The insured's duty to cooperate after the insurer initially denies the claim but later agrees to defend under reservations was the issue in Travelers Prop. Cas. Co. of Am. v. Fid. & Guar. Ins. Co., 2012 U.S. Dist. LEXIS 65834 (N.D. Cal. May 10, 2012).
Centex Homes developed several residential communities, subcontracting the construction work to a number of different entities. The subcontractors named Centex as an additional insured under their policies with Travelers. The policies had a "cooperation clause" which required the insureds to cooperate with Travelers with regard to all aspects of coverage.
In 2010, Centex was sued for construction defect claims by homeowners in two different cases. When the cases were tendered to Travelers, it refused to defend or indemnify Centex. After Centex filed suit against Travelers for denial of coverage in one of the underlying cases, Travelers reversed course by agreeing to defend, but subject to a reservation of rights. Travelers reserved the right to seek reimbursement of defense costs. Travelers also denied coverage in the second underlying case before changing its mind and agreeing to defend under a similar reservation of rights.
After agreeing to defend, Travelers sought to appoint counsel because it had a right to control the defense under the policies. Centex refused to allow Travelers to appoint new counsel because Centex had already retained counsel that was actively involved in defending the two underlying cases.
Travelers sued Centex, contending the refusal to accept appointed counsel constituted a material breach of the policies' cooperation clauses. Centex moved for partial summary judgment. The court noted that once the insurer took on the duty to defend, it generally had the absolute right to manage the defense and the insured is required to surrender all control. But when an insurer wrongfully refused to defend, the insured was relieved of its obligations to allow the insurer to manage the litigation and could proceed in whatever manner it deemed appropriate.
Consequently, Travelers lost its right to control the defense of the underlying cases when it declined to participate in the defense of those actions. Because the duty to defend arises immediately upon tender, Travelers' delay in providing Centex with a defense divested it of the right to control the defense. According, Centex's motion for partial summary judgment was granted.
