Insured Entitled to Independent Counsel Where Coverage Action Turns on Facts That Could be Used to Establish Underlying Liability

The United States District Court for the Central District of California, applying California law, has held that an insured is entitled to independent counsel where an insurer’s coverage action turns on facts that overlap with facts that might establish an insured’s liability in the underlying lawsuit.  Aspen Am. Ins. Co. v. Ou, 2019 WL 1950293 (C.D. Cal. Mar. 14, 2019).

The insured, a surgeon, obtained a healthcare professional liability policy from the insurer.  Subsequently, the estate of the insured’s former patient, who died prior to the insured applying for the policy, filed a wrongful death suit against the insured.  After receiving notice of the lawsuit, the insurer issued a reservation of rights letter, appointing defense counsel for the insured and reserving the right to deny coverage based on a policy exclusion barring coverage for “any claim arising out of, based upon or attributable to, in whole or in part .... [a]n incident which, prior to the inception of this policy, any insured had a reasonable basis to believe: (1) that a professional duty had been breached; or (2) that an incident might reasonably be expected to be the basis of a claim or suit against any insured.”  The insurer sought a judgment that no coverage was available for the lawsuit based on the exclusion.  The insured filed counterclaims asserting that he was entitled to independent counsel and that the insurer’s coverage action should be stayed while the underlying lawsuit remained pending.

The court granted partial summary judgment to the insured, finding that the insured was entitled to independent counsel because the dispositive issues in the coverage action turned on facts that overlapped, at least in part, with facts that might be used to prove the insured’s liability in the underlying lawsuit.  The court concluded that the insurer’s claims in the coverage action “turn on what [the insured] knew regarding the incident or claim and when he knew it” and that while it was in the insured’s interest for defense counsel to “marshal facts that establish [the insured’s] actions did not amount to a breach of his professional duties, . . . it is in [the insurer’s] interest here to marshal facts that establish the contrary – or at the very least, undermine [the insured’s] defense with facts that establish [the insured] had at least a reasonable basis to believe that his medical treatment [of the patient] would result in a lawsuit.”  The court also granted a partial stay of the coverage action during the pendency of the underlying lawsuit because “there is factual overlap between the actions, and the findings in this case could negatively impact [the insured’s] defense in the [underlying lawsuit].”