SCOTTSDALE INSURANCE COMPANY v. PTB SALES, INC./July 16, 2020/Excerpts by Junfola

Issues/Concepts:

  1. No duty to defend
  2. Reservation of rights to seek reimbursement of defense and indemnity expenses
  3. California Civil Code Section 2860 – no duty to provide independent counsel
  4. No interference by Scottsdale in PTB’s counterclaim in underlying action

Facts:

  • PTB purchased CGL policy from Scottsdale in 2016.
  • In 2017, Scottsdale funded PTB’s defense in action between PTB and Brooks.
  • Scottsdale contributed to settlement.
  • Scottsdale sued PTB seeking declaratory relief and reimbursement of defense costs and settlement expenses.
  • PTB countered for breach of contract and bad faith.
  • Scottsdale moved for summary judgment on its claims and on PTB’s counterclaims.
  • PTB opposed Scottsdale’s motion but did not itself move for summary judgment.
  • District court granted Scottsdale’s motion.
  • PTB appeals.
  • Affirmed/not for publication

Ruling:

  • Scottsdale had no duty to defend PTB.
    • Underlying allegations either not potentially covered under the personal and advertising injury coverage, or were excluded.
    • Duty to defend when there is a potential for coverage.
    • PTB failed to show a potential for coverage.
  • Scottsdale properly reserved its rights to recoup its defense costs and settlement expenses.
    • An insurer “properly reserve[s] its rights” to recoup its defense costs by advising its insured that it would provide a defense under a reservation of certain rights, including “[t]he right to seek reimbursement of defense fees paid toward defending causes of action which raise no potential for coverage.”
    • It repeated that reservation of rights in three subsequent communications with PTB.
    • To recoup its settlement expenses, an insurer must make “a timely and express reservation of rights.”
    • After an unsuccessful attempt to settle during the first mediation, Scottsdale sent PTB a letter reserving “the right to seek reimbursement for any judgment or settlement paid.”
    • During the second round of settlement negotiations, Scottsdale twice offered to “contribute $300,000 toward settlement of this matter, subject to its reservation of rights,” in response to Brooks’ $850,000 settlement demand.
    • Brooks then reduced its demand to $725,000 and Scottsdale increased its settlement offer to $350,000.
    • A reasonable party in PTB’s position would have understood Scottsdale’s reservation of the right to seek reimbursement for “any settlement” to apply to its offer to contribute $350,000, as both were made during the second attempt at settlement negotiations.
  • Scottsdale did not breach a duty to fund independent counsel for PTB under California Civil Code § 2860.
    • Under Section 2860, an insurer must provide independent counsel to the insured “[i]f the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises.”
    • District court properly concluded that this claim failed as a matter of law because Scottsdale owed no duty to defend.
    • There was no conflict of interest, which arises “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.”
    • Coverage depended simply on a comparison of the allegations in Complaint against the terms of the Policy. In this case, that is a solely legal issue, and the provisions of the Complaint and the Policy are fixed and not susceptible to manipulation by appointed counsel.
  • District court did not err in granting summary judgment in Scottsdale’s favor on PTB’s counterclaim for bad faith interference with the prosecution of PTB’s counterclaims against Brooks.
    • PTB voluntarily settled its counterclaims against Brooks in exchange for $250,000.
    • PTB entered into the settlement agreement with notice that Scottsdale had reserved its rights to recoup any settlement expenses, yet PTB asked Scottsdale to fund the settlement, which it did.
    • There is simply no evidence that Scottsdale interfered with PTB’s successful and self-initiated effort to settle its claims against Brooks for $250,000.
    • The district court properly granted Scottsdale’s motion for summary judgment on PTB’s counterclaims against Scottsdale.