FPI Management, Inc. v. DB Ins. Co., Ltd.
2:21-cv-00340-MCE-DB
| E.D. Cal. | Dec 13, 2021Background
- FPI Management (Plaintiff) manages Lakeview Towers; the Lee/Wei Family Trust (Owner) is the named insured on commercial liability policies issued by DB Insurance (Defendant); Plaintiff is an insured under those policies.
- The policies provide a duty to defend but contain a broad "fungi" exclusion (mold/mycotoxins and related remediation costs).
- In June 2019, 23 tenants sued the Owner, Plaintiff, and onsite manager Hileman (Campana action), alleging water intrusion, mold, and related habitability damages.
- Plaintiff tendered the Campana defense; Defendant agreed to defend under a reservation of rights, expressly reserving coverage based on the policy’s fungi exclusion.
- Defendant appointed joint defense counsel for Owner, Plaintiff, and Hileman; Plaintiff objected, arguing Cumis (independent) counsel was required under Cal. Civ. Code § 2860 and that Rule of Professional Conduct 1.7 required separate counsel for conflicts concerning Hileman.
- Plaintiff sued Defendant; DB moved to dismiss the Sixth Cause (Cumis counsel claim) and Seventh Cause (separate-counsel claim under Rule 1.7). The court denied dismissal of the Sixth and granted dismissal of the Seventh with leave to amend; Plaintiff has 20 days to amend.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether insurer's reservation of rights invoking the fungi exclusion created a conflict requiring appointment of independent (Cumis) counsel under Cal. Civ. Code § 2860 | Reservation on fungi exclusion creates a potential coverage/control conflict because defense counsel could influence facts bearing on coverage (whether damages caused by water vs. fungi) | No disqualifying conflict as a matter of law; reservations did not create a conflict that required independent counsel | Denied dismissal: Plaintiff plausibly alleged a conflict under § 2860 because counsel could affect the coverage-determinative fungi issue; Sixth Cause survives |
| Whether Plaintiff may state a private right of action to require Defendant to provide separate, conflict-free counsel based on California Rule of Professional Conduct 1.7 | Rule 1.7 and joint-representation concerns require Defendant to provide separate counsel to Plaintiff | Insurer is not a lawyer and cannot be sued for violating professional conduct rules; breach of disciplinary rules does not create a private cause of action | Granted dismissal with leave to amend: Rule 1.7 does not give rise to an independent cause of action against a non-lawyer insurer; Seventh Cause dismissed but Plaintiff may amend |
Key Cases Cited
- Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336 (9th Cir. 1996) (Rule 12(b)(6) standard—accept factual allegations as true)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading must state a plausible claim)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (courts need not accept legal conclusions as true)
- Foman v. Davis, 371 U.S. 178 (U.S. 1962) (leave to amend generally granted absent prejudice or futility)
- Ross v. Creel Printing & Publishing Co., 100 Cal. App. 4th 736 (Cal. Ct. App. 2002) (breach of disciplinary rule does not create independent private cause of action)