Federal Insurance v. MBL, Inc.

Filed 8/26/13
CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SIXTH APPELLATE DISTRICT

FEDERAL INSURANCE COMPANY et H036296
al., (Santa Clara County
Super. Ct. Nos. CV114309, CV119165)
Plaintiffs, Cross-defendants, and
Respondents,

v.

MBL, INC.,

Defendant, Cross-complainant and
Appellant.

GREAT AMERICAN INSURANCE H036578
COMPANY, (Santa Clara County
Super. Ct. Nos. CV114309, CV119165)
Plaintiff, Cross-defendant, and
Appellant,

v.

FEDERAL INSURANCE COMPANY et
al.,

Defendants, Cross-complainants and
Respondents.

After soil and groundwater contamination in the City of Modesto was traced back
to a dry cleaning facility known as Halford‟s Cleaner‟s (Halford‟s), the federal
government brought a Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA) action against the owners of the property on which Halford‟s
was located, as well as the lessees who owned and/or operated the facility, to recover the
costs of monitoring and remediating the contamination.1 The defendants in the Lyon
action subsequently filed third-party actions against, among others, appellant MBL, Inc.
(MBL), a supplier of dry cleaning products including perchloroethylene (PCE), seeking
indemnity, contribution and declaratory relief.
MBL tendered the defense of these third-party actions to its insurers, Federal
Insurance Company (Federal), Centennial Insurance Company (Centennial), Atlantic
Mutual Insurance Company (Atlantic), Nationwide Indemnity Company (Nationwide),
Utica Mutual Insurance Company (Utica) and Great American Insurance Company
(Great American) (hereafter collectively referred to as Insurers). The Insurers accepted
the tender of defense, subject to reservations of various rights, and retained counsel to
provide MBL with a defense. MBL refused to accept retained counsel, arguing the
Insurers‟ reservations of rights created a conflict of interest and demanding the Insurers
instead pay for counsel of MBL‟s choosing. The Insurers denied there was any such
conflict of interest and filed declaratory relief actions. The trial court granted summary
judgment in favor of the Insurers, finding there was no actual conflict of interest. On
appeal, MBL contends the trial court erred in finding the Insurers were entitled to
declaratory relief. We shall affirm.
In a related appeal, Great American seeks to preserve its right to equitable
contribution from the other Insurers in the event MBL‟s appeal is successful. Alone
among the Insurers, Great American paid MBL‟s independent counsel for the costs of
defending the third-party actions, subject to a reservation of the right to reimbursement
from MBL if it succeeded in its declaratory relief action. Since we are affirming the
judgments in favor of the Insurers on the question of MBL‟s right to independent

1
The CERCLA action is entitled United States v. Lyon (E.D. Cal. June 25, 2008)
[2008 U.S. Dist. LEXIS 67191] case No. 1:07-CV-00491-CJO-GSA (the Lyon action).

2
counsel--thus confirming that none of the Insurers, Great American included, was
obligated to pay such counsel--Great American‟s appeal is moot and shall be dismissed.
I. FACTUAL AND PROCEDURAL BACKGROUND
MBL supplies PCE, and other dry cleaning products, to dry cleaning facilities, and
has done so for a number of years. In 2007, MBL was named as a defendant in a number
of third-party complaints and cross-complaints filed in the Lyon action. According to the
allegations of the Lyon action, wastewater containing PCE was discharged into the sewer
system as part of Halford‟s dry cleaning operations until the mid-1980s. PCE was also
leaking from an old dry cleaning machine through the floor of the facility into the soil
and groundwater. In 1989, the site was placed on the National Priorities List of
hazardous waste sites.
Clean up activities at the site, which are ongoing, began in 2000 when the EPA
installed a groundwater treatment system and a soil vapor extraction system at the
property.
The third-party complaints and cross-complaints alleged that MBL, among others:
(1) purchased and resold chlorinated solvents to Halford‟s; (2) distributed, designed,
assembled, maintained, controlled, operated and/or repaired parts of Halford‟s
equipment; (3) engaged in service visits and inspections on Halford‟s premises, including
testing and inspecting Halford‟s equipment and witnessing Halford‟s disposal of
chlorinated solvents; (4) was legally responsible for and committed tortious acts; and, (5)
in doing so acted as a coconspirator, aider, abettor, fraudulent transferee and fraudulent
transferor of the other third-party defendants. The complaints sought contribution,
equitable indemnity and declaratory relief from MBL.
MBL filed a cross-claim in the Lyon action which named as cross-defendants,
among others, the City of Modesto, McGraw Edison Company and Bowe Permac, Inc.

3
 MBL retained defense counsel, who tendered the defense of the Lyon action to the
Insurers, requesting they appoint Cumis2 counsel. The Insurers accepted the tender of
defense subject to various reservations of rights, detailed below, and appointed counsel to
defend MBL. MBL refused to allow the Insurers‟ appointed counsel to associate as
defense counsel, asserting it was entitled to independent counsel of its own choosing
pursuant to Civil Code section 2860.3 The Insurers advised MBL it was only entitled to
Cumis counsel if their reservations of rights created a conflict of interest and, with the
exception of Great American, refused to pay the defense costs incurred by MBL‟s
counsel.4
A. Great American‟s policies
Great American issued primary general liability insurance policies to MBL with
policy periods from November 1, 1980 to November 1, 1983 (policy No. BP 2180454),
November 1, 1983 to November 1, 1984 (policy No. BP 6272405-00) and November 1,
1984 to November 1, 1985 (policy No. BP 6272405-01).

2
San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162
Cal.App.3d 358.
3
Further section references are to the Civil Code.
4
Great American ultimately paid $66,455.24 to MBL‟s counsel in the defense of
the Lyon action, though it reserved its rights to seek reallocation and/or reimbursement
from MBL and/or the other Insurers.
Great American also paid MBL‟s counsel for the defense of another action,
Schultz v. Ichimoto (E.D. Cal. Nov. 8, 2010) [2010 U.S. Dist. LEXIS 118964] No. 1:08-
CV-00526 (the Schultz action). Like the Lyon action, the Schultz action alleged that
MBL supplied PCE to one or more dry cleaning facilities in the City of Modesto and was
at least partially responsible for environmental contamination occurring at those facilities.
Great American agreed to defend MBL in the Schultz action subject to the same
reservation of rights it asserted in the Lyon action, including the right to seek
reimbursement from MBL or the other Insurers for amounts paid to MBL‟s counsel.
Great American ultimately paid MBL‟s counsel $26,176.78 in connection with the
defense of the Schultz action.

4
 Each of the Great American policies contained the following language regarding
the duty to defend: “The company shall have the right and duty to defend any suit
against the insured seeking damages on account of such bodily injury or property
damage, even if any of the allegations of the suit are groundless, false or fraudulent, and
may make such investigation and settlement of any claim or suit as it deems expedient,
but the company shall not be obligated to pay any claim or judgment or to defend any suit
after the applicable limit of the company‟s liability has been exhausted by payment of
judgments settlements.”
Great American‟s reservations of rights explained that it “reserves its rights to
decline coverage for any damages resulting from an occurrence outside of Great
American‟s policy period,” and that “Great American‟s duty to indemnify, if any, shall
not exceed the remaining available limits under the policies at issue.” Great American
also stated that “[t]o the extent that punitive damages are awarded against MBL, such
damages would not be covered,” and “Great American reserves the right to seek
reallocation and/or reimbursement pursuant to Buss v. Superior Court (1997) 16 Cal.4th
35.”
B. Nationwide‟s policies and reservation of rights
Nationwide issued three liability policies to MBL which covered the period from
November 1, 1991 to November 1, 1994. These policies contained the following
language relating to Nationwide‟s duty to defend: “We will have the right and duty to
defend any „suit‟ seeking [damages because of „bodily injury‟ or „property damage‟ to
which this insurance applies]. We may at our discretion investigate any „occurrence‟ and
settle any claim or „suit‟ that may result.” The policies also provide that “[t]his insurance
applies to „bodily injury‟ and „property damage‟ only if: [¶] . . . (2) The „bodily injury‟ or
„property damage‟ occurs during the policy period.”
Each of the Nationwide policies also contains pollution exclusions. The 1992 to
1993 policies exclude coverage for: “(1) „Bodily injury‟ or „property damage‟ arising out

5
of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or
escape of pollutants: [¶] . . . [¶] (b) At or from any premises, site or location which is or
was at any time used by or for any insured or others for the handling, storage, disposal,
processing or treatment of waste. [¶] (c) Which are or were at any time transported,
handled, stored, treated, disposed of, or processed as waste by or for any insured or any
person or organization for whom you may be legally responsible; [¶] . . . [¶] (2) Any loss,
cost or expense arising out of any: (a) Request, demand or order that any insured or
others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any
way respond to, or assess the effects of pollutants; or (b) Claim or suit by or on behalf of
a governmental authority for damages because of testing for, monitoring, cleaning up,
removing, containing, treating, detoxifying or neutralizing, or in any way responding to,
or assessing the effects of pollutants.”
The 1993-1994 policy excludes coverage for bodily injury or property damage
“which would not have occurred in whole or part but for the actual, alleged or threatened
discharge, dispersal, seepage, migration, release or escape of pollutants at any time”;
losses or expenses arising out of any “request, demand or order that any insured or others
test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way
respond to, or assess the effects of pollutants”; and losses or expenses arising out of a
“[c]laim or suit by or on behalf of a governmental authority for damages because of
testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or
neutralizing, or in any way responding to, or assessing the effects of pollutants.”
Nationwide accepted MBL‟s tender of defense subject to a reservation of its
rights, as follows: (1) to deny coverage for property damage that did not occur during the
applicable policy periods (i.e., between November 1, 1991 and November 1, 1994); (2) to
deny coverage for fines or penalties that are not “damages” as defined by the policies; (3)
to deny coverage under the absolute pollution exclusions in the policies; and (4) to seek

6
reimbursement of defense costs if it is determined Nationwide had no duty to defend the
claim.
C. Federal and Utica policies and reservations of rights
Federal issued a liability policy to MBL with an effective date of November 1,
1978 through November 1, 1980 (policy No. MP 3514 26 76). The liability policy issued
by Utica to MBL had an effective date of November 1, 1976 through November 1, 1979
(policy No. 2955).
The insuring agreement set forth in the Utica policy provides: “The Company will
pay on behalf of the insured all sums which the insured shall become legally obligated to
pay as damages because of bodily injury or property damage to which this insurance
applies, caused by an occurrence, and the Company shall have the right and duty to
defend any suit against the insured seeking damages on account of such bodily injury or
property damage, even if any of the allegations of the suit are groundless, false, or
fraudulent, and may make such investigation and settlement of any claim or suit as it
deems expedient, but the Company shall not be obligated to pay any claim or judgment or
to defend any suit after the applicable limit of the Company‟s liability has been exhausted
by payment of judgments or settlements.”
The Federal policy provides: “The company will pay on behalf of the insured all
sums which the insured shall become obligated to pay as damages by reason of liability
to which this insurance applies, imposed by law or assumed by the insured under any
written contract, for bodily injury, property damage or personal injury caused by an
occurrence and the company shall have the right and duty to defend any suit against the
insured seeking damages on account of such bodily injury, property damage or personal
injury, . . . and may make such investigation and settlement of any claim or suit as it
deems expedient. . . .” (Emphasis omitted.)
In their reservations of rights letters, Federal and Utica reserved the right to deny
coverage for: (1) any property damage that did not occur within the applicable policy

7
period; (2) any award of punitive damages; and (3) any damages awarded in excess of
their respective limits of liability. They also reserved their right to seek reimbursement
of defense costs under Buss v. Superior Court, supra, 16 Cal.4th 35 (Buss).
D. Insurers‟ complaints for declaratory relief
On June 6, 2008, the Insurers, with the exception of Great American, filed a
complaint for declaratory relief against MBL. The first cause of action sought a
declaration that the Insurers were not obligated to provide independent counsel to MBL
and the second cause of action sought a declaration that the Insurers were relieved of
their obligation to defend MBL because MBL‟s refusal to accept appointed defense
counsel breached its contractual duty, set forth in each of the insurance policies, to
cooperate with the Insurers.
On August 5, 2008, Great American filed a separate complaint seeking declaratory
relief against MBL and the Insurers. In its complaint, Great American alleged it was not
obligated to provide MBL with independent counsel to defend the Lyon action. Great
American also alleged causes of action for declaratory relief and equitable contribution
against the other Insurers.
In September 2008, MBL filed a cross-complaint in Great American‟s declaratory
relief action, naming Great American and the Insurers as cross-defendants. In this cross-
complaint, MBL asserted causes of action for declaratory relief, breach of contract and
breach of the implied covenant of good faith and fair dealing.
In November 2008, pursuant to a stipulation by the parties, the separate
declaratory relief actions brought by the Insurers and Great American were consolidated
for all purposes by the trial court.
E. Insurers‟ motions for summary adjudication in case No. H036296
Nationwide, joined by Utica and Federal, moved for summary adjudication of the
first cause of action for declaratory relief regarding their duty to provide independent
counsel to represent MBL. In this motion, Nationwide, Utica and Federal argued that the

8
limited reservations of rights asserted by these insurers did not create a conflict of interest
under section 2860. Atlantic and Centennial subsequently joined in the motion filed by
Nationwide, Utica and Federal and filed a separate motion for summary judgment or, in
the alternative, summary adjudication on MBL‟s cross-complaint.
In June 2009, after the matter was briefed and argued, the trial court granted: (1)
Nationwide, Utica and Federal‟s motion for summary adjudication of the first cause of
action; and (2) Atlantic and Centennial‟s motion for summary adjudication of the first
and second causes of action in MBL‟s cross-complaint for breach of contract and breach
of the implied covenant of good faith and fair dealing.5 In its order, the court noted that
“the specific reservations of rights by [the] insurers did not present a conflict which
would require the appointment of independent counsel. [Citations.] The court further
finds the general reservation of rights to deny coverage . . . does not present a conflict
which would require the appointment of independent counsel.” (Emphasis in original.)
Federal, Utica and Nationwide subsequently brought a separate motion for
summary judgment on MBL‟s cross-complaint. In its opposition to this motion, MBL
argued--for the first time--that Federal and Nationwide were obligated to provide
independent counsel based on evidence that those insurers were providing a defense,
through separate counsel, to other unrelated insureds in the Lyon action. With respect to
Utica, MBL claimed it had conspired with Federal and Nationwide to “deprive MBL of
its right to independent counsel.” The trial court granted the motion for summary
judgment, finding that MBL had failed to demonstrate the existence of a triable issue of
material fact on the issue of its entitlement to independent, rather than appointed, counsel.

5
On July 7, 2009, the trial court issued a supplemental order in favor of Atlantic
and Centennial clarifying that it was granting those insurers‟ alternative motion for
summary judgment on MBL‟s cross-complaint.

9
 The Insurers subsequently dismissed, without prejudice, their second cause of
action6 and judgment was entered in their favor on or about October 6, 2010. MBL
timely appealed.

F. Great American‟s motions for summary judgment and summary
adjudication in case No. H036578
On August 26, 2009, Great American brought a motion for summary adjudication
against the other Insurers, seeking (1) a judicial declaration that the other Insurers owed
ongoing defense obligations while the independent counsel dispute remained unsettled,
and (2) a ruling that Great American was entitled to equitable contribution from the other
Insurers for past amounts Great American had paid for MBL‟s defense. The trial court
denied Great American‟s motion because, “[b]ased on this court‟s prior ruling of June 18,
2009, [the co-insurers] had no obligation to pay for independent counsel.” Consequently,
Great American was not entitled to equitable contribution “ „where there is no common
obligation that is legally due from multiple insurers.‟ ”
After amending its complaint to add a cause of action for reimbursement against
MBL, Great American filed a motion for summary adjudication and summary judgment
against MBL. The motion further sought summary judgment on MBL‟s cross-complaint
against Great American. The trial court granted Great American‟s motion in its entirety
and entered a declaratory and money judgment on October 27, 2010, in favor of Great
American and against MBL.
Great American and the other Insurers stipulated to a form of judgment based on
the court‟s December 2, 2009 order denying Great American‟s motion for summary
adjudication on the issue of equitable contribution so that the issue could proceed to

6
The second cause of action sought declaratory relief regarding MBL‟s alleged
failure to cooperate with the Insurers, as required by the various policies.

10
appeal. Pursuant to that stipulation, the trial court entered judgment against Great
American and in favor of the other Insurers, and Great American timely appealed.7
II. DISCUSSION
A. Standard of Review
In order to prevail on a motion for summary judgment, a defendant must show that
one or more elements of the plaintiff‟s cause of action cannot be established or that there
is a complete defense to that cause of action. (Code Civ. Proc., § 437c, subd. (p)(2).) “A
court may grant summary judgment only when the evidence in support of the moving
party establishes that there is no issue of fact to be tried.” (Neighbarger v. Irwin
Industries, Inc. (1994) 8 Cal.4th 532, 547.) In other words, summary judgment should be
granted only when a moving party is entitled to judgment as a matter of law. (Code Civ.
Proc., § 437c, subd. (c).)
On an appeal from summary judgment, we review the record de novo. (See Guz v.
Bechtel National, Inc. (2000) 24 Cal.4th 317, 334.) “We need not defer to the trial court
and are not bound by the reasons for [its] summary judgment ruling; we review the ruling
of the trial court, not its rationale.” (Knapp v. Doherty (2004) 123 Cal.App.4th 76, 85.)
In so doing we apply the same three-step analysis the trial court applies. “First, we
identify the issues framed by the pleadings. Next, we determine whether the moving
party has established facts justifying judgment in its favor. Finally, if the moving party
has carried its initial burden, we decide whether the opposing party has demonstrated the
existence of a triable, material fact issue.” (Chavez v. Carpenter (2001) 91 Cal.App.4th
1433, 1438.)

7
After denying the parties‟ joint motion to consolidate the appeals in case Nos.
H036296 and H036578, this court granted its own motion to consider those cases
together for briefing, oral argument and decision by order dated May 6, 2011.

11
 B. Entitlement to independent counsel--statutory and case law
In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162
Cal.App.3d 358, the court held that if a conflict of interest exists between an insurer and
its insured, based on possible noncoverage under the insurance policy, the insured is
entitled to retain its own independent counsel at the insurer‟s expense. (Id. at p. 364.)
The Cumis opinion was codified in 1987 by the enactment of section 2860, which
“ „clarifies and limits‟ ” the rights and responsibilities of insurer and insured as set forth
in Cumis. (Buss, supra, 16 Cal.4th at p. 59; San Gabriel Valley Water Co. v. Hartford
Accident & Indemnity Co. (2000) 82 Cal.App.4th 1230, 1234.) Section 2860 provides, in
pertinent part: “(a) 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 . . . . [¶] (b) 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 or be deemed to
exist solely because an insured is sued for an amount in excess of the insurance policy
limits.”
“As statutory and case law make clear, not 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. (Civ. Code, § 2860, subd. (b);
[citations].) 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

12
attorney to avoid representing conflicting interests.” (Golden Eagle Ins. Co. v. Foremost
Ins. Co. (1993) 20 Cal.App.4th 1372, 1394.) For independent counsel to be required, the
conflict of interest must be “significant, not merely theoretical, actual, not merely
potential.” (Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999,
1007 (Dynamic Concepts).) The insured‟s right to independent counsel “depends upon
the nature of the coverage issue, as it relates to the issues in the underlying case.”
(Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350
(Blanchard).) “[W]here the reservation of rights is based on coverage issues which have
nothing to do with the issues being litigated in the underlying action, there is no conflict
of interest requiring independent counsel.” (Foremost Ins. Co. v. Wilks (1988) 206
Cal.App.3d 251, 261.)
As we explained in the last paragraph, not every conflict of interest entitles an
insured to insurer-paid independent counsel. Nor does “every reservation of rights
entitles an insured to select Cumis counsel. There is no such entitlement, for example,
where the coverage issue is independent of, or extrinsic to, the issues in the underlying
action [citation] or where the damages are only partially covered by the policy.”
(Dynamic Concepts, supra, 61 Cal.App.4th at p. 1006.) However, independent counsel is
required where there is a reservation of rights “and the outcome of that coverage issue
can be controlled by counsel first retained by the insurer for the defense of the claim.” (§
2860, subd. (b), italics added; Blanchard, supra, 2 Cal.App.4th at p. 350.)
C. MBL‟s Contentions
MBL argues the trial court erred in failing to analyze whether appointed defense
counsel could have controlled the outcome of specific coverage issues raised in the
insurers‟ reservations of rights letters. The duty to appoint independent counsel is not
triggered at the moment defense counsel makes a tactical decision giving rise to a
conflict. Instead, the parties‟ respective interests must be analyzed to determine if they
can be reconciled or if there is a conflict of interest which puts appointed counsel in the

13
position of having to choose which master to serve. MBL contends that the policies
underlying section 2860 and Cumis are not served in this case without requiring the
Insurers to allow MBL to name independent counsel.
In support of its arguments, MBL cites the following language from Golden Eagle
Ins. Co. v. Foremost Ins. Co., supra, 20 Cal.App.4th 1372, “Attorney control of the
outcome of a coverage dispute is written into . . . section 2860, subdivision (b) as an
example of a conflict of interest which may require appointment of independent counsel.
It is not, however, the only circumstance in which Cumis counsel may be required. The
language of . . . section 2860 „does not preclude judicial determination of conflict of
interest and duty to provide independent counsel such as was accomplished in Cumis so
long as that determination is consistent with the section.‟ ” (Id. at pp. 1395-1396.)
MBL takes the position that, under Gafcon, Inc. v. Ponsor & Associates (2002) 98
Cal.App.4th 1388, the Insurers had to prove that appointed counsel could not impact
coverage by the manner in which they defended the case in order to prevail on summary
judgment. (Id. at p. 1423.) The Insurers‟ motions ignored the fact that, to establish
MBL‟s liability in the Lyon action, the third party claimants would attempt to show a
connection between a discharge of pollutants, MBL‟s conduct and contamination leading
to recovery of response/clean-up costs. The various factual positions favorable to the
Insurers in relation to these issues are positions directly opposite to those favorable to
MBL.
MBL also argues that the Insurers‟ reservations of rights to deny coverage for
damages outside their particular policy periods triggered the obligation to provide
independent counsel. Thus, MBL and the Insurers had diverging interests with respect to
the timing of any environmental damages. The Insurers are interested in establishing that
damages took place outside their respective policy periods and MBL is interested in
establishing that any such damages occurred within those periods.

14
 Finally, MBL claims the trial court erred in finding that a general reservation of
rights cannot create a conflict of interest such as to trigger the obligation to appoint
independent counsel. If that were the case, insurers could always preserve all their
coverage rights without having to appoint independent counsel. In any event, these
general reservations of rights amount to a surreptitious reservation of the right to deny
coverage for damage that was expected or intended by MBL.
We examine each of MBL‟s contentions in turn.
1. Conflict of interest created by pollution exclusions
a. Federal and Utica‟s qualified pollution exclusions
According to MBL, the qualified pollution exclusions contained in Utica‟s and
Federal‟s policies generally exclude coverage for property damage arising out of
discharges of pollutants, but provide coverage if those discharges were “sudden and
accidental” as defined by the policies. Consequently, this type of exclusion creates a
conflict of interest since the appointed counsel would have an interest in developing facts
establishing that any discharge of pollutants by MBL was neither sudden nor accidental.
The problem with MBL‟s claim is that neither Federal nor Utica reserved their
rights to decline coverage under the qualified pollution exclusions set forth in their
policies. 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. (Dynamic Concepts, supra, 61
Cal.App.4th at p. 1010, fn. 10.) MBL‟s argument that Federal and Utica, by way of
including a general reservation of rights in their letters, somehow incorporated specific
reservations of rights on their respective qualified pollution exclusions is unavailing. A
general reservation of rights does not give rise to a conflict of interest or create a duty to
provide independent counsel. (Ibid.)

15
 b. Nationwide‟s absolute pollution exclusion
MBL contends that because the Lyon action involves an underlying claim by the
federal government against various third parties to remediate the polluted soil and
groundwater, MBL and Nationwide have a diverging interest in establishing whether or
not MBL‟s liability arose out of government directives or requests. By reserving its right
to deny coverage based on this exclusion, Nationwide was obligated to provide
independent counsel to MBL.
Nationwide responds that its reservation of the right to deny coverage under the
absolute pollution exclusion does not create the right to independent counsel because
appointed counsel cannot influence the outcome of that coverage issue. The underlying
actions arise out of pollution and seek indemnity and contribution from MBL for clean-
up costs related to soil and groundwater contamination. Whether the absolute pollution
exclusion bars a claim arising out of MBL‟s activities is not an issue that would be
litigated in the underlying actions. Counsel cannot influence the outcome of this
coverage issue, which is strictly a matter of contract interpretation. Either the loss arose
out of a government claim to remediate pollution or it did not, and there is nothing which
counsel, whether retained or independent, could do to change the answer to that question.
We agree that Nationwide‟s reservation of rights under its absolute pollution
exclusion did not create a conflict of interest which entitled MBL to independent counsel.
The third party complaints seek contribution from MBL, among other potentially
responsible parties, for the costs of remediating the soil and groundwater contamination
which was traced back to Halford‟s, which MBL supplied with PCE and other chemicals
over the years. MBL has not shown how Nationwide‟s reservation of rights to deny
coverage for losses arising out of a government demand to monitor and clean up such
pollution gives rise to a conflict of interest, since counsel could not control the outcome
of that inquiry.

16
 2. Number of accidents or occurrences
According to MBL, Nationwide‟s policy provides a specified limit for each
“accident” or “occurrence.” Thus it would be in Nationwide‟s interest to show that
MBL‟s liability arose out of only one accident or occurrence and thus only one policy
limit would apply, whereas it would be in MBL‟s interest to show that there were
multiple accidents or occurrences, thus triggering multiple policy limits. The Insurers‟
reservation of rights on this issue triggers MBL‟s right to independent counsel.
Nationwide counters that it did not reserve its rights concerning the number of
occurrences, consequently there can be no conflict of interest on this issue. In addition,
the number of occurrences was not at issue in the Lyon action. MBL did not present any
evidence to establish that the number of occurrences was litigated below or was in any
way relevant to the claims in the Lyon action.
Again, we find that MBL cannot manufacture a conflict of interest by claiming a
particular right was reserved by an insurer when, in fact, no such right was reserved.
Nationwide‟s reservation of rights letter did not reserve the right to assert that the loss
arose out of one occurrence. Without an express reservation of a right under the policy,
there can be no conflict of interest based on the application of that exclusion or policy
term during the pendency of the action. (Dynamic Concepts, supra, 61 Cal.App.4th at p.
1010, fn. 10.)
3. Defense of parties adverse to MBL
MBL contends that it was entitled to independent counsel because Federal,
Nationwide and Great American defended and insured various third parties in the Lyon
action who were adverse to MBL. Specifically, Federal defended and insured Bowe
Permac, Inc., a third-party defendant in the Lyon action. Nationwide defended and
insured McGraw-Edison, a third-party defendant in the Lyon action as well as a third-
party cross-defendant in a cross-complaint filed by MBL. Great American insured and
paid for the defense of the City of Modesto, a third-party defendant in the Lyon action

17
and a cross-defendant in MBL‟s third-party cross-complaint. In its discovery responses,
Nationwide even admitted that the same claims analyst not only adjusted the claims for
both MBL and McGraw-Edison, but was also privy to all communications from counsel
for McGraw-Edison.
Federal contends that MBL‟s argument was not raised in response to their
summary adjudication motion on their cause of action for declaratory relief on the duty to
provide independent counsel, but was only raised when Federal, Utica and Nationwide
subsequently moved for summary judgment on MBL‟s cross-complaint. Thus, it should
not be considered on appeal.
Even if this argument is properly raised on appeal, Federal did not, as MBL
claims, insure both sides of the litigation. It did not insure the property owners or the
owners of the dry cleaning facility at issue, the third-party plaintiffs in the Lyon action.
Merely because Federal may have represented another third-party defendant in that action
does not per se mean that there was a conflict of interest which entitled MBL to
independent counsel.
Furthermore, Federal retained different law firms to defend MBL and the other
insured as well as assigned different claims adjusters to the files. These claims adjusters
had no access to each others‟ files, did not discuss the claims and there is no evidence
that the defense of either insured would have been affected in any way.
Nationwide argues that there was no conflict even though it insured one of the
parties against which MBL brought a cross-claim for contribution. Nationwide agreed to
defend that party under a reservation of rights and provided separate counsel.
Nationwide‟s agreement to defend MBL under a reservation of rights does not obligate
Nationwide to cover the costs incurred by MBL in asserting affirmative claims against
other parties. Furthermore, there is no evidence of any adversarial litigation activity
between MBL and McGraw-Edison that could have created a conflict of interest for
defense counsel retained by the insurers.

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 Great American claims that MBL failed to show that it controlled the defense of
the other insured; rather, the record reflected that different counsel represented the City of
Modesto in the Lyon action and Great American assigned different claims adjusters to the
separate insureds.
We agree with the Insurers. MBL failed to present evidence below to show that
the Insurers‟ representation of other parties in the Lyon action gave rise to a “significant,
not merely theoretical, actual, not merely potential” conflict of interest. (Dynamic
Concepts, supra, 61 Cal.App.4th at p. 1007.) MBL‟s reliance on O‟Morrow v. Borad
(1946) 27 Cal.2d 794 to support its arguments on this issue is misplaced. O‟Morrow
arose out of an automobile accident involving two vehicles and the drivers of those
vehicles happened to both be insured by the same insurance company. The insureds were
thus direct adversaries in the litigation. However, that at the time O‟Morrow was
decided, contributory negligence was a complete bar to recovery. If each driver was
shown to be at least partly to blame for the collision, the insurer would pay nothing to
either of them. Since O‟Morrow was decided, we have moved to a system of
comparative negligence, in which responsibility for the loss is apportioned between and
among wrongdoers based on the degree of their respective fault.
In this case, the Insurers could only avoid liability by establishing that a particular
insured had no responsibility for the pollution at issue, not that each of its insureds was
partially responsible for the loss. Ultimately, the Insurers would potentially have to
indemnify all of their respective insureds against any judgment that might be entered and
thus would have no incentive to shift liability among them.
4. Exclusion of damages outside the policy periods
MBL asserts that the Insurers‟ reservation of the right to deny coverage for
damages occurring outside their various policy periods gave rise to a conflict of interest.
Those reservations created a divergent interest in establishing the timing of any
potentially covered losses.

19
 We think it is clear where the coverage issue in question relates only to the timing
of damages, there is no conflict under section 2860. (Blanchard, supra, 2 Cal.App.4th at
p. 350.) As the court explained in a similar situation in Blanchard, “Insurance counsel
had no incentive to attach liability to appellant. Respondent recognized its liability for
certain damages flowing from appellant‟s liability; thus it was to the advantage of both
appellant and respondent to minimize appellant‟s underlying liability.” (Ibid.)
Here, as in Blanchard, it is in the interest of both the Insurers and MBL to defeat
liability. MBL provided no evidence to establish how defense counsel could have
controlled the issue of when certain damages occurred. Defense counsel could not
control the facts at issue below, such as when MBL delivered solvents to the dry cleaning
facility, or when the seepages and resulting environmental contamination occurred.
Furthermore, the point in time the alleged damages occurred would not be relevant to
defense counsel jointly retained by multiple insurers, who together issued policies
providing coverage to MBL over a period of approximately 20 years.
5. General reservations of rights
To the extent MBL contends the Insurers‟ general reservations of rights gave rise
to a conflict of interest, we reject that argument. General reservations are just that:
general reservations. At most, they create a theoretical, potential conflict of interest--
nothing more. (Dynamic Concepts, supra, 61 Cal.App.4th at p. 1010, fn. 10.)
6. Conclusion
MBL failed to present evidence demonstrating a triable issue of material fact on
the question of whether there exists a conflict of interest under section 2860.
Consequently, we find the trial court did not err in granting the Insurers‟ motions and
entering judgment in their favor.

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 D. Great American‟s appeal in case No. H036578
Because we have decided that judgment was properly entered in favor of the other
Insurers, the trial court also properly entered judgment in favor of the other Insurers on
Great American‟s declaratory relief action.
At the heart of this dispute is the question whether MBL was entitled to
independent counsel; since it was not, the other Insurers were not obligated to contribute
to payment of MBL‟s counsel and Great American is not entitled to equitable
contribution from the other Insurers.
Equitable contribution is a loss-sharing mechanism intended to accomplish
ultimate justice among coinsurers of the same insured. (Signal Companies, Inc. v.
Harbor Ins. Co. (1980) 27 Cal.3d 359, 369.) “Contribution among insurers is permitted
where one insurer pays a loss or defends a claim for which another insurer shares
responsibility.” (Maryland Casualty Co. v. Nationwide Ins. Co. (1998) 65 Cal.App.4th
21, 26.) “Equitable contribution permits reimbursement to the insurer that paid on the
loss for the excess it paid over its proportionate share of the obligation, on the theory that
the debt it paid was equally and concurrently owed by the other insurers and should be
shared by them pro rata in proportion to their respective coverage of the risk.”
(Fireman‟s Fund Ins. Co. v. Maryland Casualty Co. (1998) 65 Cal.App.4th 1279, 1293
(Fireman‟s Fund).)
The fundamental prerequisite to equitable contribution is shared responsibility for
the loss. Equitable contribution “is predicated on the commonsense principle that where
multiple insurers or indemnitors share equal contractual liability for the primary
indemnification of a loss or the discharge of an obligation, the selection of which
indemnitor is to bear the loss should not be left to the often arbitrary choice of the loss
claimant, and no indemnitor should have any incentive to avoid paying a just claim in the
hope the claimant will obtain full payment from another coindemnitor.” (Fireman‟s
Fund, supra, 65 Cal.App.4th at p. 1295.) “The idea is that the insurers are „equally

21
bound,‟ so therefore they „all should contribute to the payment.‟ ” (Herrick Corp. v.
Canadian Ins. Co. (1994) 29 Cal.App.4th 753, 759.) Thus “[e]quitable contribution . . .
applies to apportion costs among insurers that share the same level of liability on the
same risk as to the same insured.” (Maryland Casualty Co. v. Nationwide Mutual Ins.
Co. (2000) 81 Cal.App.4th 1082, 1089.)
Under California law, an insurer “must defend a suit which potentially seeks
damages within the coverage of the policy.” (Gray v. Zurich Insurance Co. (1966) 65
Cal.2d 263, 275.) Where a potential for coverage exits, the duty to defend arises
immediately upon tender of the underlying suit in order “to afford the insured what it is
entitled to: the full protection of a defense on its behalf.” (Montrose Chemical Corp. v.
Superior Court (1993) 6 Cal.4th 287, 295; see also Buss, supra, 16 Cal.4th at p. 49.)
Once it attaches, the duty to defend continues until the conclusion of the
underlying action, “unless the insurer sooner proves, by facts subsequently developed,
that the potential for coverage which previously appeared cannot possibly materialize, or
no longer exists.” (Scottsdale Ins. Co. v. MV Transportation (2005) 36 Cal.4th 643, 657.)
To put it another way, “the duty to defend begins when a potential for coverage arises,
and the duty continues until the insurer proves otherwise.” (Hartford Accident &
Indemnity Co. v. Superior Court (1994) 23 Cal.App.4th 1774, 1781 [primary insurer
obligated to defend until it obtained a judicial declaration relieving it of defense
obligation]; Maryland Casualty Co. v. National American Ins. Co. (1996) 48 Cal.App.4th
1822, 1833 [defending insurer entitled to equitable contribution until nondefending
insurer successfully proves defense against insured].)
In this case, none of the Insurers disputed their duty to defend MBL. They all
acknowledged that duty and agreed to defend MBL, subject to their reservations of
various rights. MBL, however, insisted on retaining independent counsel, rather than
allowing counsel appointed by the Insurers to conduct its defense. As discussed above,
MBL was not entitled to independent counsel, thus none of the Insurers (including Great

22
American) were ever obligated to reimburse MBL for the fees generated by that counsel.
Great American, as it happens, did reimburse MBL for those fees, but because there was
no obligation to pay, Great American can only seek reimbursement for those fees from
MBL, not the other Insurers.
III. DISPOSITION
The judgments at issue in H036296 are affirmed. The Insurers are entitled to their
costs in connection with that appeal.
The appeal from the judgment in H036578 is dismissed as moot. The parties are
to bear their own costs in connection with that appeal.

Premo, J.

WE CONCUR:

Rushing, P.J.

Elia, J.

Federal Insurance Company et al. v. MBL, Inc.
H036296
Great American Insurance Company v. Federal Insurance Company et al.
H036578

23
Trial Court: Santa Clara County Superior Court
Superior Court Nos. CV114309,
CV119165
Trial Judge: Hon. Mark H. Pierce

Counsel for Defendant/Appellant: Hamrick & Evans
MBL, Inc. A. Raymond Hamrick III
Case No. H036296 James M. Pazos
Kenneth A. Kotarski
Counsel for Plaintiff/Respondent: Barber Law Group
Nationwide Indemnity Co. Bryan M. Barber
Case No. H036296 Steven D. Meier

Counsel for Plaintiff/Respondent: Chamberlin Keaster & Brockman
Federal Insurance Co. and Utica Kirk C. Chamberlin
Mutual Insurance Co. Elizabeth M. Brockman
Case No. H036296

Counsel for Plaintiff/Cross- Duane Morris
defendant/Respondent: Paul J. Killion
Great American Insurance Company Dominica C. Anderson
Case No. H036296 Michael J. Dickman

Counsel for Plaintiff/Appellant: Duane Morris
Great American Insurance Co. Paul J. Killion
Case No. H036578 Dominica C. Anderson
Michael J. Dickman
Counsel for Defendant/Respondent: Barber Law Group
Nationwide Indemnity Co. Bryan M. Barber
Case No. H036578 Steven D. Meier

Counsel for Defendant/Respondent: Chamberlin Keaster & Brockman
Federal Insurance Co. and Kirk C. Chamberlin
Utica Mutual Insurance Co. Elizabeth M. Brockman
Case No. H036578

Federal Insurance Company et al. v. MBL, Inc.
H036296
Great American Insurance Company v. Federal Insurance Company et al.
H036578