Cerecedes v. Houston Casualty Company

Background

Jason Cerecedes alleged that he purchased several commercial general-liability and excess-liability insurance policies from Houston Casualty Company for successive periods from October 14, 2018, through October 14, 2022. Cerecedes had performed construction renovation work for Una Elias. After Elias alleged that the work caused property damage, Cerecedes notified Houston Casualty Company of the claim.

Houston Casualty Company initially declined coverage, stating that the damage did not occur during the policy periods and affected only Cerecedes’s work rather than other property. After Elias sued Cerecedes in state court, Houston Casualty Company again denied coverage before later acknowledging a duty to defend while reserving rights concerning indemnity and policy exclusions.

Cerecedes requested independent counsel under California Civil Code section 2860, commonly called Cumis counsel. Houston Casualty Company first sought to appoint Thomas Fama and later selected Skane Mills. Cerecedes alleged that the insurer and its appointed counsel had conflicting interests because defense decisions could affect whether the insurer had to provide coverage. He also alleged that Houston Casualty Company acted in bad faith by denying coverage, withholding or redacting communications, and changing its position.

Motion to Dismiss

Houston Casualty Company moved under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. It sought dismissal of the claim for declaratory relief concerning independent counsel and the request for punitive damages.

For purposes of the motion, the court accepted the Second Amended Complaint’s factual allegations as true. The court also treated the insurance-policy documents submitted by Houston Casualty Company as part of the complaint because the complaint referred to them and Cerecedes did not dispute their authenticity.

Independent Counsel

The court explained that California law requires an insurer to pay for independent counsel when a conflict of interest between the insurer and insured creates that duty. A reservation of rights alone does not always create such a conflict. The relevant question is whether counsel appointed by the insurer could control the outcome of coverage-related issues through litigation decisions in the underlying case.

The court held that Cerecedes plausibly alleged such a conflict. The complaint alleged that appointed counsel could influence discovery, expert evaluations, inspections, and factual development concerning whether the damage involved other property and whether it occurred during the policy periods. Those facts could affect Houston Casualty Company’s coverage obligations. The court also found that the alleged coverage denials and the handling of communications with appointed counsel supported the claim that the insurer had an incentive to minimize coverage at Cerecedes’s expense.

The court rejected the argument that appointing Skane Mills eliminated the conflict. The alleged conflict was between Cerecedes and Houston Casualty Company, not merely between Cerecedes and the first lawyer, Thomas Fama. The court therefore concluded that the complaint sufficiently pleaded a claim concerning the appointment of independent counsel.

Punitive Damages

Under California Civil Code section 3294, punitive damages require facts supporting oppression, fraud, or malice. The court rejected Houston Casualty Company’s argument that the complaint contained only generalized allegations.

The court found that the complaint included specific allegations about the two coverage denials, Houston Casualty Company’s later change in position, the appointment and replacement of defense counsel, and the company’s alleged reluctance to provide related communications. Taken together, those allegations were sufficient at the motion-to-dismiss stage to support a claim that Houston Casualty Company acted with a willful or conscious disregard of Cerecedes’s rights.

Disposition

The court denied Houston Casualty Company’s motion to dismiss. The ruling allowed the independent-counsel claim and punitive-damages request to proceed past the pleading stage. The order did not decide the ultimate merits of those claims.