issue of fact to
be tried. (Code Civ. Proc., § 437c,
subd. (c); California
to determine whether triable issues of material fact exist. (Wiener
v. Southcoast Childcare Centers, Inc. (2004) 32 Cal.4th 1138, 1142.) All doubts as to the propriety of granting
the motion are resolved in favor of the opposing party. (Hamburg v. Wal-Mart Stores, Inc. (2004) 116 Cal.App.4th 497, 502.)
B. The
Right to Appointment of Independent Counsel
Civil Code
section 2860 provides that “[i]f 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, at the time the insured is informed that a possible conflict may arise
or does exist, the insured expressly waives, in writing, the right to
independent counsel.†(
(a).) “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 . . . .â€
(Id., subd. (b).)
Makabe’s
position on appeal is the same as that asserted throughout the litigation, that
Sequoia reserved its right to contest the existence of an “occurrence†within
the meaning of the policy, triggering the duty to provide Makabe with
independent counsel. Assuming that this
is correct, the trial court correctly found that “Sequoia withdrew its
reservation of rights on the issue of occurrence on December 18, 2008.†Chritton clearly stated in his letter: “Sequoia’s reservation of rights
. . . does not reserve the issue of occurrence or with respect to the
issue of intent.†This position was
repeated in all subsequent correspondence with Zakariaie, Makabe’s counsel, by
Chritton, Archer Norris, and Sequoia.
As Makabe
states, “‘“[w]aiver is the intentional relinquishment of a known right after
knowledge of the facts.â€
[Citations.]’†(
(1995) 11 Cal.4th 1, 31.) “The waiver
may be either express, based on the words of the waiving party, or implied,
based on conduct indicating an intent to relinquish the right. [Citation.]â€
(Ibid.) This rule “requires the insurer to
intentionally relinquish its right to deny coverage.†(Ibid.)
It is
crystal clear—to everyone but Zakariaie—that Sequoia waived, i.e.,
intentionally relinquished, its right to deny coverage based on the
nonexistence of an “occurrence.â€
Zakariaie’s stubborn insistence that it did not do so based on the
original reservation of rights letter, despite the subsequent express waivers
of the right, is simply wrong.
C. Insurance Code Section 533
Insurance
Code section 533 provides that “[a]n insurer is not liable for a loss caused by
the wilful act of the insured.†Makabe
argues that “the allegations in the Underlying Action regarding the intentional
conduct of the insured and the application of Insurance Code section 533
created a conflict of interest based on the presumptive ability of panel
counsel hired by the insurer to control the outcome of the lawsuit, where a
finding of negligence would require indemnification of the insured by Sequoia,
and a finding of intentional tort, would result in no indemnification because
of the applicability of Insurance Code section 533.â€
Insurance
Code section 533 “is an implied exclusionary clause which, by statute, must be
read into all insurance policies.†(
Cal.App.4th 478, 499-500.) However, “an
insurer can be held liable to an insured on an estoppel theory for
representations concerning the promises of coverage which were made after the
‘wilful’ tort had allegedly been committed and on which promise the insured
relied in dispensing with the services of his personal attorney in the
underlying action and permitting counsel selected by the insurer to defend
him.†(Id. at p. 511, italics omitted.)
In other words, if the insurer omits from its reservation of rights the
protection afforded by Insurance Code section 533, the duty to provide
independent counsel is not triggered.
(See, e.g., Shafer v. Berger,
Kahn, Shafton, Moss, Figler, Simon & Gladstone (2003) 107 Cal.App.4th
54, 61-62; see also Miller v. Elite Ins.
Co. (1980) 100 Cal.App.3d 739, 754 [“Where an insurer reserves its right to
claim noncoverage under the policy, notice of the reservation must be given to
the insured or the reservation is deemed waived.â€].)
Chritton
stated in his February 27 letter that “Sequoia will not assert the ‘expected or
intended’ exclusion included within Coverage A to the Sequoia policy.†He explained:
“You indicate that Sequoia’s appointed counsel would have the apparent
incentive of having the conduct of Bob Wall be intentional, rather then [
the issue of occurrence and no assertion of a reservation of rights based on
the ‘expected or intended’ exclusion, the issue is not one of intent but rather
whether the damages consist of bodily injury or property damage, as those terms
are defined within the Sequoia policy as well as the potential application of
the two exclusions identified within the December 5, 2008 reservation of
rights.â€
Chritton
added in his March 6 letter that Insurance Code section 533 did not require
independent counsel, because Civil Code section 2860, subdivision (b), declares
that “a conflict of interest does not exist as to allegations or facts in the
litigation for which the insurer denies coverage,†and “[n]o conflict of
interest shall be deemed to exist as to the allegations of punitive damages,â€
i.e., willful conduct by the insured.
These two
letters make it clear that Sequoia omitted the protection of Insurance Code
section 533 from its reservation of rights and waived the right to deny
coverage based on the “expected or intended†exclusion. Section 533 did not create a conflict of
interest triggering the duty to provide independent
counsel.
D. Filing
of Declaratory Relief Action
Makabe
finally asserts that Sequoia’s duty to provide independent counsel was
triggered by the filing of the declaratory relief action. It relies on authority stating that a
conflict of interest may arise “where the insurer has filed suit against the
insured, whether or not the suit is related to the lawsuit the insurer is
obligated to defend.†(
(2001) 91 Cal.App.4th 1093, 1101.) This
reliance is misplaced.
In
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. For example, 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. [Citation.] The insurer owes no duty to provide
independent counsel in these situations because the Cumis rule is not
based on insurance law but on the ethical duty of an attorney to avoid
representing conflicting interests.’
[Citation.] For independent
counsel to be required, the conflict of interest must be ‘significant, not
merely theoretical, actual, not merely potential.’ [Citation.]
Some of the circumstances that may create a conflict of interest
requiring the insurer to provide independent counsel include: (1) where the
insurer reserves its rights on a given issue and the outcome of that
coverage issue can be controlled by the insurer’s retained counsel [citations];
(2) where the insurer insures both the plaintiff and the defendant [citation];
(3) where the insurer has filed suit against the insured, whether or not the
suit is related to the lawsuit the insurer is obligated to defend [citation];
(4) where the insurer pursues settlement in excess of policy limits without the
insured’s consent and leaving the insured exposed to claims by third parties
[citation]; and (5) any other situation where an attorney who represents the
interests of both the insurer and the insured finds that his or her
‘representation of the one is rendered less effective by reason of his [or her]
representation of the other.’
[Citations.]†(
Makabe also
relies on rule 3-310(C) of the Rules of Professional Conduct, which provides
that an attorney “shall not, without the informed written consent of each
client: [¶] (1) Accept
representation of more than one client in a matter in which the interests of
the clients potentially conflict; or [¶] (2) Accept or continue representation
of more than one client in a matter in which the interests of the clients
actually conflict . . . .â€
Contrary to
Makabe’s claim, nothing in James 3 Corp.
or rule 3-310(C) supports a conclusion that “the moment†Sequoia filed its
declaratory relief action, Makabe was entitled to independent counsel in the
underlying Steadfast litigation.
“circumstances that may create a
conflict of interest requiring the insurer to provide independent
counsel.†(James 3 Corp. v. Truck Ins. Exchange, supra, 91 Cal.App.4th at p. 1101, italics added.) Rule 3-310(C) of the Rules of Professional
Conduct prevents an attorney from representing two clients when their interest
conflict. So long as the panel attorney
representing Makabe in the underlying litigation did not also represent Sequoia
in the declaratory relief action, we see no problem of conflicting loyalty.
DISPOSITION
The
judgment is affirmed. Sequoia is to
recover its costs on appeal.
JACKSON,
J.
We concur:
PERLUSS,
P. J.
ZELON,
J.
name="_ftn1" title="">[1]
Code section 2860 addresses a situation in which “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.†(
name="_ftn2" title="">[2] San
Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162
Cal.App.3d 358, 375.
