Unreported / Non-Citable
Background
Citizens of Humanity, LLC (“Citizens”) appealed the district court’s dismissal of its breach of contract, contractual bad faith, and tortious bad faith claims against RLI Insurance Company (“RLI”). The dispute centered on whether RLI had a duty to provide independent counsel to Citizens under California Civil Code § 2860. Citizens argued that RLI’s reservation of rights created a conflict of interest requiring independent counsel, premised on Citizens’ interpretation that the insurance policy contained an exclusion for claims based on “intentional conduct.” The district court dismissed the claims, and Citizens appealed. The Ninth Circuit exercised jurisdiction under 28 U.S.C. § 1291 and reviewed the dismissal de novo.
The Court’s Holding
The Ninth Circuit affirmed the district court’s dismissal. First, the court held that Citizens failed to state a plausible breach of contract claim because the insurance policy did not contain an exclusion for “intentional conduct,” contrary to Citizens’ interpretation. Even if such an exclusion existed, RLI’s general reservation of rights did not create a conflict of interest triggering the right to independent counsel under California law (citing Fed. Ins. Co. v. MBL, Inc.). Second, the contractual and tortious bad faith claims failed as a matter of law because they depended on the existence of a breach of contract and the withholding of policy benefits, neither of which was established. The court also declined Citizens’ invitation to certify the question to the California Supreme Court, finding no convincing evidence that the state high court would rule differently.
Key Takeaways
- Under California law, the right to independent counsel under Civ. Code § 2860 arises only when an insurer reserves rights on specific coverage issues that create an actual conflict of interest precluding dual representation.
- A general reservation of rights, without more, does not create a conflict of interest or a duty to provide independent counsel.
- The plain language of the insurance policy governs; here, the policy lacked an “intentional conduct” exclusion, undermining the insured’s conflict argument.
- Contractual bad faith claims cannot survive without an underlying breach of contract; tortious bad faith claims require the withholding of benefits due under the policy.
- The Ninth Circuit declined to certify the issue to the California Supreme Court, applying the standard that certification requires convincing evidence the state high court would decide differently.
Why It Matters
This memorandum disposition reinforces the stringent requirements under California law for triggering an insurer’s duty to provide independent counsel. It clarifies that an insured’s subjective interpretation of a policy—particularly one that reads in an exclusion not present in the text—cannot manufacture a conflict of interest. The decision also reaffirms the derivative nature of bad faith claims in California: without a covered breach or withheld benefits, both contractual and tortious bad faith claims fail. While non-precedential under Ninth Circuit Rule 36-3, the ruling provides a clear application of Swanson, MBL, and John’s Grill principles to a coverage dispute involving reservation of rights and the duty to defend. The memorandum is unpublished, so it is not binding precedent. It nevertheless shows how federal courts applying California law distinguish an actual counsel conflict from a reservation that merely preserves coverage defenses. Coverage counsel should compare the reserved issue with the facts defense counsel must litigate before assuming Civil Code section 2860 applies. The result also preserves the difference between the duty to defend and the separate duty to fund independent counsel. An insurer may defend subject to a reservation without automatically surrendering control of the defense. The operative question is whether the reserved coverage issue creates incentives for appointed counsel to shape facts against the insured. Here the alleged policy exclusion was absent, and the remaining general reservation did not establish that kind of conflict.