Insurer's Entitled to Reimbursement Upon a Finding of Rescission Must Still Prove That its Provision of Possibility "Conflicted Defense" Through "Appointed Counsel" Created Value so as to Entitle it for Reimbursement for Such Counsel's Fee Expense
Century Surety Co. v. Robin Singh Educational Services, Inc., Case No. CV-06-8066-CAS (Ex) (Central Dist. (Cal. Western Div.) April 14, 2008)
Judge Snyder found rescission appropriate as against Testmasters for alleged failure to properly answer a policy application question requiring disclosure of claims within the proceeding five years. Nevertheless, even though conceding that such a policy was eviscerated ab initio. The court challenged whether the insurer, Century Surety, was capable of receiving reimbursement for monies expended through appointed counsel, where an issue was raised at to whether the insured was entitled to independent counsel as it had sought. If so there may not be any value created by appointed counsel’s legal services, even assuming the services were otherwise reasonable and the amounts charged appropriate.
Finding a fact issue posed, the court sent this issue to trial. The court observed that LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co., 156 Cal. App. 4th 1259, 1266 (2007) provided that:
The consequence of rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration has been received. . . The policy would be ‘extinguished’ ab initio, as though it had never existed.” Id. at 184. “A policy void ab initio . . . cannot be breached.” Looking at the issue of rescission however, the court noted that: “‘[i]n a rescission action, the complaining party may receive restitution for all benefits conferred on the other party, restoring both parties to economic status quo ante.’ Ogden Martin Sys., Inc. v. San Bernardino County, 932 F.2d 1284, 1287 (9th Cir. 1991).”
The court stated “Century is entitled to reimbursement for monies
paid on TestMasters’ behalf only to the extent that these monies conferred a benefit
upon TestMasters.” Id. at 37:18-20. Under California law, appointed counsel represents both the insurer and the insured but independent counsel only the insured. Rockwell Internat. Corp. v. Superior Court, 26 Cal.App.4th 1255, 1264, 32 Cal.Rptr.2d 153, 158 (Cal.App.(2.Dist.) 1994). See also Employers Ins. of Wausau v. Albert D. Seeno Const. Co., 692 F.Supp. 1150, 1157 (N.D. Cal. 1988) (”Case law thus leaves little doubt that Cumis counsel represent solely the insured . . .”)
A “conflicted attorney” appointed by the insurer cannot discharge its contractual defense obligation. This follows because an insurer must provide its insured with a full defense. Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 24 Cal. Rptr. 2d 467, 861 P.2d 1153 (Cal. 1993) by competent counsel Assurance Co. of America v. Haven, 32 Cal.App.4th 78, 90, 38 Cal.Rptr.2d 25, 33 (1995). Ordinarily, that duty is met by hiring one defense lawyer to represent the interests of both the insured and insurer, but is not met by hiring a single lawyer where there is a conflict of interest. Rockwell, 26 Cal. App.4th at 1263-64.
This is especially the case where as of the facts in Testmasters, the insured retained its own independent counsel to concurrently represent its interests because of the conflict. The appointed counsel was of no value to it in providing a defense. Where a conflicted attorney is provided, no value is received and thus no right to reimbursement is possible. See also Croskey, Et al., California Practice Guide: Insurance Litigation, Chap. 7B-K, p. 7B-91, § 7:769 (Rutter Group 2006):
As part of its duty to defend, the insurer must provide a full defense by competent counsel. That duty is breached when an insurer furnishes defense counsel whose ability to represent the insured is impaired by a disqualifying conflict of interest. In such cases, the insured is usually permitted to hire independent counsel at the insurer’s expense. [Emphasis added.]
Since no benefit is conferred on the “other contracting party”, here the insured, where appointed counsel is provided and “independent counsel” was due, there can be no right to reimbursement. Modoc Mineral & Oil Co. v. Cal-Vada Drilling & Exploration Co., 236 Cal. App. 2d 868, 873, 46 Cal. Rptr. 508. 511 (1965); see also Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1031 (9th Cir. 1999) (“Under true rescission, the plaintiff returns to the defendant the subject of the transaction, plus any other benefit received under the contract, and the defendant returns to the plaintiff the consideration furnished, plus interest.”).
This also follows because the right to restitution following rescission is an equitable right and a valueless conflicted defense cannot satisfy its requirements. “Section 1691, subdivision 2 of the Civil Code, requires the restoration only of property possessing a value. It has been repeatedly held that where the thing involved in a rescission suit has no value . . . it is not necessary, as a prerequisite to the cancellation of a contract, to restore the property.” Dunn v. Stringer, 41 Cal. App. 2d 638, 646 (1940).
Judge Snyder found rescission appropriate as against Testmasters for alleged failure to properly answer a policy application question requiring disclosure of claims within the proceeding five years. Nevertheless, even though conceding that such a policy was eviscerated ab initio. The court challenged whether the insurer, Century Surety, was capable of receiving reimbursement for monies expended through appointed counsel, where an issue was raised at to whether the insured was entitled to independent counsel as it had sought. If so there may not be any value created by appointed counsel’s legal services, even assuming the services were otherwise reasonable and the amounts charged appropriate.
Finding a fact issue posed, the court sent this issue to trial. The court observed that LA Sound USA, Inc. v. St. Paul Fire & Marine Ins. Co., 156 Cal. App. 4th 1259, 1266 (2007) provided that:
The consequence of rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration has been received. . . The policy would be ‘extinguished’ ab initio, as though it had never existed.” Id. at 184. “A policy void ab initio . . . cannot be breached.” Looking at the issue of rescission however, the court noted that: “‘[i]n a rescission action, the complaining party may receive restitution for all benefits conferred on the other party, restoring both parties to economic status quo ante.’ Ogden Martin Sys., Inc. v. San Bernardino County, 932 F.2d 1284, 1287 (9th Cir. 1991).”
The court stated “Century is entitled to reimbursement for monies
paid on TestMasters’ behalf only to the extent that these monies conferred a benefit
upon TestMasters.” Id. at 37:18-20. Under California law, appointed counsel represents both the insurer and the insured but independent counsel only the insured. Rockwell Internat. Corp. v. Superior Court, 26 Cal.App.4th 1255, 1264, 32 Cal.Rptr.2d 153, 158 (Cal.App.(2.Dist.) 1994). See also Employers Ins. of Wausau v. Albert D. Seeno Const. Co., 692 F.Supp. 1150, 1157 (N.D. Cal. 1988) (”Case law thus leaves little doubt that Cumis counsel represent solely the insured . . .”)
A “conflicted attorney” appointed by the insurer cannot discharge its contractual defense obligation. This follows because an insurer must provide its insured with a full defense. Montrose Chem. Corp. v. Superior Court, 6 Cal. 4th 287, 24 Cal. Rptr. 2d 467, 861 P.2d 1153 (Cal. 1993) by competent counsel Assurance Co. of America v. Haven, 32 Cal.App.4th 78, 90, 38 Cal.Rptr.2d 25, 33 (1995). Ordinarily, that duty is met by hiring one defense lawyer to represent the interests of both the insured and insurer, but is not met by hiring a single lawyer where there is a conflict of interest. Rockwell, 26 Cal. App.4th at 1263-64.
This is especially the case where as of the facts in Testmasters, the insured retained its own independent counsel to concurrently represent its interests because of the conflict. The appointed counsel was of no value to it in providing a defense. Where a conflicted attorney is provided, no value is received and thus no right to reimbursement is possible. See also Croskey, Et al., California Practice Guide: Insurance Litigation, Chap. 7B-K, p. 7B-91, § 7:769 (Rutter Group 2006):
As part of its duty to defend, the insurer must provide a full defense by competent counsel. That duty is breached when an insurer furnishes defense counsel whose ability to represent the insured is impaired by a disqualifying conflict of interest. In such cases, the insured is usually permitted to hire independent counsel at the insurer’s expense. [Emphasis added.]
Since no benefit is conferred on the “other contracting party”, here the insured, where appointed counsel is provided and “independent counsel” was due, there can be no right to reimbursement. Modoc Mineral & Oil Co. v. Cal-Vada Drilling & Exploration Co., 236 Cal. App. 2d 868, 873, 46 Cal. Rptr. 508. 511 (1965); see also Ambassador Hotel Co. v. Wei-Chuan Inv., 189 F.3d 1017, 1031 (9th Cir. 1999) (“Under true rescission, the plaintiff returns to the defendant the subject of the transaction, plus any other benefit received under the contract, and the defendant returns to the plaintiff the consideration furnished, plus interest.”).
This also follows because the right to restitution following rescission is an equitable right and a valueless conflicted defense cannot satisfy its requirements. “Section 1691, subdivision 2 of the Civil Code, requires the restoration only of property possessing a value. It has been repeatedly held that where the thing involved in a rescission suit has no value . . . it is not necessary, as a prerequisite to the cancellation of a contract, to restore the property.” Dunn v. Stringer, 41 Cal. App. 2d 638, 646 (1940).
