Opinion
NOT TO BE PUBLISHED
San Francisco County Super. Ct. No. CGC 06449220
Horner, J.
This is an appeal from a summary adjudication order and related enforcement order in an insurance coverage and bad faith lawsuit (collectively, the orders). The trial court issued the orders after finding appellant Hartford Casualty Insurance Company (Hartford) owed respondents J.R. Marketing, L.L.C., Noble Locks Enterprises, Inc., Jane and Robert Ratto and Penelope Kane (collectively, respondents) a duty to defend and to provide independent counsel in a lawsuit brought against them for defamation, conspiracy and other causes of action. For reasons discussed below, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
In August 2005, Hartford issued to respondents a commercial general liability policy effective August 18, 2005 to August 18, 2006 (the policy). Under the policy, subject to various exclusions of coverage, Hartford promised to defend and indemnify claims against respondents for damages resulting from, among other things, advertising injury. “Advertising injury” is defined under the policy to include slander, libel or disparagement occurring within the policy period.
In September 2005, Meir Avganim and others sued respondents for intentional misrepresentation, breach of fiduciary duty, unfair competition, restraint of trade, defamation, interference with business relationships, conversion, accounting, mismanagement and conspiracy (Avganim matter). Also in September 2005, respondents tendered the complaint to Hartford, seeking defense and indemnity.
Hartford initially refused to defend or indemnify respondents on the ground, among others, that the acts complained of appeared to have occurred before the relevant insurance policy’s inception date of August 18, 2005. Hartford nonetheless invited respondents to provide additional coverage information should they believe Hartford’s position to be erroneous.
In February 2006, respondents filed this lawsuit against Hartford for breach of contract, negligence, breach of the duty of good faith and fair dealing, and declaratory relief. Hartford thereafter reconsidered its initial coverage position based on additional information provided by respondents, and in March 2006 agreed to provide a defense in the Avganim matter subject to a reservation of rights. Hartford declined, however, to pay defense costs incurred before January 19, 2006, the date respondents proffered extrinsic evidence of certain defamatory statements made during the policy period, or to provide respondents with independent counsel, instead referring the matter for defense to its panel counsel.
In April 2006, respondents moved for summary adjudication on the issue of whether Hartford owed them a duty to defend, including a duty to provide independent counsel, from the initial tender in the Avganim matter in September 2005. On July 26, 2006, the trial court granted respondents’ motion.
On August 7, 2006, respondents moved to enforce the trial court’s summary adjudication ruling, arguing that Hartford was still refusing to provide or fund a complete defense in the Avganim matter.
After respondents filed the motion to enforce the summary adjudication order but before the motion was heard, Hartford filed a motion to disqualify respondents’ counsel. The trial court’s denial of Hartford’s disqualification motion is the subject of a separate appeal before this court, J.R. Marketing, L.L.C. et al. v. Hartford Casualty Insurance Company, A115472.
On September 27, 2006, the trial court granted respondents’ motion to enforce the summary adjudication order, finding Hartford “has breached and continues to breach its defense obligations” by failing to pay reasonable and necessary defense costs and to provide independent counsel. The trial court thus ordered Hartford to pay all past due invoices, as well as all future invoices within 30 days of their submittal, for legal fees and costs related to respondents’ defense in the Avganim matter. This appeal followed.
DISCUSSION
Hartford seeks reversal of both the trial court’s summary adjudication order and the subsequent order to enforce it on the following grounds: (1) the trial court erred as a matter of law in summarily adjudicating that Hartford owes a duty to defend respondents from the date of the initial tender in September 2005 and to provide them independent counsel in the Avganim matter; and (2) the subsequent enforcement order was an abuse of the trial court’s discretion because, among other things, it effectively awarded respondents damages based on a breach of contract by Hartford that was never adjudicated. We disagree.
As an initial matter, respondents contend the so-called final judgment rule bars consideration on appeal of the summary adjudication order and the enforcement order. (Morehart v. County of Santa Barbara (1994) 7 Cal.4th 725, 743 [under the one final judgment rule, “an appeal cannot be taken from a judgment that fails to complete the disposition of all the causes of action between the parties”]); Steen v. Fremont Cemetery Corp. (1992) 9 Cal.App.4th 1221, 1226.) Hartford, to the contrary, contends that the enforcement order is an appealable collateral order, and that the summary adjudication order, although not independently appealable, is properly before this court because it forms the basis of the otherwise appealable enforcement order. We agree. Under the collateral order exception to the one final judgment rule, an interlocutory order is appealable if such order is: (1) collateral to the subject matter of the litigation; (2) final as to the collateral matter; and (3) directs payment of money or performance of an act. (In re Marriage of Skelley (1976) 18 Cal.3d 365, 368; Steen, supra, 9 Cal.App.4th at pp. 1227-1228.) Here, the enforcement order and the summary adjudication order upon which it is based relate only to whether Hartford owes an initial duty to defend respondents and to provide them independent counsel in the Avganim matter. As such, the orders are collateral to the main issue of the litigation – whether Hartford breached its contract and engaged in bad faith in refusing to provide coverage to respondents in the underlying matter. The orders together constitute a final judgment with respect to the existence of the duty to defend and to provide independent counsel, leaving nothing further to be resolved with respect to those two issues. And the enforcement order directs the payment of money, in that it requires Hartford to pay certain defense costs incurred by respondents. As such, we reject respondents’ appealability challenge and move on to the merits of this appeal.
The Duty to Defend.
In insurance coverage litigation, the law recognizes that insurers have two distinct duties – to defend insureds in lawsuits that potentially seek damages for claims within the policy coverage, and to provide indemnity for actual damages awarded for claims within the policy coverage. (Buss v. Superior Court (1997) 16 Cal.4th 35, 45-49; see also Watts Industries, Inc. v. Zurich American Ins. Co. (2004) 121 Cal.App.4th 1029, 1039 [Watts].) Because the duty to defend, which requires the insurer to mount and fund a defense, is based on the mere potential for damages rather than on actual damages, it is broader than the duty to indemnify. (Buss, supra, 16 Cal.4th at pp. 45-49.) Further, the duty to defend “arises on tender of defense by the insured” based upon “facts the insurer knew at the inception of the underlying lawsuit,” and lasts “until the underlying lawsuit is concluded or the insurer shows that there is no potential for coverage. (Montrose [Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287,] 295.)” (Watts, supra, 121 Cal.App.4th at p. 1039 [emphasis added].) To make a showing of no potential for coverage, “the insurer must establish that ‘the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.’ ([Montrose, supra, 6 Cal.4th] at p. 300.).” (Watts, supra, 121 Cal.App.4th at p. 1039.)
The duty to indemnify, with which we are not concerned here, does not arise until the insurance coverage lawsuit is concluded and a final determination based on the evidence has been made that the insurer is liable for coverage under the policy. (Buss, supra, 16 Cal.4th at p. 46.)
Thus, to prevail in an action seeking declaratory relief on the issue of the duty to defend “the insured must prove the existence of a potential for coverage, while the insurer must establish the absence of any such potential. In other words, the insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot. Facts merely tending to show that the claim is not covered, or may not be covered, but are insufficient to eliminate the possibility that resultant damages (or the nature of the action) will fall within the scope of coverage, therefore add no weight to the scales. Any seeming disparity in the respective burdens merely reflects the substantive law.” (Montrose, supra, 6 Cal.4th at p. 300.)
Generally, “where there is any doubt as to whether the duty to defend exists, the doubt must be resolved in favor of the insured and against the insurer. [Citations.]” (Ringler Associates Inc. v. Maryland Casualty Co. (2000) 80 Cal.App.4th 1165, 1186 [Ringler]; see also Montrose, supra, 6 Cal.4th at pp. 299-300.)
Applying these legal principles here, we thus must determine whether “any potential for coverage” exists as of September 2005 under the policy based on the Avganim complaint and other extrinsic evidence made available to Hartford in connection with the tender. (Montrose, supra, 6 Cal.4th at p. 300; Watts, supra, 121 Cal.App.4th at p. 1039; Haskel Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 976.) And, if such potential exists, we then must determine whether Hartford offered “undisputed extrinsic evidence which conclusively establishes that there is no potential for coverage.” (Haskel, supra, at pp. 976-977.)
Specifically, Hartford challenges the trial court’s finding that it owed a duty to defend between September 26, 2005 and January 19, 2006 on the ground that “it was not until January 19, 2006 that Respondents submitted extrinsic evidence of defamatory statements at least arguably not excluded from coverage.”
The Avganim complaint states a cause of action for, among other things, defamation. Paragraph 18, subparagraph (d) of the Avganim complaint provides that “in August, 2005, Plaintiffs learned, for the first time, that on earlier dates so far unknown to Plaintiffs, without the knowledge or consent of Plaintiffs, Defendants: [¶] . . . [¶] ‘Demeaned and disparaged Plaintiffs, the Business and the products of the Business to customers, prospective customers, suppliers, prospective suppliers and the public at large.’ ” Paragraphs 49 and 50 provide that “[c]ommencing in or about 2004, Defendants, on numerous occasions, made false written and oral statements concerning Plaintiffs and the Business, demeaning and disparaging Plaintiffs, the Business and the products of the Business,” and “repeated said statements, or the substance thereof, to other persons . . . .” Paragraph 87, subdivision (e) alleges that, “unless restrained, Defendants will continue to perform said wrongful acts,” and thus seeks to enjoin them in the future from “demeaning or disparaging in any way Plaintiffs, the Business, or the products of the Business.”
Respondents’ policy was effective August 18, 2005 through August 18, 2006, and provides coverage for, among other things, “ ‘[p]ersonal and advertising injury’ caused by an offense arising out of your business . . . during the policy period.” “Personal and advertising injury” is defined as “injury . . . arising out of one or more of the following offenses . . . d. Oral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services . . . .”
The policy also includes a “prior publication exclusion,” which excludes from coverage “ ‘Personal and advertising injury’ . . . [a]rising out of oral, written or electronic publication of material whose first publication took place before the beginning of the policy period; . . . .’ ”
Hartford claims no coverage exists as of September 2005 as a matter of law because the Avganim complaint alleges facts that clearly fall within the scope of the prior publication exclusion for two reasons: (1) the alleged defamatory statements were made before the policy’s inception date of August 18, 2005; and (2) even if certain alleged defamatory statements were made during the policy period, those statements were substantially the same as those first made before the policy period. We address each of these claims in turn.
With respect to Hartford’s first claim, we conclude the allegations and the extrinsic evidence supporting those allegations that was made available to Hartford in connection with the tender were sufficient to raise the possibility of coverage as of September 2005 notwithstanding the policy’s exclusion for defamation occurring outside the policy period. As set forth above, the relevant policy became effective August 18, 2005. The Avganim complaint alleges the defamation began in 2004, and that the plaintiffs first learned of it in August 2005. The complaint nowhere alleges a date by which the defamation ended. To the contrary, the complaint alleges the defamation was ongoing, and seeks injunctive relief to prevent it from continuing further. Thus, even though the underlying allegations fail to specify exactly when the alleged defamation occurred, they nonetheless leave open the possibility such defamation occurred within the policy period, particularly when viewed in light of our obligation to resolve any doubt as to the existence of the duty to defend in favor of the insured. (Montrose, supra, 6 Cal.4th at pp. 299-300.)
Moreover, extrinsic evidence offered by respondents in support of the complaint show that at least some of the allegedly defamatory statements were in fact made after the policy’s August 2005 inception date. Such evidence includes a December 2005 email from an Avganim plaintiff alleging that “Scott and Jane [Ratto] have been telling all Noble customers that we are no longer around, or no longer in business partnership with them, and other stories that have been really creative,” and deposition testimony from respondents’ former employee alleging that, during a December 2005 business trip, Jane Ratto “stated that there was a possibility that [the plaintiff’s] locks were infringing” and that “[the potential customer] showed concern . . . .” This evidence, wholly consistent with the allegations in the Avganim complaint which was tendered to Hartford in September 2005, was provided to Hartford in January and February 2006, and raised the possibility of defamation occurring during the policy period.
With respect to Hartford’s related claim that the prior publication exclusion bars coverage because any defamatory statements allegedly made during the policy period were substantially the same as those made before the policy period, we conclude it too is undermined by the Avganim complaint and the extrinsic evidence. We faced a similar argument in an earlier decision, Ringler, supra, 80 Cal.App.4th 1165, in which we held, “the first-publication exclusion language at issue is intended to and in fact bars coverage of an insured’s continuous or repeated publication of substantially the same offending material previously published at a point of time before a policy incepts, while not barring coverage of offensive publications made during the policy period which differ in substance from those published before commencement of coverage. [Citations.]” (Id. at p. 1183.) Relying on this holding, Hartford claims that, to the extent the Avganim complaint alleges defamatory statements made within the policy period, respondents have provided no material tending to show those statements were different from those allegedly first made in 2004, before the policy period began. But, as we explained above, respondents have the burden on summary adjudication to show only a potential for coverage. Hartford, on the other hand, has the burden to conclusively negate all possibility of coverage. (Montrose, supra, 6 Cal.4th at p. 300.) This defense burden is not met, at least at this stage, by pointing to an absence of evidence that the defamatory statements allegedly made during the policy period differed in substance from those made before the policy period began. Rather, until such time as Hartford affirmatively establishes the statements made during the policy period were substantially the same as those made beforehand, its duty to defend remains. (Atlantic Mutual Ins. Co. v. J. Lamb, Inc. (2002) 100 Cal.App.4th 1017, 1038-1039 [“[o]nce the potential for coverage ha[s] been established by the . . . complaint, [the insured] need[s] to do no more”]; Montrose, supra, 6 Cal.4th at p. 300 [the duty to defend is excused only where “ ‘the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage’ ”]; id. at pp. 299-300 [any doubt as to whether the facts establish the existence of the defense duty must be resolved in the insured’s favor].)
Ringler is not to the contrary. The issue there was whether the trial court properly adjudged that the insurer owed no duty to defend or to indemnify where, unlike here, no evidence existed that the alleged defamation occurred within the policy period, and during depositions the plaintiffs’ witnesses all testified the statements occurred outside the policy period. (Ringler, supra, 80 Cal.App.4th at pp. 1175, 1184-1185.) Affirming the grant of summary judgment, we noted: “Out of this entire undisputed record [the insured] cannot point to a single fact negating the application of the first-publication exclusion to the defamatory publications alleged in the [underlying] actions.” (Id. at p. 1184.) In other words, the duty to defend was excused in Ringler because, unlike here, the complaint and extrinsic evidence could by “no conceivable theory” raise a single issue bringing the dispute within policy coverage. (Montrose, supra, 6 Cal.4th at p. 300; see also Atlantic Mutual Ins. Co. v. J. Lamb, Inc., supra, 100 Cal.App.4th at pp. 1038-1039.)
Given the allegations in the Avganim complaint and the extrinsic evidence made available to Hartford consistent with those allegations, which raise the possibility of new defamation occurring within the policy period, we thus conclude Hartford has not conclusively established that the prior publication exclusion bars coverage. (CNA Casualty of California v. Seaboard Surety Co. (1986) 176 Cal.App.3d 598, 613-614 [“The spirit of Gray [v. Zurich Insurance Co., supra, 65 Cal.2d 263] would not be served if an insurer could decline a defense where the application of an exclusion was only a possibility.”]; Atlantic Mutual Ins. Co. v. J. Lamb, Inc., supra, 100 Cal.App.4th at pp. 1038-1039 [“An insurer may rely on an exclusion to deny coverage only if it provides conclusive evidence demonstrating that the exclusion applies. [Citations.] Thus, an insurer that wishes to rely on an exclusion has the burden of proving, through conclusive evidence, that the exclusion applies in all possible worlds.”].) As such, the trial court’s finding of a duty to defend as of September 2005 stands.
The Duty To Provide Independent Counsel.
Generally, an insurer owing a duty to defend an insured has the right to control the defense and settlement of the underlying action, and to otherwise directly participate in the action, so long as no conflict of interest exists between the insured and the insurer. (Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1407.) To that end, the insurer has the right to retain an attorney on the insured’s behalf, which attorney owes a fiduciary duty to both the insurer and the insured. (Id. at p. 1406.) When, however, a conflict of interest arises, the insurer has a duty under Civil Code section 2860 (section 2860) to provide independent counsel, or “Cumis” counsel, for the insured, and to pay the reasonable value of the independent counsel’s legal services and costs. (Civ. Code, § 2860, subds. (a) and (c); e.g., Gafcon, supra, 98 Cal.App.4th at pp. 1421-1422; Bogard v. Employers Casualty Co. (1985) 164 Cal.App.3d 602, 610-611.)
For purposes of this appeal, we use the terms “Cumis counsel” and “independent counsel” interchangeably. The term Cumis counsel derives from the holding of San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis). In response to the Cumis decision, our Legislature adopted section 2860 in 1987 to codify and clarify its holding. Section 2860 provides in full:
Section 2860 does not purport to identify all situations in which a conflict of interest exists that triggers the right to Cumis counsel. Rather, it provides that a conflict of interest “may arise or does exist,” triggering such right, “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.” (Civ. Code, § 2860, subds. (a) and (b); see also San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375 [“where there are divergent interests of the insured and the insurer brought about by the insurer’s reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured . . . [and] may not compel the insured to surrender control of the litigation”]; Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1007.)
Several California cases decided since the enactment of section 2860 have considered the issue of whether an insurer’s reservation of rights gives rise to a conflict of interest requiring Cumis counsel. These cases have generally held that whether such reservation triggers the right to Cumis counsel “depends upon the nature of the coverage issue, as it relates to the issues in the underlying case.” (Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350; Gafcon, supra, 98 Cal.App.4th at p. 1421; see also Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1395-1396.) When the defense attorney can “control[] the outcome of the [coverage] issue to [the insured’s] detriment, or ha[s] incentive to do so,” Cumis counsel must be provided. (Blanchard, supra, 2 Cal.App.4th at p. 350.) Or, stated otherwise, “ ‘when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case . . . a conflict of interest sufficient to require independent counsel, to be chosen by the insured, will arise.’ (State Farm Fire & Casualty Co. v. Superior Court [(1989) 216 Cal.App.3d 1222,] 1226, fn. 3.)” (Gafcon, supra, 98 Cal.App.4th at pp. 1421-1422.)
When, however, the coverage issue is “independent of, or extrinsic to, the issues in the underlying action,” no conflict of interest arises requiring Cumis counsel. (Gafcon, supra, 98 Cal.App.4th at p. 1422; see also Foremost Ins. Co. v. Wilks (1988) 206 Cal.App.3d 251, 261 [“where 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”].) Further, a “mere possibility of an unspecified conflict does not require independent counsel. The conflict must be significant, not merely theoretical, actual, [or] . . . potential.” (Dynamic Concepts, supra, 61 Cal.App.4th at p. 1007.)
When the insured seeks summary adjudication of its right to independent counsel, the insured bears an initial burden of showing a conflict of interest exists that provides the basis for such right. The burden then shifts to the insurer to show the insured cannot establish a conflict of interest requiring independent counsel. (Gafcon, supra, 98 Cal.App.4th at pp. 1402, 1423-1424.) Any doubts regarding the propriety of granting the summary adjudication motion are resolved in favor of the insurer as the non-moving party. (Ibid.) On appeal, we perform a de novo review, applying the same analysis as the trial court. (Ibid.)
Here, the trial court summarily adjudicated that Hartford had a duty to retain independent counsel for respondents at its own expense after concluding Hartford’s reservation of rights in accepting tender of the Avganim matter created a conflict of interest between the company and respondents. Hartford claims that conclusion was erroneous as a matter of law. We disagree.
According to its reservation of rights letter, Hartford agreed to provide respondents a defense while “disclaim[ing] any coverage obligation for the noncovered elements of the lawsuit. Please be aware that . . . there is no coverage for any damages that might be awarded for defamation occurring prior to the inception of the Policy.” Hartford further noted that “specifically excluded from coverage is: ‘Personal and advertising injury’ . . . [a]rising out of oral, written or electronic publication of material whose first publication took place before the beginning of the policy period; . . . .’ ”
Finally, Hartford made clear that, in agreeing to defend the case, it intended to “assert any and all of its applicable coverage defenses. Indeed, The Hartford is not waiving its rights to deny coverage, to fully supplement or modify its reservation of rights, to raise any additional coverage defenses as they arise, or to refuse to defend J.R. Marketing further at any future time.” Hartford also made clear that, with the reservation of rights, it was not waiving any coverage defense or other policy provision: “[N]othing contained in this letter nor any other act of this company or its representatives shall be construed as a waiver of any known or unknown coverage defense, nor does this letter waive or change any provisions or conditions of the policy. Additionally, the foregoing in no way restricts or limits this company from relying upon and asserting other facts and grounds that are, or may become, available to it.”
Hartford describes this extensive reservation of rights as too “general” to create a conflict of interest. We disagree with Hartford’s description, concluding that Hartford’s reservation effectively reserved all of its rights to decline coverage. As set forth above, in addition to disclaiming any intent to waive any coverage defenses, Hartford expressly reserved its rights to decline coverage based on the policy’s prior publication exclusion, and impliedly reserved its rights to decline coverage based on the policy’s “expected or intended injury” exclusion. Both of these reservations, we conclude, put Hartford at odds with respondents in developing defenses in the Avganim matter, triggering the right to Cumis counsel under section 2860. (Blanchard, supra, 2 Cal.App.4th at p. 350; Gafcon, supra, 98 Cal.App.4th at p. 1421.) We explain.
The policy’s prior publication exclusion, as we have already stated, excludes from coverage “ ‘Personal and advertising injury’ . . . [a]rising out of oral, written or electronic publication of material whose first publication took place before the beginning of the policy period . . . .’ ” The policy’s “expected or intended injury” exclusion excludes from coverage “ ‘personal or advertising injury’ . . . ‘arising out of an offense committed by, at the direction of or with the consent or acquiescence of the insured with the expectation of inflicting ‘personal and advertising injury.’ ”
With respect to the prior publication exclusion, Hartford contends its reservation of rights created no conflict of interest because “the timing of [defamatory statements] . . . cannot be controlled by defense counsel.” While we agree defense counsel cannot control the timing of such statements, as respondents point out, other key issues implicated by this coverage defense may indeed prove to be under defense counsel’s control. Hartford, for example, may benefit at trial – to respondents’ detriment – from developing a theory that the defamatory statements respondents allegedly made during the policy period were substantially the same as those they allegedly made before the policy period. As we have already explained, the prior publication exclusion language “bars coverage of an insured’s continuous or repeated publication of substantially the same offending material previously published at a point of time before a policy incepts, while not barring coverage of offensive publications made during the policy period which differ in substance from those published before commencement of coverage.” (Ringler, supra, 80 Cal.App.4th at p. 1183.) As such, given the parties’ diverging interests in applying this rule, a conflict of interest exists based on Hartford’s reservation of rights under the prior publication exclusion.
Of course, it may ultimately be determined at trial that Hartford has a viable defense to coverage based on the prior publication or other exclusion, and thus has no duty to indemnify respondents. Here, however, we are concerned only with Hartford’s initial duty to defend and to provide independent counsel based on the potential for coverage, which, for reasons discussed above, has not been conclusively negated.
Further, with respect to the policy’s “expected or intended injury” exclusion, Hartford contends it created no conflict of interest because the company did not expressly reserve any rights based on it, and thus waived the right to raise it as a defense. But, as set forth above, Hartford expressly informed respondents, among other things, that it “will assert any and all of its applicable coverage defenses,” and “that nothing contained in this letter nor any other act of this company or its representatives shall be construed as a waiver of any known or unknown coverage defense.” Given these statements, we, like the trial court, reject Hartford’s suggestion that its reservation of rights constitutes a waiver of any defense based on this exclusion.
Moreover, the Avganim complaint alleges respondents made defamatory statements “intended by [respondents] to expose Plaintiffs and the Business, and they did in fact expose Plaintiffs and the Business, to contempt, ridicule and obloquy . . . .” Such allegations give Hartford’s counsel an incentive, contrary to respondents’ interests, to pursue a theory at trial that the alleged defamatory statements were knowingly or intentionally made. As such, a conflict of interest also exists based on Hartford’s reservation of rights with respect to the “expected or intended injury” exclusion.
We thus affirm the trial court’s finding of a duty by Hartford to provide respondents independent counsel at its own expense.
Enforcing the Duty to Defend and to Provide Independent Counsel.
We next address Hartford’s contention that the trial court abused its discretion in issuing the enforcement order by: (1) effectively awarding damages for breach of the duty to defend without any adjudication of such breach; (2) effectively imposing prospective damages for an unestablished prior breach; and (3) declining, based on an unestablished prior breach, to apply section 2860, subdivision (c) to limit the rates chargeable by independent counsel and to permit arbitration of fee disputes. Hartford reasons that the predicate for the enforcement order – the trial court’s summary adjudication of the duty to defend and to provide independent counsel – was a declaratory relief adjudication, not a breach of contract adjudication, that could “only be enforced prospectively on the issues within the scope of the judgment.” In determining whether Hartford’s contention has merit, we thus must examine the nature of both the duty to defend and a declaratory relief adjudication.
The duty to defend “entails the rendering of a service, viz., the mounting and funding of a defense.” (Buss, supra, 16 Cal.4th at p. 46.) “The duty to defend arises when tender is made . . . [and] obligates the insurer, unless no part of any claim is potentially covered, to fund a defense to minimize the insured’s liability.” (State of California v. Pacific Indemnity Co. (1998) 63 Cal.App.4th 1535, 1546; see also Gray Cary Ware & Freidenrich v. Vigilant Insurance Co. (2004) 114 Cal.App.4th 1185, 1189 [“th[e] duty [to defend] includes providing competent counsel and paying all reasonable and necessary costs”]; Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 58 [the duty to defend “requires the incurring of reasonable and necessary [defense] costs”].)
Further, the insurer’s funding obligations arise immediately upon the finding of a duty to defend. “Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf.” (Montrose, supra, 6 Cal.4th at p. 295; see also Buss, supra, 16 Cal.4th at p. 49 [“To defend meaningfully, the insurer must defend immediately.”].) “The insured’s desire to secure the right to call on the insurer’s superior resources for the defense of third party claims is, in all likelihood, typically as significant a motive for the purchase of insurance as is the wish to obtain indemnity for possible liability. As a consequence, California courts have been consistently solicitous of insureds’ expectations on this score.” (Montrose, supra, at pp. 295-296.)
As our colleagues in the Second Appellate District have explained: “An insured obtains liability insurance in substantial part in order to be protected against the trauma and financial hardship of litigation. If the courts did not impose an immediate defense obligation upon a showing of a ‘potential for coverage,’ thereby relieving the insured from the burden of financing his own defense and then having to sue the insurer for reimbursement, the premiums paid by the insured would purchase nothing more than a lawsuit. [Citation.])” (Haskel, supra, 33 Cal.App.4th at p. 979 fn. 14 [emphasis added].) As such, once a duty to defend is found to exist, so too is the insurer’s obligation to fund the defense by making reasonable and necessary expenditures in furtherance of such defense.
Here, the trial court determined on summary adjudication that Hartford had a duty to defend respondents. It is well-established that such a declaratory relief adjudication is equitable in nature, and thus affords the trial court broad powers to fashion appropriate remedies capable of providing complete relief to the parties. (Dawson v. East Side Union High School Dist. (1994) 28 Cal.App.4th 998, 1044-1045; Oceanside Community Assoc. v. Oceanside Land Co. (1983) 147 Cal.App.3d 166, 178 [“Equity is not limited in scope or type of relief which may be granted. Equitable remedies may be molded by the exigencies of each case.”].)
As we have already concluded, the trial court’ summary adjudication of the duty to defend issue was a final judgment on a collateral issue.
These equitable remedies undoubtedly include remedies designed to enforce a trial court’s order of declaratory relief. “ ‘The jurisdiction of a court of equity to enforce its decrees is coextensive with its jurisdiction to determine the rights of the parties, and it has power to enforce its decrees as a necessary incident to its jurisdiction. Except where the decree is self-executing, jurisdiction of the cause continues for this purpose, or leave may be expressly reserved to reinstate the cause for the purpose of enforcing the decree, or to make such further orders as may be necessary.’ [Citations.] It follows that retention of jurisdiction by the court for the purpose of interpreting and enforcing its judgment is within the scope of declaratory relief.” (Dawson, supra, 28 Cal.App.4th at p. 1044.)
Here, the trial court’s enforcement order did no more than confirm and enforce Hartford’s duty to defend by directing it to immediately fund the defense by paying all outstanding defense legal bills within 15 days, and by paying all future reasonable and necessary defense costs within 30 days of receiving the relevant invoices. As discussed above, where a duty to defend exists, enforcement of that duty necessarily includes directing immediate payment of reasonable and necessary defense bills. (See State of California v. Pacific Indemnity Co., supra, 63 Cal.App.4th at p. 1546; Gray Cary Ware & Freidenrich v. Vigilant Insurance Co., supra, 114 Cal.App.4th at p. 1189; Aerojet-General Corp. v. Transport Indemnity Co., supra, 17 Cal.4th at p. 58.) As such, we conclude the trial court’s order directing payment of respondents’ outstanding and future defense bills was well within its discretion. Indeed, to conclude otherwise would be to render the duty to defend meaningless, because the insured would be deprived of the very benefit of the bargain it sought in purchasing the policy. (Haskel, supra, 33 Cal.App.4th at p. 979 fn. 14.) And as the trial court correctly noted, any challenge to the reasonableness or necessity of defense bills can await an action for reimbursement following the conclusion of the underlying matter. (Ibid.) We thus turn to Hartford’s final claim of error based on section 2860.
As mentioned above, Hartford argues that, even were the trial court authorized to order payment of defense bills, it was not authorized to order payment of such bills at independent counsel rates in excess of those rates Hartford generally pays its own defense counsel, or to preclude Hartford from arbitrating fee disputes. According to Hartford, such order violated section 2860, subdivision (c).
Section 2860, subdivision (c) is set forth above in footnote 5.
The trial court found Hartford was not entitled to the protections of section 2860, subdivision (c), including those restricting rates paid to independent counsel to rates generally paid to the insurer’s own counsel and providing for arbitration of fee disputes, based on Hartford’s ongoing failure to immediately and fully defend respondents. (See Stalberg v. Western Title Ins. Co. (1991) 230 Cal.App.3d 1223, 1233 [where the insurer wrongfully denied a defense, it gave up the right to control the defense and could not condition its payment of attorney fees on the insured’s use of particular defense counsel]; Atmel Corp. v. St. Paul Fire & Marine (N.D. Cal. 2005) 426 F.Supp.2d 1039, 1047 [“ ‘[t]o take advantage of the provisions of section 2860, an insurer must meet its duty to defend and accept tender of the insured’s defense’ ”].)
The trial court reasoned that, were insurers permitted to take advantage of the rate restrictions in section 2860, subdivision (c) despite failing to meet their duty to defend, it would “encourage insurers to reject their Cumis obligations for as long as they chose, safe in the notion that they could, at any point, invoke the protection of the statute, effectively forcing their policyholders to transfer the file to yet another law firm whose rates are lower.”
The trial court found Hartford had failed to fully meet its duty to defend based on the evidence submitted and arguments made in connection with respondents’ motion to enforce the summary adjudication order. Such evidence showed that Hartford had failed to timely pay all reasonable and necessary defense costs incurred by respondents and had failed to provide independent counsel. In particular, Hartford had paid some defense bills but not others, and had unilaterally deducted certain portions of the costs contained in still others.
Hartford points to evidence that it had in fact paid several outstanding defense bills by the time of the hearing on the motion for an enforcement order, and had hired panel counsel to represent respondents. Hartford does not challenge, however, the trial court’s finding that it had failed to pay all outstanding bills in full following issuance of the summary adjudication order on July 26, 2006. Nor does Hartford challenge the trial court’s finding that it failed to provide and pay for independent counsel for respondents following issuance of the order. Indeed, the evidence shows that, as of August 8, 2006, Hartford’s panel counsel still understood itself to be lead defense counsel in the Avganim matter. Hartford also moved to disqualify certain of respondents’ counsel on conflict-of-interest grounds after the trial court issued its summary adjudication order, and then objected to paying invoices from those counsel based on the alleged conflicts.
Given this evidence of Hartford’s ongoing failure to meet its duty to defend, we conclude the trial court’s refusal to afford Hartford the protections of section 2860, subdivision (c) was fully consistent with its broad equitable powers set forth above. (Stalberg, supra, 230 Cal.App.3d at p. 1233; Atmel Corp. v. St. Paul Fire & Marine, supra, 426 F.Supp.2d at p. 1047.) Indeed, to deny the trial court the power to find a failure of duty under these circumstances would be to effectively deny it the very power to enforce such duty that we have already concluded existed under general principles of equity. (See Klinker v. Klinker (1955) 132 Cal.App.2d 687, 694 [“where equity has acquired jurisdiction for one purpose, it will retain that jurisdiction to the final adjustment of all differences between the parties arising from the causes of action alleged”]; see also Sills v. Siller (1963) 218 Cal.App.2d 735, 743 [in a declaratory relief action, where all parties were before the court, a liability determination was necessary for complete disposal of the action, and the defendants’ liability was clearly established, the trial court had authority to declare an amount due to be paid the estate].) As such, we decline to find an abuse of discretion based on the trial court’s application of section 2860, subdivision (c).
DISPOSITION
The trial court’s summary adjudication order and enforcement order are affirmed. Hartford shall bear costs on appeal.
We concur: Pollak, Acting P. J., Siggins, J.
“(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.
“(c) When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage. The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. This subdivision does not invalidate other different or additional policy provisions pertaining to attorney’s fees or providing for methods of settlement of disputes concerning those fees. Any dispute concerning attorney’s fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute.
“(d) When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action. Any claim of privilege asserted is subject to in camera review in the appropriate law and motion department of the superior court. Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party.
“(e) The insured may waive its right to select independent counsel by signing the following statement: ‘I have been advised and informed of my right to select independent counsel to represent me in this lawsuit. I have considered this matter fully and freely waive my right to select independent counsel at this time. I authorize my insurer to select a defense attorney to represent me in this lawsuit.’
“(f) Where the insured selects independent counsel pursuant to the provisions of this section, both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation. Counsel shall cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured. Nothing in this section shall relieve the insured of his or her duty to cooperate with the insurer under the terms of the insurance contract.”