Opinion
D071478
09-20-2018
PACIFIC INTERCULTURAL EXCHANGE, Plaintiff and Appellant, v. SCOTTSDALE INSURANCE COMPANY, Defendant and Respondent.
Gaglione Law Group, Robert J. Gaglione, Benjamin Bertran-Harris and Thomas G. Wesch for Plaintiff and Appellant. Selman Breitman and Nathaniel S.G. Braun for Defendant and Respondent.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 37-2015-00007066-CU-BC-CTL) APPEAL from a judgment of the Superior Court of San Diego County, Katherine A. Bacal, Judge. Affirmed. Gaglione Law Group, Robert J. Gaglione, Benjamin Bertran-Harris and Thomas G. Wesch for Plaintiff and Appellant. Selman Breitman and Nathaniel S.G. Braun for Defendant and Respondent.
INTRODUCTION
Pacific Intercultural Exchange (PIE) sued its insurer, Scottsdale Insurance Company (Scottsdale), seeking recovery of $106,102.63 in legal fees allegedly incurred for PIE's general counsel, Robert Gaglione, between February 2011 through October 2011 related to a lawsuit filed by a third party. PIE alleged Scottsdale was obligated to pay Gaglione to act as independent counsel under Civil Code section 2860 based on conflicts of interest between Scottsdale and PIE. The trial court granted Scottsdale summary judgment after concluding there was no conflict of interest between PIE and Scottsdale requiring appointment of independent counsel in addition to insurance defense counsel.
Further statutory references are to the Civil Code unless otherwise stated.
On appeal, PIE contends summary judgment should be reversed because a conflict existed between PIE and Scottsdale based upon Scottsdale's reservation of rights and based on a professional conflict of interest between assigned defense counsel and a codefendant in the underlying action. PIE also contends the court abused its discretion in sustaining evidentiary objections related to the summary judgment motion. We disagree with each of PIE's contentions and, therefore, affirm the judgment.
BACKGROUND
Scottsdale issued two general liability policies covering PIE during the period of March 23, 2009, through March 23, 2011. These policies included a coverage form for Sexual and/or Physical Abuse Liability, which stated: "We will pay on your behalf all sums which you shall become legally obligated to pay as damages because of injury manifesting during the policy period to any person, and arising out of sexual and/or physical abuse, caused by one of your employees, or arising out of your failure to properly supervise. We shall have the right and duty to defend any suit against you seeking such damages, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and such settlement of any claim or suit as we deem expedient, but we shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of our liability has been exhausted." (Some capitalization omitted.) The coverage form defined employee as "any person, other than a person insured, in your employment," which included, but was not limited to "persons with child caring responsibilities" and "volunteer workers."
PIE, a San Diego company, placed foreign exchange students in United States homes and schools. It placed a foreign exchange student (Student) in the Oregon home of CL for the 2009-2010 school year. CL sexually abused the 16-year-old Student between September 2009 and June 2010. CL pleaded guilty to four counts of sexual abuse in the second degree.
PIE notified Scottsdale of the abuse and requested coverage. In a letter dated August 5, 2010, Scottsdale acknowledged receipt of the claim and request for coverage. Scottsdale set forth the applicable policies and endorsements, which provided $250,000 for each claim with an aggregate of $500,000 based upon sexual and/or physical abuse. Scottsdale stated CL "may well qualify as an 'employee' " under the endorsement definition. The letter stated it reserved "the right to assert defenses regarding any of the other terms, conditions or exclusions of this policy ...."
In early February 2011 PIE asked Scottsdale to appoint defense counsel to represent PIE in the matter. PIE also asserted Scottsdale's reservation of rights letter required appointment of independent counsel under section 2860 and asked Scottsdale to pay PIE's general counsel to serve in this capacity.
Student filed suit against PIE and CL in Oregon on February 14, 2011, alleging causes of action for sexual battery, negligence, breach of contract, and unfair trade practices. Student alleged PIE was vicariously liable for CL's actions and for failing to properly screen and vet CL.
On the day the lawsuit was filed, Scottsdale's claim specialist advised PIE if CL committed the acts, "the policy will cover such damages" and "PIE does not have to be found vicariously liable or even legally liable on a theory that [PIE] knew or should have known [CL's] propensities in order for the claim to fall within the insuring agreement."
Thereafter, Scottsdale appointed Jeffrey Hansen of the Smith Freed & Eberhard (Smith Freed) firm as defense counsel.
Gaglione again asked Scottsdale to pay him as independent counsel asserting Scottsdale was reserving its rights on issues which PIE submitted could be controlled by counsel retained by the insurer: "(1) whether [CL] was an 'employee' of PIE as defined in the policy, [¶] (2) whether the sexual and/or physical abuse was caused by PIE's failure to supervise, and [¶] (3) whether judgment is entered against PIE for a covered or uncovered claim or cause of action ...."
On February 28, 2011, Scottsdale's claim specialist advised PIE that Scottsdale accepted coverage under the Sexual and/or Physical Abuse Liability Coverage form and CL qualified as an "employee" as defined by the form.
Scottsdale provided a letter from its coverage counsel in April 2011 confirming Scottsdale "agreed to defend, and is defending, the named insured regarding the suit" pursuant to the Sexual and/or Physical Abuse Liability Coverage. Scottsdale stated PIE was not entitled to independent counsel pursuant to section 2860 because "Scottsdale has not reserved and is not reserving rights on any coverage issue the outcome of which could be controlled by appointed defense counsel." Scottsdale pointed out Gaglione could not have provided preappointment defense services because counsel was retained immediately after the filing of the lawsuit and "[a]t no time has the named insured ever been without a defense counsel regarding the underlying lawsuit."
After analyzing the allegations and damages sought in each cause of action, Scottsdale's coverage counsel stated, "Scottsdale has acknowledged that each of the four causes of action raises the potential for at least some 'damages' because of injury subject to coverage under the Sexual and/or Physical Abuse Liability Coverage afforded by the policies." Scottsdale "never asserted that whether [Scottsdale] would owe an indemnity obligation to the named insured regarding the underlying suit pursuant to the terms of the Sexual and/or Physical Abuse Liability Coverage would turn on whether [CL] was or was not an 'employee' for purposes of that coverage or whether instead it would have to be shown that the named insured was itself guilty of failure to properly supervise." Therefore, Scottsdale determined the reasons identified by Gaglione for Scottsdale to pay for Gaglione's services pursuant to section 2860 were not justified. The letter concluded by confirming Scottsdale was "not reserving its rights pursuant to any of the exclusions stated in the Sexual and/or Physical Abuse Liability Coverage form" apart from an exclusion stating coverage does not apply to claims for punitive or exemplary damages, which does not present a conflict of interest under section 2860, subdivision (b).
Student offered to settle the underlying action in May 2011 for $300,000, which was within the combined limits of Scottsdale's policies. Scottsdale offered to pay the demand. However, PIE expressed concern about whether a settlement would place its United States Department of State (State Department) designation at risk and jeopardize PIE's business. PIE asked Scottsdale to defer settlement until after a June meeting with the State Department. Scottsdale agreed to seek an extension for the demand deadline.
Gaglione later reported the State Department would not hold it against PIE if the Student's action settled. However, PIE wanted a strict confidentiality agreement. PIE's defense counsel observed PIE's proposed confidentiality provision would keep Student from speaking about the molestation to anyone, including a therapist or family member. Student's attorney refused the proposed confidentiality agreement and PIE refused to sign the settlement agreement proposed by Student. Scottsdale's claim specialist reminded Gaglione of the $500,000 policy limits available for settlement.
PIE and Gaglione asked defense counsel to file a counterclaim against Student. Defense counsel expressed concern jurors would be outraged by a counterclaim against Student.
In September 2011 Scottsdale offered Student its applicable policy limits—$500,000—to settle the action. PIE did not consent to settlement without its requested confidentiality agreement.
Scottsdale stated it had the right to settle the claim within policy limits without PIE's agreement. Nevertheless, in September 2011, due to an apparently deteriorating relationship with assigned defense counsel, Scottsdale's coverage counsel offered PIE the option of choosing other defense counsel "pursuant to" section 2860 who shall meet its requirements. Scottsdale indicated the reference to section 2860 was meant only to impose the statute's limitation on counsel qualifications.
PIE proposed another firm as independent counsel to "assist" Gaglione with the defense of the case. When Scottsdale clarified it would only pay for one law firm to defend the case, PIE selected new defense counsel.
In December 2011 new defense counsel reported the State Department took no position on the settlement or confidentiality. PIE continued to request its confidentiality terms.
The State Department suspended PIE's designation as a sponsor in the secondary school student category of the exchange visitor program in July 2012 citing "a pattern of regulatory non-compliance and efforts to hide its misconduct."
Scottsdale ultimately paid to settle the Student's action. PIE did not contribute to the payment of defense costs or the settlement. Scottsdale paid more than $500,000 in defense costs for PIE to defend Student's action.
When PIE's president was deposed, PIE had not paid the $106,102.63 in fees it seeks to recover for Gaglione.
DISCUSSION
I
Standard of Review
A plaintiff moving for summary judgment "bears the burden of persuasion that 'each element of' the 'cause of action' in question has been 'proved,' and hence that 'there is no defense' thereto." (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 850; see Code Civ. Proc., § 437c, subd. (p)(1).) The moving plaintiff's initial burden of proof does not include disproving any affirmative defenses asserted by defendants. (Oldcastle Precast, Inc. v. Lumbermens Mutual Casualty Co. (2009) 170 Cal.App.4th 554, 564.) If the plaintiff meets its burden, " 'the burden shifts to the defendant ... to show that a triable issue of one or more material facts exists as to that cause of action or a defense thereto. The defendant ... may not rely upon the mere allegations or denials' of his 'pleadings to show that a triable issue of material fact exists but, instead,' must 'set forth the specific facts showing that a triable issue of material fact exists as to that cause of action or a defense thereto.' " (Aguilar, at p. 849.)
"Although we independently assess the grant of summary judgment, our inquiry is subject to two constraints. Under the summary judgment statute, we examine the evidence submitted in connection with the summary judgment motion, with the exception of evidence to which objections have been appropriately sustained. [Citations.] ... [¶] Furthermore, our review is governed by a fundamental principle of appellate procedure, namely, that ' "[a] judgment or order of the lower court is presumed correct," ' and thus, ' "error must be affirmatively shown." ' [Citation.] Under this principle, [the appellant] bear[s] the burden of establishing error on appeal, even though [the respondent] had the burden of proving its right to summary judgment before the trial court. [Citation.] For this reason, our review is limited to contentions adequately raised in the [appellant's] briefs." (Paslay v. State Farm General Ins. Co. (2016) 248 Cal.App.4th 639, 644-645.)
II
Independent Counsel Under Section 2860
PIE contends it had a conflict of interest with Scottsdale on several grounds requiring appointment of independent counsel. We conclude none of the issues raised by PIE gave rise to a conflict of interest.
A
Section 2860 states: "(a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel. An insurance contract may contain a provision which sets forth the method of selecting that counsel consistent with this section.
"(b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits."
"[N]ot every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer's expense." (Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1394 (Golden Eagle).) "A reservation of rights by an insurer does not necessarily constitute a conflict of interest requiring the insurer to provide independent counsel. The conflict must be 'significant, not merely theoretical, actual, not merely potential.' [Citations.] Nor is a general reservation of rights sufficient to trigger the right to independent counsel: 'Where the insurer has not expressly reserved its right to deny coverage under a particular exclusion in its policy, there can be no actual conflict based on the application of that exclusion during the pendency of the action.' [Citation.] Independent counsel may be required, however, 'when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.' " (Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, 30-31.)
B
PIE first contends Scottsdale's reservation of rights based on punitive damages created a conflict. However, section 2860, subdivision (b) expressly states Scottsdale's reservation of rights as to punitive damages claims and claims for damages in excess of the policy limits does not present a conflict of interest. (Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350 ["The fact punitive damages are alleged does not itself create a conflict (citations) nor does a conflict exist solely because the insured is sued for an amount in excess of insurance policy limits."].)
Second, PIE suggests Scottsdale expressed a reservation about whether CL was an employee of PIE for purposes of coverage. This is not so. Scottsdale accepted the defense under the Sexual and/or Physical Abuse Liability Coverage form for all causes of action alleged by Student. Contrary to PIE's contention, Scottsdale did not specifically reserve on any exclusion in the Sexual and/or Physical Abuse Liability Coverage form. Nor did it specifically reserve on the issue of whether CL was an employee as defined by the Sexual and/or Physical Abuse Liability Coverage form. Initially, Scottsdale stated CL "may well qualify as an 'employee' " as defined in the coverage form. It stated he would not qualify as an insured, who could be excluded from coverage. Thereafter, Scottsdale repeatedly informed PIE the claims were covered under the Sexual and/or Physical Abuse Liability Coverage form because CL qualified as an employee under the terms of the coverage form.
Scottsdale's general reservation of rights to coverage under other portions of the policy did not create a conflict because it accepted the defense under the relevant coverage form. " '[W]here the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel.' " (Federal Ins. Co. v. MBL, Inc. (2013) 219 Cal.App.4th 29, 42.)
C
PIE next contends Scottsdale's settlement negotiations revealed a conflict. We disagree. Scottsdale offered the limits of its policy early in the case when it determined PIE's liability was reasonably clear, which is "precisely what an insurer is required to do." (Lehto v. Allstate Ins. Co. (1994) 31 Cal.App.4th 60, 68.) "Where, as here, the insurer early on decides to offer the policy limits in settlement of its insureds' claims, no conflict of interest arises" between an insurer and its insured. (Id. at p. 71.)
The fact PIE disagreed with the proposed settlement terms and asked for additional time to try to secure better terms did not create a conflict. Where an insurance policy gives the insurer the exclusive right to control settlement, an insurer's decision to settle over the insured's objection does not create conflict requiring appointment of independent counsel. (Hurvitz v. St. Paul Fire & Marine Ins. Co. (2003) 109 Cal.App.4th 918, 930-931 (Hurvitz).) "[A] liability insurance policy's purpose is to provide the insured with a defense and indemnification for third party claims within the scope of the coverage purchased, and not to insure the entire range of the insured's well-being." (Western Polymer Technology, Inc. v. Reliance Ins. Co. (1995) 32 Cal.App.4th 14, 27 (Western Polymer).)
Here, Scottsdale's policy stated it had the right and duty to settle any claim as it deemed "expedient" under the Sexual and/or Physical Abuse Liability Coverage form. Nevertheless, Scottsdale worked with PIE to give it more time to try to resolve its issues with the State Department and to try to negotiate a more favorable confidentiality agreement.
This is not like Golden Eagle, supra, 20 Cal.App.4th at page 1396 where the court found a conflict of interest because the insureds refused to consent to a proposed settlement in excess of the policy limits, which would have exposed the insureds to uncovered liability. Here, Scottsdale consistently offered, and ultimately paid, to settle the claim within the policy limits.
Novak v. Low, Ball & Lynch (1999) 77 Cal.App.4th 278, cited by PIE, is also inapposite because it involved settlement negotiations for a partial settlement of two potentially covered claims after the insurer appointed independent counsel under section 2860. (Id. at pp. 280-281, 286.) Here, there was no conflict requiring appointment of independent counsel and Scottsdale had the contractual right to negotiate a settlement of all claims within the policy limits as it deemed appropriate.
"Under a policy provision giving an insurance company discretion to settle as it sees fit, the insurer is 'entitled to control settlement negotiations without interference from the insured,' and generally, it has no liability to the insured for settling within the policy limits. [Citation.] Thus, there is no cause of action where the insured claims the settlement injured its business reputation ...." (New Plumbing Contractors, Inc. v. Edwards, Sooy & Byron (2002) 99 Cal.App.4th 799, 802, citing Western Polymer, supra, 32 Cal.App.4th at pp. 24, 26-27.) Similarly, there was no conflict requiring independent counsel based on settlement negotiations.
D
Finally, PIE asks us to extend section 2860 and make a judicial determination it had a right to independent counsel because assigned defense counsel had a professional conflict of interest based on its representation of a party suing CL in a separate matter when CL was a codefendant in Student's underlying action. We decline the invitation. First, defense counsel did not represent CL in this action. Even if defense counsel had a professional conflict between PIE and CL in separate actions, that did not create a conflict of interest between PIE and Scottsdale.
Gulf Ins. Co. v. Berger (2000) 79 Cal.App.4th 114, 131-132, a case relied upon by PIE, involved a malpractice lawsuit by an insurer against defense counsel retained to represent an insured in an underlying action. The court determined there was no conflict of interest precluding the insurer from suing defense counsel. The court observed a "disqualifying conflict exists if '[I]nsurance counsel had ... incentive to attach liability to [the insured]' " and such a conflict " ' "precludes the insurer-appointed defense counsel from presenting a quality defense for the insured." ' " (Id. at p. 131.) No such conflict arose in that case or here. There was no evidence that assigned defense counsel's prior interaction with CL provided an incentive to shift liability to PIE based on an uncovered claim.
Dissatisfaction with assigned defense counsel does not create a conflict with an insurer requiring appointment of independent counsel. (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 880-881 [assigned defense counsel acts as an independent contractor and the insurer does not become liable for trial counsel's legal malpractice].) At most, PIE may have been entitled to different counsel, but not independent counsel contemplated by section 2860. The fact Scottsdale permitted PIE to select alternate counsel does not support the inference a conflict existed requiring Scottsdale to pay Gaglione as independent counsel from February through October 2011.
III
Evidentiary Rulings
PIE challenges several evidentiary rulings. Both parties assert we review the court's rulings on evidentiary objections in summary judgment proceedings for abuse of discretion, which is consistent with the weight of authority. (Duarte v. Pacific Specialty Ins. Co. (2017) 13 Cal.App.5th 45, 52 (Duarte); see Nazir v. United Airlines, Inc. (2009) 178 Cal.App.4th 243, 255, fn. 4.) We will uphold a court's evidentiary ruling if it is proper on any ground. (Philip Chang & Sons Associates v. La Casa Novato (1986) 177 Cal.App.3d 159, 173.)
"The party challenging a trial court's evidentiary ruling has the 'burden to establish such an abuse, which we will find only if the trial court's order exceeds the bounds of reason. [Citation.] "Where a trial court has discretionary power to decide an issue, an appellate court is not authorized to substitute its judgment of the correct result for the decision of the trial court." [Citation.] We will only interfere with the lower court's judgment if appellant can show that under the evidence offered, " 'no judge could reasonably have made the order that he did.' " ' " (Duarte, supra, 13 Cal.App.5th at p. 52.)
A
The court did not abuse its discretion in sustaining objections to two paragraphs of the declaration of John Doty, president of PIE. Paragraph No. 14 of Doty's declaration recounted two statements from officials at the State Department that "the State Department did not want PIE to settle the [Student's action] because it would bring 'notoriety and disrepute' to the State Department" and later "that the State Department 'would not hold it against PIE' if PIE was to settle the [Student's] Action confidentially." Contrary to PIE's contention, these statements were offered for their truth to suggest PIE could not settle without consequence unless the settlement included a confidentiality provision. As such, they were inadmissible hearsay. (Evid. Code, § 1200, subds. (a), (b).) In addition, the statements were irrelevant to the issue of a conflict of interest between PIE and Scottsdale because Scottsdale had the contractual right to settle the claim within the policy limits without regard to other business consequences to PIE. (Evid. Code, § 210; Hurvitz, supra, 109 Cal.App.4th at p. 931.)
Paragraph No. 9 of Doty's declaration recounted the contents of an e-mail string in which he states he was told by Scottsdale's claim specialist that assigned defense counsel told her the firm had " 'run a conflicts check.' " Doty's statement recounted multiple levels of hearsay offered for the truth for which there are no exceptions. PIE contends, without explanation, the statement by Scottsdale's claim specialist about the conflict check was an admissible party admission on behalf of Scottsdale pursuant to Evidence Code section 1222. Even if Scottsdale's claim specialist was a person authorized to make statements on behalf of Scottsdale, PIE does not explain the relevance of the statement. No conflict of counsel could be imputed to Scottsdale for purposes of section 2860. (Merritt, supra, 34 Cal.App.3d at pp. 880-881.)
B
The court did not abuse its discretion in sustaining an objection to the declaration of CL's former mother-in-law recounting a conversation she allegedly had with a PIE representative. The declaration was an out-of-court statement submitted for the truth of the matter asserted, i.e., that she informed PIE she found pornographic material in CL's room. This hearsay statement was not admissible under any exception. Even if it were not hearsay, PIE fails to explain the relevance of the statement to the issue of whether a conflict existed between PIE and Scottsdale. In the opening brief, PIE comments, without explanation, the declaration was "important to demonstrate that the insurance defense counsel had the ability to steer the outcome of the underlying case to an uncovered claim." " ' "When an appellant ... asserts [a point] but fails to support it with reasoned argument and citations to authority, we treat the point as waived [or forfeited]." ' [Citation.] 'We are not bound to develop appellants' arguments for them.' " (Cahill v. San Diego Gas & Electric Co. (2011) 194 Cal.App.4th 939, 956; see Nwosu v. Uba (2004) 122 Cal.App.4th 1229, 1246 [statements in appellate briefs not supported by citations to the record are improper and cannot be considered].) As we have stated, any professional conflict originally assigned defense counsel may have had with the codefendant could not have imputed a conflict of interest to Scottsdale for purposes of section 2860.
C
Finally, the court did not abuse its discretion in excluding the declaration of PIE's proffered expert as improper opinion evidence pursuant to Evidence Code sections 720, 801, and 802 regarding the issue of whether a conflict of interest required appointment of independent counsel pursuant to section 2860, which is an issue of law.
DISPOSITION
The judgment is affirmed. Respondent shall recover costs on appeal.
McCONNELL, P. J. WE CONCUR: NARES, J. GUERRERO, J.