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Written By: Tonya D. Hubinger, Esq. and Roger J. Brothers, Esq.

Buchman Provine Brothers Smith LLP

Walnut Creek, California

On September 25, 2013, the California Supreme Court ordered that the opinion of Schaefer v. Elder, 217 Cal. App.4th 1, be depublished. In Schaefer v. Elder, the Court of Appeal had ruled that a policy provision in the general liability insurance contract, which made coverage dependent on the status of a contractor's personnel as independent contractors versus employees, created a conflict pursuant to California Civil Code section 2860 and, thus, entitled the insured to independent counsel.

In Schaefer, Steve Schaefer ("Schaefer") contracted with Kelly Elder dba Elder Construction ("Elder") to construct a residence. Schaefer subsequently sued Elder for alleged construction defects. Elder tendered the defense of the lawsuit to his insurer, CastlePoint National Insurance Company ("CastlePoint"), who accepted the tender under a reservation of rights. CastlePoint then appointed counsel to represent Elder.

The CastlePoint insurance contract contained a "contractor's special condition" which stated that it would not cover work performed by an independent contractor unless the insured first obtained written indemnity agreements and additional insured status from the independent contractors. CastlePoint then filed a declaratory relief action against Elder in order to determine whether the insurance contract covered the claims and whether the "contractor's special condition" applied.

Elder hired separate counsel to file documents with the court to disqualify the firm appointed by CastlePoint and to determine Elder's right to independent counsel. It was alleged, in Schaefer's underlying complaint, that Elder used "employees" to construct Schaefer's home. However, in answers to interrogatories prepared by the firm hired by CastlePoint, Elder stated that he "primarily contracted with subcontractors to construct the subject property." The interrogatory responses prepared by the firm hired by CastlePoint supported application of the contractor's special condition coverage defense asserted by CastlePoint in its declaratory relief action.

It was in Elder's best interest to establish that construction of the Schaefer home was performed by employees, whereas, it was in CastlePoint's best interest to establish that such work was performed by subcontractors. Hence, according to the Court of Appeal, a coverage conflict existed entitling Elder to independent counsel.

In the absence of the depublication order, the Court of Appeal's decision would have allowed insureds a right to obtain independent counsel due to a conflict of interest that disqualifies insurer-appointed counsel from representing the interests of both the insured and insurer. Although this case appears to turn on the specific "contractor's special condition" provision, if not ordered depublished by the California Supreme Court, it could have impacted many insurers and insureds with respect to the manner in which insureds are represented in lawsuits through their insurers.

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