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(Article from Insurance Law Alert, February 2015)

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A California federal district court ruled that an insurer did not breach its duty to defend by failing to provide an immediate and complete defense. Travelers Prop. Cas. Co. of Am. v. Kaufman & Broad Monterey Bay, Inc., 2015 WL 581509 (N.D. Cal. Feb. 11, 2015).

Travelers agreed to defend certain additional insured parties (the “Defendants”) in an underlying product liability suit subject to a reservation of rights. The Defendants opposed Travelers’ choice of counsel on the basis of a purported conflict of interest. Travelers filed suit arguing that Defendants’ refusal to accept appointed counsel constituted a breach of the policy’s cooperation clause and the implied covenant of good faith and fair dealing. Defendants counterclaimed that Travelers failed to provide an immediate and complete defense. The court disagreed and ruled in Travelers’ favor.

Travelers received notice of tender on July 6, 2012. Two weeks later, Travelers acknowledged tender and requested certain documentation. Defendants did not respond. Approximately three months later, Travelers again contacted Defendants, who thereafter immediately forwarded the requested materials. Within one week of receiving the documentation, Travelers agreed to provide a defense. The court held that this factual record established that Travelers fulfilled its obligation to provide an immediate defense. The court rejected Defendants’ contention that Travelers was obligated to provide a defense immediately upon tender, finding that “the duty to defend did not arise until [Travelers] was provided with all the information necessary to determine the existence of coverage.”

The court explained that a reservation of rights that includes “extensive limitations” of the insurer’s defense obligations does not, without more, constitute a failure to provide a complete defense. The court further ruled that Travelers did not violate its defense obligations by settling the underlying action without Defendants’ consent (and thereafter withdrawing its defense of the action). The court explained that a defending insurer has the right to control the defense and settlement of the underlying action so long as the insurer does not further its own interests at the policyholder’s expense. Here, Defendants failed to show that the settlement and subsequent withdrawal resulted in increased fees or costs above what they would have otherwise incurred. In particular, the court held that Travelers was entitled to limit its settlement to claims arising out of the named insured’s work because the policy’s additional insured clause provided coverage only for claims arising out of the named insured’s work.