In Federal Ins. Co. v. MBL, Inc., 2013 WL 4506149 (Cal. Ct. App. Aug. 26, 2013), the California Court of Appeal continued the judicial trend of restricting the insured’s right to insurer-paid independent counsel. The court held that a general reservation of rights, and a specific reservation of rights to deny coverage on the basis of the Absolute Pollution exclusion and to contend that the alleged damages did not occur during the policy period, do not create a conflict of interest between the insurer and its insured which would entitle the insured to independent counsel in an underlying action.

Although damages cannot be awarded in UCL cases, they can be highly intrusive and expensive to defend against, and a prevailing plaintiff may be awarded attorneys’ fees as well as disgorgement and other equitable remedies. Later cases will try to stretch Zhang to other circumstances, but for now it is limited to actions by first-party claimants (the carrier’s own policyholders). Read narrowly, the decision only allows the UCL cause of action to be pleaded; proof still remains a major hurdle.Reservations of Rights and Independent Counsel Insurers came out ahead in two California appellate opinions that dealt with reservations of rights.Federal Ins. Co. v. MBL, Inc., 219 Cal.App.4th 29 (2013). Halford’s Cleaners was targeted by the U.S. government in an environmental cleanup case brought under CERCLA.

The court cited California law to articulate its rule for determining when an insurer must provide independent counsel: “’For independent counsel to be required, the conflict of interest must be significant, not merely theoretical, actual, not merely potential.’ [Fed. Ins. Co. v. MBL, Inc., 160 Cal.Rptr.3d 910, 920 (internal quotations omitted)]. Therefore, even when (1) there is a reservation of rights and (2) insurer-provided counsel has control over an issues in the case that will also decide the coverage issue, courts must still determine whether there is an actual conflict of interest.