Fact Disputes Preclude Summary Judgment Over Insurer’s Failure to Provide Immediate Defense

The United States District Court for the Central District of California, applying California law, has held that an insurer was not entitled to summary judgment in full, finding that triable issues of fact remained regarding the insurer’s alleged failure to provide an immediate defense to the insured corporation and to assign separate counsel for an insured director.  Celerity Educ. Grp. v. Scottsdale Ins. Co., 2019 WL 430497 (C.D. Cal. Feb. 4, 2019).

Starting in January 2017, the United States Attorney’s Office (USAO) launched an investigation into the insured public benefit corporation.  The investigation focused on, among other things, the corporation’s alleged theft of government property, wire fraud, and mail fraud.  After warrants were authorized to search the corporation’s records, the corporation sought consent from its insurer to engage its own counsel.  The insurer denied the request, and instead appointed counsel of its choosing.  The corporation subsequently rejected the insurer’s appointed counsel and retained its previously selected counsel.

In March 2017, the USAO named one of the insured corporation’s board members as a “person of interest” in the investigation.  The insurer subsequently denied the corporation’s request for the insurer to appoint separate counsel for each of the corporation’s five board members, reasoning that the corporation had identified no conflicts of interest between the board members individually or with respect to the corporation.  The corporation sued the insurer for breach of contract.  After suit was filed, the court issued an order concluding that the corporation was not entitled to independent counsel, but that one board member was entitled to separate counsel based on the USAO’s identification of that individual as a person of interest.

The insured corporation’s breach of contract suit alleged that the insurer (i) failed to pay fees incurred between tender and acceptance of a defense; (ii) failed to reimburse pre-tender fees; and (iii) failed to assign separate counsel for the “person of interest” sooner, or at minimum, to reimburse the corporation for the fees it incurred as a result.

Ruling on summary judgment, the court first found that that the insurer’s month-long delay in accepting its obligation to defend after being notified of the search warrant could constitute a breach of the policy in light of the “high-profile and high stakes nature” of the investigation.  Second, the court held that the insurer did not breach the policy by refusing to reimburse the corporation for its pre-tender fees.  On that point, the corporation argued that it was required to immediately hire counsel in response to the warrants, and that the costs it incurred before notifying the insurer were therefore involuntary.  The court disagreed, noting that the insured failed to produce evidence establishing why it was unable to immediately notify the insurer of the investigation.  Finally, the court held that factual issues remained over whether the insurer should have appointed separate counsel sooner, and if so, whether the insured engaged in “bad faith” as a result.


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