The California Court of Appeal for the Fourth Appellate District was presented with the issue of whether an insurer is entitled to binding arbitration of an alleged Cumis fee dispute in an action against the insurer for breach of contract and bad faith, where there has been no determination that the insurer had a duty to defend or whether the insurer had satisfied its obligations under Civil Code section 2860. The Court of Appeal held the trial court erred in treating the case as a fee dispute subject to section 2860(c) and ordering arbitration of the Cumis fee dispute. Central to the case were issues regarding bad faith and breach of contract, which needed to be resolved first, before the Cumis fee dispute could be arbitrated.
A Homeowners Association sued Intergulf Development LLC (the "insured") and others, alleging defects in the construction of a condominium project in downtown San Diego. Interstate Fire & Casualty Company ("Interstate") issued a liability policy to the insured. The insured tendered the complaint to Interstate, seeking defense and indemnity. After investigating the claim, Interstate agreed to defend and appointed counsel. Ten days later, the insured objected, in writing, to the defense by counsel selected by Interstate and requested appointment of independent counsel under section 2860. Interstate did not respond to this letter. The insured later requested that Interstate reimburse defense costs incurred by independent counsel. Interstate again failed to respond. The insured wrote Interstate again seeking a defense and demanding payment of defense costs. Once again, Interstate did not respond. The insured filed suit against Interstate for bad faith, breach of contract, and declaratory relief. Interstate thereafter made some defense cost payments to the insured.
Five weeks before the scheduled trial, Interstate filed a petition to compel arbitration of what Interstate characterized as a "Cumis Fee Dispute." The insured argued that the lawsuit was about the damages Interstate owed for breaching its duty to defend and that because the questions regarding Interstate's duty to defend, conflict of interest, and bad faith had not been resolved, Interstate's petition to compel arbitration was premature. The trial court nevertheless granted Interstate's petition and continued the trial pending completion of arbitration. The insured filed a petition for writ of mandate, which was summarily denied. The Supreme Court granted the insured's petition for review and transferred the matter to the Court of Appeal with directions that the court vacate the order denying the petition for writ of mandate and issue an order to show cause why the relief sought should not be granted.
The Court of Appeal ruled the trial court abused its discretion by granting Interstate's petition to compel arbitration under section 2860(c) before the parties had resolved the issues raised by the insured's complaint. The Court of Appeal agreed with the insured that the gravamen of the complaint was bad faith and breach of contract, not a dispute over the amount Interstate should pay to independent counsel under section 2860(c). The Court of Appeal noted that Interstate admitted that it did not pay the insured anything before the bad faith lawsuit was filed and that Interstate had belatedly "acceded" to the insured's demand for independent counsel. Unreasonable delay in paying policy benefits or paying less than the amount due may constitute a breach of contract as well as bad faith giving rise to damages in tort. By filing the action for breach of contract, bad faith, and declaratory relief, the insured gave Interstate notice that it was treating Interstate's failure to acknowledge the insured's right to independent counsel and delay in paying policy benefits as a total breach of the duty to defend.
The Court of Appeal further noted that entitlement to damages for breach of contract and bad faith turned on: (1) whether Interstate had a duty to defend in the first instance; and (2) whether Interstate breached that duty by failing to defend "immediately" and "entirely" upon tender of the defense. Neither of these questions had been resolved at the time the trial court granted Interstate's petition to compel arbitration under section 2860. The Court of Appeal concluded that a premature determination that Interstate was entitled to binding arbitration under section 2860(c) may prejudice the insured's claim that Interstate failed to accept the insured's selection of independent counsel and pay its share of defense costs in a timely manner – factual questions at the heart of the breach of contract and bad faith claims.
Accordingly, the Court of Appeal granted the insured's request for a peremptory writ of mandate, directed the superior court to vacate its order granting Interstate's petition to compel arbitration, and entered an order denying the petition. The Court of Appeal decision does not preclude Interstate from pursuing its remedies under section 2860(c) at a later time, if appropriate.
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This opinion is not final. Though it has been certified for publication, it may be modified on rehearing, or granted review by the Supreme Court of the State of California. Should any of these events occur, the opinion would be unavailable for use as authority in other cases.
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