Ruling Takes Insurers To Task For Untimely Responses

On Nov. 17, insurers were taught another costly lesson about the importance of
promptly responding to tendered claims from their insureds. In Janopaul + Block
Cos. LLC v. Superior Court (St. Paul Fire and Marine Ins. Co.), 2011 DJDAR 16685, the 4th
District Court of Appeal wrestled with an issue relating to insurance bad faith suits -
one that is all too familiar in today's legal landscape. 

Legal precedent in this area seems to be following a point-counterpoint format. The
appellate court's decision in San Diego Federal Credit Union v. Cumis Insurance Society, 162
Cal. App. 3d 358 (1984) recognized that an insurer's decision to defend its insured
under a reservation of rights creates a conflict of interest
sufficient to justify hiring independent counsel for the insured. In response to Cumis,
the Legislature passed Civil Code Section 2860(c), providing insurers with a
mechanism to control the costs of Cumis counsel through fee arbitration. Experience
has shown, however, that disputes relating to reservations of rights, or even bad faith
claims, were being wrapped up in the arbitration process.

The Janopaul entities were the owners of the El Cortez Hotel in San Diego, and
began a project to restore the historic building, hiring a St. Paul insured to serve as
general contractor for the project. Janopaul's contract contained an express
indemnity provision stating that the general contractor would indemnify Janopaul
for all claims arising from its work. When Janopaul was sued by the El Cortez
Owners Association, it tendered its defense to the general contractor, and eventually,
to St. Paul as the general contractor's insurer.

After Janopaul's independent lawyers defended the case for over two years without
a coverage decision from St. Paul, the insurer eventually offered to defend under a
reservation of rights. The parties could not, however, agree on the rate that St. Paul
would pay for Janopaul's independent counsel. St. Paul filed a petition to compel
arbitration under California Civil Code Section 2860(c). After St. Paul filed its
petition to compel arbitration, Janopaul filed a bad faith suit based on an alleged
breach of St. Paul's duty to defend due to the delayed response to Janopaul's tender.

In the Janopaul opinion, the 4th District Court of Appeal rejected St. Paul's
petition to submit the matter to arbitration, finding that the trial court must first
address the threshold questions of duty to defend, breach, and bad faith raised by
Janopaul's lawsuit. The ruling allows Janopaul to pursue recovery of its full cost of
defense from St. Paul, without the limitation imposed by Section 2860(c). In ruling
that this was not a simple fee dispute between an insurer and its insured, the court
reinforced its ruling from Intergulf Development LLC v. Superior Court (2010) 183
Cal. App. 4th 16, where it held that an insurer's bad faith failure to respond to a tender could result in the forfeiture of the arbitration right provided by Section
2860(c). Janopaul broadens the potential reach of Intergulf, as the insured filed its
bad faith suit after the insurer sought the refuge of statutory fee arbitration.
Intergulf's timeline was reversed, with the insurer filing its petition to compel
arbitration in the midst of bad faith litigation.

Janopaul has answered a question raised during oral argument in Intergulf - how
will courts perceive a bad faith lawsuit filed after an insurer raises the specter of fee
arbitration? Though perhaps trial judges were willing and able to sort the wheat
from the chaff in discerning whether a bad faith suit was filed simply as a tactic to
avoid impending fee arbitration, Janopaul provides a bright-line rule in holding that
the "threshold questions of duty to defend, breach and bad faith" must be determined
by a trial court before Section 2860(c) arbitration because "a determination of one or
more of those issues in favor of the insured may eliminate altogether the need for
arbitration."

After reading Janopaul, and in keeping with the trend in this area of law, insurers
may be waiting for a Newtonian reaction by the state Supreme Court or the
Legislature. For the time being, however, this case should serve as a reminder that
companies with the possibility of insurance coverage should tender their claims early
and realize that they are entitled to a response in a timely manner. An untimely
response by the insurance company may have serious consequences.