O'Kun v. State Farm General Ins. Co.
Filed 1/29/07 O'Kun v. State Farm General Ins. Co. CA2/6
NOT
TO BE PUBLISHED IN THE OFFICIAL REPORTS
California
Rules of Court, rule 977(a), prohibits courts and parties from citing or
relying on opinions not certified for publication or ordered published, except
as specified by rule 977(b). This opinion has not been certified for
publication or ordered published for purposes of rule 977.
IN
THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND
APPELLATE DISTRICT
DIVISION
SIX
LAN O'KUN,
Cross-complainant and
v.
STATE FARM GENERAL INSURANCE
Cross-Defendant and
| 2d (Super. (Ventura
|
A lawsuit was
filed against appellant Lan O'Kun, alleging that he vandalized parking spaces
at a condominium complex where he resided. O'Kun tendered his defense to his
insurer, respondent State Farm General Insurance Company, which it accepted. A
coverage dispute arose between State Farm and O'Kun. State Farm gave O'Kun the
election of 1) waiving any conflict and accepting retained counsel from State
Farm at no cost, or 2) retaining independent
counsel which State Farm would compensate at insurance defense rates
pursuant to Civil Code section 2860.
We consider
whether a conflict occurred sufficient to trigger application of Civil Code
section 2860, the propriety of State Farm's conduct in defending O'Kun, and his
entitlement to costs incurred in defending the underlying action. We modify the
judgment but otherwise affirm.
Underlying Action
O'Kun
owned a condominium in the Malibu Bay Club, located on Pacific Coast Highway in
Ventura County. Malibu Beach Way Parking, Inc. owned 36 parking spaces and
had installed barriers to prevent Malibu Bay Club owners from parking in its
spaces.
On August
22, 2001, Malibu Beach Way Parking, Inc. and an individual, Montgomery Knox,
filed a damage action against Lan O'Kun and numerous other defendants
("underlying action"), claiming they had interfered with Malibu Beach
Way Parking, Inc.'s ownership of the spaces. (Malibu Beach Way Parking,
Inc. v. Malibu Bay Club (Super. Ct. Ventura
County, 2001, No. CIV205682).) Among other things, Malibu Beach Way Parking,
Inc. alleged that some of the parking barriers had been vandalized.
O'Kun was
insured by State Farm under a homeowner's policy and personal liability
umbrella policy. The policy excluded from coverage intentional or willful property damage caused by the insured.
After the underlying action was initiated, O'Kun retained Hill, Farrer and
Burrill (HF&B) to defend him. He also submitted a tender of defense to
State Farm, which it accepted subject to a reservation of rights.
Cumis
Decision and Section 2860
To place
the factual issues in context, we briefly address the decision in San Diego
Navy Federal Credit Union v. Cumis Ins. Society, Inc. (Cumis) (1984) 162
Cal.App.3d 358, codified by Civil Code section 2860.[1]
The Cumis
court addressed the situation in which the insurer has a duty to defend its
insured and the possibility of a coverage dispute arises between them. Under such
circumstances, counsel retained by the insurer may be unable to effectively
represent both insurer and insured. If this occurs, the insurer must give the
insured the election of 1) waiving any conflict and accepting retained counsel
from the insurer at no cost; or 2) retaining independent counsel which the
insurer will compensate at insurance defense rates. (§ 2860, subd. (a);[2] Cumis, supra, 162
Cal.App.3d at p. 375.)
Section
2860, enacted in response to Cumis, places limitations on the amount of
attorney's fees that insurers are required to pay to independent counsel. (§ 2860,
subd. (c);[3] James
3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1100.)
Defense
of Underlying Action
After State
Farm accepted O'Kun's tender of defense, it retained counsel, Michael B.
Geibel, to represent O'Kun. On October 1, 2001, Geibel notified HF&B by
letter that State Farm's reservation of rights included its right to dispute
coverage under the policy. Geibel indicated that this created a potential conflict
under section 2860, entitling O'Kun to select his own counsel. Geibel informed
O'Kun that, should he elect Geibel as defense counsel, he would be required to
sign a "waiver of Civil Code Section 2860 form."
O'Kun refused
to sign the waiver and submitted a bill from HF&B to State Farm for payment.
State Farm refused to pay the bill unless O'Kun selected HF&B as his
independent counsel. O'Kun refused. As a result, State Farm filed a declaratory
relief action against O'Kun, requesting a judicial declaration that it
had no obligation to indemnify or defend him and would be permitted to withdraw
from the underlying action. O'Kun filed a cross-complaint for money damages. The
trial court stayed the declaratory relief action pending resolution of the
underlying action.
The
exchange of letters among counsel continued. On December 5, 2001, State Farm's counsel notified O'Kun by letter that it would accept HF&B as Cumis counsel
and would pay a rate of $135 per hour. O'Kun again refused to waive his right
to independent counsel, and State Farm again refused to provide retained
counsel in the absence of a written waiver.
On June 14, 2002, one month before trial on the underlying action, State Farm's counsel
notified HF&B by letter that State Farm would provide O'Kun "with a
full and complete defense to this lawsuit." Counsel for State Farm indicated
that Geibel would associate into the case and State Farm would pay HF&B at Cumis
counsel rates. State Farm subsequently settled the underlying action,
paying $6,000 on O'Kun's behalf to obtain a release and dismissal.
Declaratory
Relief Action
After settling
the underlying action, State Farm dismissed its complaint against O'Kun and
sent HF&B a draft in the amount of $9,900.05 in fees and costs for O'Kun's
defense. This left only the adjudication of O'Kun's cross-complaint.
The
operative pleading is O'Kun's second amended cross-complaint for money damages.
O'Kun asserted causes of action for 1) declaratory relief; 2) breach of
implied covenant of good faith and fair dealing; 3) breach of contract; and 4)
unfair business practices under Business and Profession Code, section 17200.
He alleged that State Farm acted in bad faith and breached its contract of
insurance due to its delay in providing him with a defense, its delay in
reimbursing him for attorneys fees, and by requiring him to sign a waiver under
section 2860. He also claimed that section 2860 was inapplicable.
On December 27, 2002, the trial court sustained State Farm's demurrer with leave to amend as
to the fourth cause of action for unfair
business practices and postponed ruling on the remaining causes of action.
1) State Farm's Motion for Summary Judgment
State Farm moved
for summary judgment/summary adjudication of issues on the second amended
cross-complaint. On October 13, 2003, the trial court (Henry J. Walsh) denied State
Farm's motion on procedural grounds.
The trial
court noted, however, that the issue of State Farm's compliance with section
2860 was directly related to the first cause of action for declaratory relief.
It stated that this cause of action was "potentially dispositive of the
entire case. As such, and on the court's own motion, this issue and cause of
action is severed from the remaining issues and causes of action." The trial
court set the matter for a bench trial. The remaining causes of action were
O'Kun's claims for insurance bad faith, breach of contract, and unfair business
practices.
In his
trial brief, O'Kun argued that the trial court could not properly sever the
cause of action for declaratory relief and require the parties to try it to the
court. O'Kun contended that the court's order was a denial of his right to a
jury trial because he sought monetary damages and there existed substantial
issues of material fact on the breach of contract claim.
2)
Trial Court's Ruling
Judge Walsh
issued a written decision following the bench trial, addressing in
part State Farm's obligation to pay attorneys fees to HF&B. The trial court
applied section 2860 and ruled that a carrier may impose reduced fees on
independent counsel without being required to associate retained counsel. It
concluded that neither section 2860 nor authority interpreting the statute requires
a carrier to provide two sets of attorneys to its insured. The dispute
regarding fees owed by State Farm to HF&B was subject to the statutorily
mandated arbitration process.
Although
previously severed from the first cause of action, the trial court also addressed
the second cause of action for breach of the implied covenant of good faith and
fair dealing. It found that State Farm did not act in bad faith by failing to
retain counsel for O'Kun in the underlying action. It pointed out that O'Kun
had hired independent counsel, and thus had capable and experienced legal
representation from the outset of the underlying action. There was never a
question that O'Kun was without an attorney, that his defense was handled
improperly, or that it was tainted by an attorney with divided loyalties. O'Kun
does not contend that he suffered legal detriment due to State Farm's lack of
participation in the underlying action. The court determined that State Farm
was the prevailing party and was entitled to its statutory costs of suit.
The trial court
adopted a proposed order submitted by State Farm declaring that 1) section 2860
applied to the declaratory relief cause of action; 2) State Farm's obligation
to pay for O'Kun's counsel was limited by section 2860, subdivision (c); 3) any
dispute regarding attorney's fees paid by State Farm was subject to binding
arbitration; 4) State Farm did not act in bad faith by failing to retain
counsel for O'Kun; and 5) an insurer is not required to provide retained counsel
before limiting the rate for attorneys fees incurred by independent counsel.
Arbitration
of Fee Dispute
O'Kun refused
to arbitrate and State Farm filed a motion to compel. O'Kun filed opposition,
claiming that the dispute did not involve reimbursement for the amount of Cumis
counsel fees he incurred (and was therefore not governed by section 2860). Rather,
the issue was that he was entitled to damages as a result of "being
forced" to hire independent counsel. Judge Walsh granted the motion to
compel, appointed an arbitrator and set an arbitration completion date.
The parties
entered into binding arbitration. The arbitrator determined that section 2860
applied, and the issues to be decided were the appropriate billing rate for
HF&B and the reasonableness of its time spent in defending O'Kun.[4] O'Kun argued that the
item of costs could not properly be the subject of a section 2860 arbitration,
so the parties did not address that matter.
The
arbitrator fixed HF&B's hourly rate at $145 and awarded O'Kun $11,972.45 in
attorneys fees. The trial court confirmed the award. State Farm satisfied the
judgment but HF&B refused to accept the payment, concerned that it might
jeopardize O'Kun's right to appeal.
Trial
on Defense Costs in the Underlying Action
The
remaining issue of O'Kun's claim for costs came before Judge Steven Hintz. He granted
State Farm's oral motion in limine, ruling that O'Kun was precluded from
offering evidence of any damages except his unpaid defense costs in the
underlying action. The parties agreed to waive a jury and tried the sole
damage issue to the court.
Judge Hintz
took the matter under submission and issued a judgment, filed July 28, 2005. He adopted Judge Walsh's ruling on the first and second causes of action
for declaratory relief and bad faith. He recounted
that O'Kun had obtained a confirmed arbitration award and State Farm had
satisfied the judgment.[5]
Judge Hintz
indicated that, in the matter before him, O'Kun had requested $3,111.72 in expenses,
but was entitled to only $606.83. In the body of the ruling, he identified this
figure as "expenses." However, he rendered judgment "in favor
of [O'Kun] and against [State Farm] on the third cause of action for breach of
contract in the sum of $606.83," causing it to appear that this amount was
awarded as contract damages. Judgment was rendered in favor of State Farm on the
remaining causes of action.
Judge
Hintz issued a second judgment, filed on August 30, 2005, combining the amount of the arbitration award and the defense costs owed to O'Kun. It read,
"All issues having been tried to the Court in various proceedings, and an
Arbitration Award having been confirmed: [¶] . . . [¶] That
Lan O'Kun shall have judgment in his favor and against State Farm General Insurance
Company in the sum of $12,579.34,[6] plus
costs pursuant to a cost bill in the sum of $_____." The dollar amount of
costs was left undetermined.
Postjudgment
Order Denying O'Kun's Costs
Both
parties filed a memorandum of costs. State Farm moved to tax O'Kun's costs on
the ground that he was not the prevailing party. O'Kun moved to strike State
Farm's cost bill, arguing that he was the prevailing party under Code of Civil
Procedure section 1032, subdivision (a)(4) because State Farm had dismissed the
complaint against him and he had obtained a monetary recovery when the trial
court confirmed his arbitration award.
Judge Hintz
took the matter under submission and, on November 12, 2005, issued a minute order denying O'Kun's motion to strike State Farm's cost bill. He granted
State Farm's motion to tax costs and declared it to be the prevailing party.
He ruled that O'Kun was not entitled to costs.
O'Kun appeals
Judge Hintz's July 28, 2005 judgment, adjudicating the causes of action in the
second amended cross-complaint and the August 30, 2005 judgment, awarding him
$12,579.34 in attorney's fees and unspecified costs. He also appeals Judge
Hintz's November 23, 2005 postjudgment order, denying his costs and declaring
State Farm to be the prevailing party.
DISCUSSION
O'Kun argues:
1) that he was denied the right to a jury trial; 2) the trial court erred in
its interpretation of section 2860; 3) the fee dispute was not amenable to
arbitration; 4) State Farm acted in bad faith and breached the contract of
insurance by failing to defend; and 5) the trial court erred by denying him
costs. O'Kun raises both factual and legal issues. We review factual findings
for an abuse of discretion; questions of law are subject to our independent
review. (City and County of San Francisco v. Cobra Solution, Inc. (2006)
38 Cal.4th 839, 848; People ex rel. Dept. of Corporations v. SpeeDee Oil
Change Systems, Inc. (1999) 20 Cal.4th 1135, 1143-1144.)
Right
to Jury Trial
Following
its denial of State Farm's motion for summary judgment, the trial court
indicated it would sever the first cause of action to determine State Farm's
"compliance" with section 2860. O'Kun claims that the trial court
erred by severing the first cause of action and requiring the parties to try
the matter to the court. He contends there were factual questions that needed
to be resolved before the court could address the applicability of section
2860.
O'Kun first
contends that the issue was whether section 2860 applied, not whether
State Farm complied with the statute. By using the term
"compliance," the trial court necessarily decided a factual issue--that
a conflict existed which would trigger the application of the statute. O'Kun asserts
that no conflict occurred because State Farm and O'Kun's interests were
aligned: both wanted to prove that no property damage occurred.
The
principle underlying Cumis and section 2860 is an attorney's ethical
duty to avoid the representation of clients with competing interests. (Golden
Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1396.) A
conflict requiring the appointment of independent counsel may arise when an
insurer reserves its rights on a coverage issue and the outcome of that issue
can be controlled by the insurer's retained counsel. (§ 2860, subd. (b); James
3 Corp. v. Truck Ins. Exchange, supra, 91 Cal.App.4th at p. 1101.)
"[T]he
existence of a conflict of interest should be identified early in the
proceedings so it can be treated effectively before prejudice has occurred to
either party." (Cumis, supra, 162 Cal.App.3d at p. 371, fn. 7.) An
insurer's reservation of rights may create a disqualifying conflict of interest,
requiring the insurer to pay independent counsel to represent the insured.
(§ 2860, subd. (b); Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998)
61 Cal.App.4th 999, 1006.)
The issue
to be addressed in the underlying action was whether O'Kun bore liability and,
if so, whether his conduct was negligent or willful. When this question arose,
the interests of O'Kun and State Farm diverged because it was unclear whether
the damage was a covered claim. Under these circumstances, State Farm was
obligated to offer O'Kun the choice of 1) waiving any conflict and accepting retained
counsel at no cost, or 2) obtaining independent counsel which State Farm would
compensate at insurance defense rates. (§ 2860, subds. (a)-(e).)
O'Kun
attempts to buttress his argument that no conflict arose by relying on a letter
from Geibel (retained counsel) to State Farm in which Geibel stated that he had
"made full disclosure [regarding] any potential conflicts. I personally
do not see a conflict by our firm [in representing O'Kun]." This letter
does not support O'Kun's position. It relates to any conflict Geibel might
have in his representation of O'Kun. It does not relate to a conflict concerning
coverage that could have arisen between O'Kun and State Farm, necessitating
the appointment of independent counsel.
Moreover,
O'Kun was not entitled to have a jury determine whether a conflict had arisen
under section 2860. "In the absence of a dispute over some underlying
fact, the existence of a conflict is a question of law for the trial judge to
decide, not a jury question." (Blanchard v. State Farm Fire &
Casualty Co. (1991) 2 Cal.App.4th 345, 350.)
Section
2860
O'Kun
claims that the statute's fee limitation provisions do not apply unless the
insured is represented by independent counsel as well as retained counsel
appointed by the insurer. He contends that, because he was not represented by
two attorneys, State Farm could not limit the fees paid to HF&B.
In reaching
this conclusion, O'Kun quotes the statutory language which states, "Where
the insured selects independent counsel pursuant to the provisions of this
section, both the counsel provided by the insurer and independent counsel
selected by the insured shall be allowed to participate in all aspects
of the litigation." (§ 2860, subd. (f), italics added.)
To further
his argument, O'Kun relies on an unreported federal case in which the court
interpreted Cumis and section 2860 as requiring the presence of two
attorneys. (National Union Fire Ins. Co. v. Hilton Hotels Corp.
(N.D.Cal., May 6, 1991, No. C-90-2189MHP) 1991 WL 405182.) "Cumis
envisions a two counsel situation with both insurer's and insured's counsel
participating in the underlying action." (Id. at p.*3.)
A thorough reading of the case reflects that the National Union court
concluded that Cumis and section 2860 were inapplicable to its facts, because
the insured before it was represented by only one attorney.
O'Kun
acknowledges that National Union is an unreported case, but claims that
"it is the only case which deals directly with the issue of whether 2860
applies to a single counsel situation, and is exactly on point." We
reject this argument without further analysis. Appellant's argument finds no
support in the statute. Subdivision (f) permits the insurer to provide both retained
and independent counsel, but there is no requirement that it do both. O'Kun
has offered no binding authority interpreting 2860 or the Cumis decision
in the manner he suggests.
Binding
Arbitration
Under
section 2860, subdivision (c), "The insurer's obligation to pay fees to
the independent counsel selected by the insured is limited to the rates which
are actually paid by the insurer to attorneys retained by it in the ordinary
course of business in the defense of similar actions in the community where the
claim arose or is being defended. . . . Any dispute
concerning attorney's fees not resolved by these methods shall be resolved by
final and binding arbitration by a single neutral arbitrator selected by the
parties to the dispute."
O'Kun
contends that the matter was erroneously ordered into arbitration because the
trial court misunderstood the nature of the dispute. He claims that the issue
did not concern the payment of attorneys fees under section 2860, subdivision
(c), but was instead a claim for damages for breach of contract resulting from
State Farm's failure to immediately provide a defense.
The plain
language of the statute provides that any attorneys fee disputes must be resolved
by final and binding arbitration. (§ 2860, subd. (c).) Because the court
found that section 2860 applied, it properly ordered the parties to arbitrate.
There is no indication that the trial court "misunderstood" O'Kun's
argument.
Breach
of Contract and Breach of Implied Covenant
of
Good Faith and Fair Dealing
Judge
Hintz's ruling on State Farm's motion in limine restricted evidence of defense costs
to those O'Kun incurred in defending the underlying action. O'Kun claims that
the ruling effectively deprived him of the opportunity to litigate the issues
of bad faith and breach of contract.
We reject
this argument because Judge Walsh decided against O'Kun on the issue of bad
faith. In reaching this decision, he made the implied finding that State Farm did
not breach the contract of insurance. Judge Walsh noted that State Farm had provided
a defense, settled the case and reimbursed O'Kun for his attorneys fees. O'Kun
received a complete defense and full indemnity in the underlying action, the
two benefits afforded by his coverage.
O'Kun's
Award of $606.83 in Defense Costs
We briefly reiterate
the procedural history leading up to this dispute. After hearing the parties'
arguments on O'Kun's entitlement to defense costs in the underlying action, Judge
Hintz rendered a judgment on the second amended cross-complaint, in which he
awarded O'Kun the sum of $606.83. In the body of the judgment, he identified
this sum as expenses. In the final paragraph of the judgment he indicated that
$606.83 was awarded on the breach of contract claim. It is clear from the
record that Judge Hintz intended this amount to be awarded as costs.[7]
Several
days later, Judge Hintz issued a separate judgment, awarding O'Kun $12,579.34 on
the arbitration award. This sum combined the $11,972.45 arbitration award and
the $606.83 awarded on the second amended cross-complaint. In the same
judgment, he awarded "costs pursuant to a cost bill in the sum of $____."
It appears that he issued this second judgment to finally adjudicate all
aspects of the case.
After the
second judgment was entered, both parties filed a cost bill and moved to tax or
strike the other's costs. Each argued that that it was the prevailing party. Judge
Hintz took the matter under submission and issued a minute order. He denied
O'Kun's motion to strike State Farm's cost bill and ruled that O'Kun was not
entitled to costs. He granted State Farm's motion to tax costs and declared it
to be the prevailing party.
The second
judgment was entirely superfluous and could not be the basis for a cost award. Reference
to the arbitration award was unnecessary because it had been confirmed by the
trial court eight months earlier.[8]
Nor was there a statutory or contractual basis for O'Kun to recover the costs
of arbitration. (Code Civ. Proc., § 1284.2.) The award of $606.83 had previously
been awarded in the second amended cross-complaint.
DISPOSITION
We affirm
the trial court's July 8, 2005 judgment on the second amended cross-complaint,
but strike that portion of the judgment finding that State Farm breached the
contract of insurance.
The trial
court is directed to strike the final paragraph of the judgment and replace it
with the following: "It is hereby ordered, adjudged and decreed that
judgment shall be entered in favor of cross-defendant State Farm General
Insurance Company and against Lan O'Kun on all causes of action in the second
amended cross-complaint. O'Kun is awarded $606.83 in defense costs incurred in
the underlying action."
The August
30, 2005, judgment addressing the arbitration award and costs is vacated as
moot, for the reasons cited in the opinion. We affirm the November 23, 2005
postjudgment order denying O'Kun costs. As modified, the judgment is affirmed.
Costs on appeal are awarded
to State Farm.
NOT TO
BE PUBLISHED.
COFFEE,
J.
We concur:
GILBERT,
P.J.
YEGAN, J.
Henry
J. Walsh, Judge
Steven
Hintz, Judge
Superior
Court County of Ventura
______________________________
Hill,
Farrer & Burrill, Neil D. Martin and G. Cresswell Templeton III for Cross-complainantt
and Appellant, Lan O'Kun.
Horvitz
& Levy, Peter Abrahams, Mitchell C. Tilner; Crandall, Wade & Lowe and
Ilse Dipinto for Cross-defendant and Respondent, State Farm General Insurance
Company.
Publication courtesy of California
pro bono legal advice.
Analysis and review provided by La Mesa Property line Lawyers.
[2] "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 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." (§ 2860, subd. (a).)
[3] ". . . The
insurer's obligation to pay fees to the independent counsel selected by the
insured is limited to the rates which are actually paid by the insurer to
attorneys retained by it in the ordinary course of business in the defense of
similar actions in the community where the claim arose or is being
defended. . . . " (§ 2860, subd. (c).)
[4] The
arbitrator did not specify the numbers of hours HF&B had expended in
O'Kun's defense, but noted that while HF&B presented evidence of the hours
billed, "State Farm did not present any evidence as to the
unreasonableness of the time spent by [HF&B]."
[5] In a minute order issued
prior to Judge Hintz's written ruling, he concluded that section 2860 was
inapplicable. However, this misstatement was corrected in his written ruling.
[6] The figure of $12,579.34
represented the $11,972.45 arbitration award plus the $606.83 awarded in the
bench trial. There is a minor miscalculation, but neither party disputes it,
so we construe the cost award to be $606.83.
[7] Judge
Hintz indicated in his minute order the sole matter before him was the amount
of costs due O'Kun for his defense of the underlying action. He denied O'Kun
$3,111.72 in expenses and awarded him "[t]he remaining costs and fees of
$606.83 . . . ."
[8] The
record does not contain a copy of the judgment confirming the arbitration
award, but the reporter's transcript indicates that the award was confirmed by
Judge Walsh on December 6, 2004. O'Kun does not appeal the judgment of
confirmation.
