Filed 5/22/15
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FOURTH APPELLATE DISTRICT
DIVISION TWO
CENTEX HOMES,
Plaintiff and Appellant, E060057
v. (Super.Ct.No. RIC1306704)
ST. PAUL FIRE AND MARINE OPINION
INSURANCE COMPANY et al.,
Defendants and Respondents.
APPEAL from the Superior Court of Riverside County. Richard J. Oberholzer,
Judge. (Retired Judge of the Kern Super. Ct. assigned by the Chief Justice pursuant to
art. VI, § 6 of the Cal. Const.) Affirmed.
Newmeyer & Dillon, Thomas F. Newmeyer, Joseph A. Ferrentino, Clayton T.
Tanaka and Christina K. Kazarian for Plaintiff and Appellant.
The Aguilar law Group, A. Eric Aguilera and Raymond E. Brown for Defendants
and Respondents.
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I
INTRODUCTION
This insurance coverage dispute arises from underlying construction defect
litigation in which Corona homeowners have sued the developer, plaintiff and appellant
Centex Homes (Centex), for work performed by Centex’s subcontractors. One of the
subcontractors, Oak Leaf Landscape, Inc. (Oak Leaf), is insured by defendants and
respondents, St. Paul Fire & Marine Insurance Company and St. Paul Mercury Insurance
Company (Travelers). Centex is named as an additional insured on the Travelers’s
policy.
Centex appeals from an order and judgment sustaining without leave to amend
defendants’ demurrer to the seventh and eighth causes of action of the original complaint
filed by Centex. The seventh and eight causes of action for declaratory relief are about
insurance coverage and Centex’s right to independent counsel pursuant to Civil Code
section 2860. We agree with the trial court’s ruling that the claims are neither “ripe” nor
“actual” and affirm the judgment.1
II
FACTUAL AND PROCEDURAL BACKGROUND
The facts alleged in the complaint are taken as true for purposes of a demurrer.
1
We deny the request for judicial notice filed April 18, 2014. (Evid. Code,
§§ 452 and 459; Cal. Rules of Court, rule 8.252.)
2
(Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) We do not “assume the truth of
contentions, deductions or conclusions of law.” (Aubry v. Tri-City Hospital Dist. (1992)
2 Cal.4th 962, 967.)
Centex alleges that it was a developer of single-family residences in Corona. In
May 2012, Centex was sued by Corona homeowners in Riverside County Superior Court
for construction defects. Centex tendered the defense to Travelers, which accepted the
defense subject to a reservation of rights, including the right to choose defense counsel.
The Riverside litigation was stayed pending the Corona plaintiffs’ compliance with the
prelitigation procedures of the Right to Repair Act, Civil Code section 895 et seq. In
April 2013, the Corona plaintiffs served Centex with a notice of violations.
A. The Complaint
In June 2013, Centex filed the present action against 57 subcontractors, alleging
six causes of action for breach of contract to indemnify, defend, and obtain insurance, for
equitable indemnity, and for contribution and repayment. The complaint specifically
alleges that Centex “has incurred, is incurring, and will incur defense fees and costs” to
defend the Corona plaintiffs’ claims, all of which are recoverable through defense and
indemnity provisions in its agreements with its subcontractors and through various
insurers who named Centex as an additional insured under general liability policies
issued to the subcontractors.
The seventh and eighth causes of action are for declaratory relief against
Travelers. In the seventh cause of action, Centex alleges that the Corona homeowners are
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suing for construction defects caused by subcontractors who were insured by Travelers
and that Centex is a named additional insured. Consequently, Centex asserts Travelers is
obligated to defend and indemnify Centex against the Corona homeowners’ claims and
Travelers breached its duty to defend by requiring a reservation of rights, seeking to
obtain full reimbursement from Centex. Centex articulates the dispute and controversy
with Travelers as follows: “. . . allocation . . . needs to be made . . . regarding the costs
and fees associated with Centex Homes’ defense in the Underlying Action. . . . [¶]
Declaratory judgment is both proper and necessary, so that the respective rights, duties,
and obligations of the Insurer Defendants, Centex Homes, and Subcontractor Defendants
as to the allocation of Centex’s defense fees and costs related to/arising from the
Underlying Action may be determined.”
In the eighth cause of action, Centex alleges that Travelers breached its duty to
provide Centex “with a full, complete, immediate, and conflict free defense,” causing
Centex to incur defense costs. Centex further alleges that, by defending Centex under a
reservation of rights and appointing its own “panel defense counsel,” Travelers has
created a conflict of interest with Centex, triggering the right to independent counsel. In
particular, Centex contends Travelers is trying to limit the scope of its coverage to the
work of its named insured, Oak Leaf. Furthermore, Travelers denies there is any covered
“occurrence” or “property damage” under its policy. Centex argues Travelers is also
competing with Centex by seeking recovery or reimbursement from other subcontractors
and forcing Centex to share counsel with the subcontractors, while disadvantageously
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controlling and manipulating Centex’s defense, particularly the use of experts. For those
reasons, Centex alleges it has an immediate need for independent counsel.
B. The Demurrer
In its demurrer, Travelers argued that Centex had not alleged any specific facts to
demonstrate Travelers is manipulating the defense, thus entitling Centex to independent
counsel. Furthermore, the allocation of defense costs and fees is premature because the
amount of fees, the parties involved, and the relevant facts are still unknown. Centex, of
course, adopted a contrary position. The trial court found that the seventh cause of action
“is not ripe and therefore no cause of action is stated.” As to the eighth cause of action,
the court found “no actual present conflict of interest requiring independent counsel.”
III
DISCUSSION
Centex argues that, to the extent Travelers controls the defense of both the
subcontractors and Centex, Travelers can manipulate the litigation against Centex’s
interests, creating an ethical conflict requiring independent counsel: “There is a large
block of authority recognizing what also seems relatively obvious: when an insured is
obligated to provide defenses for two or more insureds with adverse interests, there is a
sufficient conflict of interest that the insurer must provide independent counsel for each
insured at its own expense.” (14 Couch on Insurance (3d ed. 2014) § 202:24.)
Additionally, Centex claims that, when Travelers seeks reimbursement of defense fees,
its right to reimbursement and the issue of allocation must be resolved as part of the
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action against the subcontractors. Therefore, Centex maintains the trial court erred in
sustaining the demurrer and finding that Centex could not amend its complaint to state a
cause of action against Travelers.
A. Standard of Review
The appellate court conducts an independent review of the trial court sustaining a
demurrer. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415; Hernandez v.
City of Pomona (1996) 49 Cal.App.4th 1492, 1497.) All material facts are admitted as
true and the complaint is given a reasonable interpretation, reading it as a whole. (Blank
v. Kirwan, supra, 39 Cal.3d at p. 318.) If the complaint, as liberally construed, can state
a cause of action under any legal theory, it survives demurrer. (Hernandez, at p. 1497.)
The denial of leave to amend is reviewed under an abuse of discretion standard. (Id. at
pp. 1497-1498.) If there is a reasonable possibility that the complaint can be cured by
amendment, a trial court abuses its discretion in refusing to allow the amendment.
(Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.)
B. The Seventh Cause of Action
A cause of action for declaratory relief may adjudicate future rights and liability
between parties who have a relationship, either contractual or otherwise. (See Cardellini
v. Casey (1986) 181 Cal.App.3d 389; Bachis v. State Farm Mutual Auto Ins. Co. (1968)
265 Cal.App.2d 722.) The pleader need not establish it is also entitled to a favorable
judgment. (See Ludgate Ins. Co. v. Lockheed Martin Corp. (2000) 82 Cal.App.4th 592,
606.) To assert a cause of action for declaratory relief, Code of Civil Procedure section
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1060 requires that there be an “actual controversy relating to the legal rights and duties of
the respective parties,” not an abstract or academic dispute. (Connerly v.
Schwarzenegger (2007) 146 Cal.App.4th 739, 746-747.) “However, the courts will
nevertheless evaluate in the context of a demurrer whether the factual allegations of the
complaint for declaratory relief reveal that an actual controversy exists between the
parties. (Alameda County Land Use Assn. v. City of Hayward (1995) 38 Cal.App.4th
1716, 1721-1722.) ‘Sustaining a demurrer when the complaint reveals such a
controversy constitutes error. [Citations.] [¶] Before a controversy is ripe for
adjudication it “‘must be definite and concrete, touching the legal relations of parties
having adverse legal interests. [Citation.] It must be a real and substantial controversy
admitting of specific relief through a decree of a conclusive character, as distinguished
from an opinion advising what the law would be upon a hypothetical state of facts.’”
[Citations.]’ (Id. at p. 1722.)” (Otay Land Co. v. Royal Indemnity Co. (2008) 169
Cal.App.4th 556, 562.)
In Buss v. Superior Court (1997) 16 Cal.4th 35, the California Supreme Court
ruled that an insurer’s right to reimbursement is limited: “[F]or what specific defense
costs may the insurer obtain reimbursement from the insured? [¶] The answer is:
Defense costs that can be allocated solely to the claims that are not even potentially
covered.” (Id. at p. 53.) Buss also held the insurer has the burden of proving that the
defense costs can be allocated to claims that are not even potentially covered. (Ibid.)
Based on Buss, Centex argues that how much, if any, reimbursement is ultimately
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ordered is irrelevant to the question of whether a cause of action for declaratory relief can
be stated in the complaint. Therefore, the controversy between Travelers and Centex is
“actual” and needs to be decided by the court.
Centex identifies the following as disputed: (1) whether Travelers has the right to
be reimbursed by Centex for all defense fees that relate to the work of subcontractors it
did not insure; (2) whether Travelers has the right to be reimbursed for defense fees in
proportion to the ultimate amount it pays for indemnity for the subcontractors it insures;
and (3) whether Travelers has the right to reimbursement for all defense fees not related
to property damage arising from the work of its named insured subcontractor, Oak Leaf.
When read carefully, Centex’s claims are all anticipatory, not actual or ripe. It is
still unknown whether Oak Leaf’s work caused the property damage claimed by the
Corona homeowners. The proportionate liability of all the subcontractors has also not
been adjudicated. The amount of defense fees has not been established in the ongoing
underlying litigation. Quite simply, there are not enough facts about liability, damages,
or the cost of defense for the trial court to offer any declaration as to the rights and
obligations of the parties. (Wilson v. Transit Authority (1962) 199 Cal.App.2d 716, 722;
State of California v. Pacific Indemnity Co. (1998) 63 Cal.App.4th 1535, 1549; County of
San Diego v. State of California (2008) 164 Cal.App.4th 580, 588.) Therefore, the trial
court correctly determined the seventh cause of action is not “ripe”—although Centex
may certainly be able to renew its claims at a later date.
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C. The Eighth Cause of Action
Centex also argues an actual and present controversy exists about whether a
conflict of interest with Travelers requires independent counsel. The trial court
concluded that no such conflict existed yet at the pleading stage. Centex asserts, in so
ruling, the court disregarded California’s strong public policy protecting the right to
independent counsel.
Civil Code section 2860 (Section 2860) and California case law provide Centex,
as an insured, with the right to obtain independent counsel paid for by Travelers, as
Centex’s insurer, whenever their competing interests create an ethical conflict for
counsel. “[T]he insurer is required to provide its insured with independent counsel of the
insured’s choosing ‘who represents the insured, not the insurer.”’ (Long v. Century
Indemnity Co. (2008) 163 Cal.App.4th 1460, 1469.) Where an insurer asserts a
reimbursement claim for defense costs, “[t]he potential for conflict requires a careful
analysis of the parties’ respective interests to determine whether they can be reconciled
. . . or whether an actual conflict of interest precludes insurer-appointed defense counsel
from presenting a quality defense for the insured.” (Dynamic Concepts, Inc. v. Truck Ins.
Exchange (1998) 61 Cal.App.4th 999, 1007-1008; Federal Ins. Co. v. MBL, Inc. (2013)
219 Cal.App.4th 29, 42.) An attorney’s duty of loyalty to the client is so strong that it
“forbids any act that would interfere with the dedication of an attorney’s ‘entire energies
to [the] client’s interests.’” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 289, quoting
Anderson v. Eaton (1930) 211 Cal. 113, 116.)
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A reservation of rights by an insurer does not necessarily constitute a conflict of
interest requiring the insurer to provide independent counsel. The conflict must be
“significant, not merely theoretical, actual, not merely potential.” (Dynamic Concepts,
Inc. v. Truck Ins. Exchange, supra, 61 Cal.App.4th at p. 1007; Gafcon, Inc. v. Ponsor &
Associates (2002) 98 Cal.App.4th 1388, 1421; James 3 Corp. v. Truck Ins. Exchange
(2001) 91 Cal.App.4th 1093, 1101-1102; see Federal Ins. Co. v. MBL, Inc., supra, 219
Cal.App.4th at p. 42.) Nor is a general reservation of rights sufficient to trigger the right
to independent counsel: “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.” (Federal Ins.
Co., at pp. 44, 47.) Independent counsel may be required, 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.” (Civ.
Code, § 2860, subd. (b); see Long v. Century Indemnity Co., supra, 163 Cal.App.4th at
1472.) In San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162
Cal.App.3d 358, the court held, in such cases, the “insurer may be subject to substantial
temptation to shape its defense so as to place the risk of loss entirely upon the insured”
(id. at p. 368) and “[n]o matter how honest the intentions, counsel cannot discharge
inconsistent duties.” (Id. at p. 366.)
Centex alleges the interests of Centex, Travelers, and Oak Leaf are irreconcilably
adverse to each other. Centex specifically alleges that Travelers will control Centex’s
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defense in the underlying action to prejudice the present coverage dispute between
Centex and itself. The express conflicts of interests include Travelers instructing the
defense counsel: (1) to sue Oak Leaf, the subcontractor insured by Travelers; (2) to
retain and direct the work of experts; (3) to evaluate the contracts between Centex and
Oak Leaf to determine what Oak Leaf should contribute towards any settlement with the
Corona homeowners; (4) to allocate Centex’s defense fees and costs among the
subcontractors; (5) to negotiate settlements between Centex and the subcontractors; and
(6) to ascertain whether the work performed by Oak Leaf caused property damage. In
other words, Centex asserts that, to the extent panel counsel can challenge the liability of
Oak Leaf, it creates a direct conflict of interest by enhancing Travelers’s reimbursement
claims against Centex. However, these anticipated circumstances have not occurred yet
in the underlying litigation.
We conclude the facts alleged by Centex do not support its claim of a conflict of
interest with Travelers. An insurer has the right to control a defense. (James 3 Corp. v.
Truck Ins. Exchange, supra, 91 Cal.App.4th at pp. 1102-1103.) Centex argues Travelers
will manipulate experts to its advantage without giving any explanation about how that
will be accomplished. Similarly, Centex offers a host of allegations about how Travelers
will control the litigation without describing how this is occurring in the underlying
construction defect litigation. Centex is alleging conclusions without substance, not
facts. As Gertrude Stein famously said about Oakland, there is no there there.
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In Blanchard v. State Farm & Casualty Co. (1991) 2 Cal.App.4th 345, the
appellate court stated that that insurance counsel had no incentive to attach liability to the
insured and that it was in the interest of both the insurer and the insured to minimize the
insured’s liability. (Id. at p. 350.) Here, Travelers and Centex’s interests may be slightly
different because Travelers’s liability is limited to Oak Leaf’s work and Travelers claims
a right to reimbursement against Centex for all defense fees unrelated to property damage
caused by Oak Leaf. Centex asserts that, unlike counsel in Blanchard, Travelers’s panel
counsel has an incentive to control the defense so as to increase Travelers’s
reimbursement claim—a conflict which requires the appointment of independent counsel.
We disagree because we do not perceive the interests of Centex and Travelers to be
adverse. Depending on the eventual degree of liability among the subcontractors,
Travelers may be liable for damages but Centex will receive coverage from Travelers or
the other insurers covering the other subcontractors. Centex’s liability is derivative and
Travelers has the same interest in defending the underlying claim. These circumstances
do not cause a conflict requiring independent counsel. (Foremost Ins. Co. v. Wilks (1988)
206 Cal.App.3d 251, 261; Blanchard, at p. 350.) The demurrer to the eighth cause of
action was properly sustained—although these claims may also be renewed if they
become actual and present.
D. Leave to Amend
Public policy dictates that leave to amend be liberally granted. If there is any
reasonable possibility that the plaintiff can state a cause of action, it is error to sustain a
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demurrer without leave to amend. (Youngman v. Nevada Irrigation Dist. (1969) 70
Cal.2d 240, 245; Sheehan v. San Francisco 49ers, Ltd. (2009) 45 Cal.4th 992, 998.) As
an alternative, Centex requests a reversal to allow Centex the opportunity to amend its
complaint.
Unfortunately, Centex did not request leave to amend from the trial court. On
appeal, it does not sufficiently propose how the seventh and eighth causes of action could
be amended to state a claim based on an actual, present, existing, or ripe controversy. For
that reason, we reject this argument. (Schifando v. City of Los Angeles, supra, 31 Cal.4th
at p. 1081.)
IV
DISPOSITION
We affirm the judgment and order Travelers, the prevailing party, to recover its
costs on appeal.
CERTIFIED FOR PUBLICATION
CODRINGTON
J.
We concur:
HOLLENHORST
Acting P. J.
MILLER
J.
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