Trademark Infringement/Contribution
Royal Indem. Co. v. Hartford Ins. Co. of the Midwest, No. B196406, 2008 WL 2009747 (Cal. Ct. App. (2d. Dist.) May 12, 2008
Two carriers. Both agreed to defend disparagement claims in a trademark/unfair competition lawsuit brought against the insured. Royal permitted the insured to choose independent counsel, Sheppard Mullin, while Hartford contended that it was entitled to appoint counsel, Sedgwick. Hartford decided that no conflict of interest arose precluding it from choosing counsel as it wished.
The court concluded that a conflict of interest arose requiring Hartford to accede to its insured’s request for counsel. Its appointment of Sedgwick, therefore, did not suffice to discharge its defense duty.
"An insurer is not liable for losses caused by an insured’s willful acts. (Ins. Code § 533.) Because intentional acts are excluded from coverage, an inherent conflict may present itself in third party litigation: the insured seeks a verdict that either he is not liable or that his liability emanates from negligent conduct covered by his insurance policy; by contrast, the insurer has an economic interest in establishing either that its insured is free from liability or that liability emanates from intentional conduct not covered by the policy. Independent counsel is warranted when the insurer's 'best interests are served by a finding of willful conduct because it thus may not be deemed liable.'" (Previews, Inc. v. California Union Ins. Co. (9th Cir.1981) 640 F.2d 1026, 1028.) Id. at *4.
Hartford, by preserving various elements of its right to attack exclusionary conduct including the “knowledge of its falsity” exclusion, created a conflict. (Compare James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1103 [insurer “agreed to defend the insureds against the trademark infringement and related claims without any reservation of rights”].) The court noted that in a “mixed action” where some claims are covered and others not, there is a potential for conflict even apart from the intentional acts exclusion issue previously noted.
“[I]n cases involving multiple claims against the insured, some of which fall within the policy coverage and some of which do not, the insurer may be subject to substantial temptation to shape its defense so as to place the risk of loss entirely upon the insured.” (Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 647.)
In a mixed action, there is a potential conflict of interest because '[t]he insured will want any judgment limited to covered claims, while the insurance company will be better off if judgment is imposed on claims not covered under the policy.' (Croskey et al., Cal. Practice Guide: Insurance Litigation, supra, at ¶ 7:785, p. 7B-96.) 'It seems doubtful that the conflict of interest can be avoided merely by the insurer's instructing defense counsel to ignore coverage defenses.'” (Id., ¶ 7:788, p. 7B-98.) Id. at *5.
The insured scored a complete victory and is not required to pay any money in the counterclaims. Therefore, the alleged violation of the cooperation clause was not problematic and, even though the insured refused to allow Sedgwick to serve as counsel because it believed it was entitled to retain independent counsel, that action did not sufficiently prejudice Hartford so as to eliminate its duty to pay for independent counsel.
The court noted that Hartford did not waive a “no voluntary payments” clause of non-compliance and thus it was not before the court. Moreover, Royal agreed to pay Sheppard Mullin’s fees as independent counsel.
Since Royal was on the hook for the payments, the insured was not making voluntary payments as Royal was not acting as a “volunteer.” Equitable contributions, therefore, arose against Hartford in favor of Royal Indemnity Co.
The court also found that prejudgment interest was recoverable in favor of Royal and that a stipulation that read, “[i]f the Court determines that Royal has a right of recovery, Royal's damages shall be $150,000” did not bar such recovery because it related to damages, not prejudgment interest.
