Second District, Division Seven Disagrees With Reasoning in Younesi.
In the absence of contractual arbitration or other alternative dispute resolution process agreed upon by the interested parties, Civil Code section 2860(c) mandates final and binding arbitration of any state court dispute between the insured and insurer over fees to be reimbursed to insured's independent counsel chosen under San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984). Fireman's Fund Ins. Companies v. Younesi, 48 Cal.App.4th 451, 459 (1996) held that section 2860's arbitration provision did not apply to an action that alleged claims beyond a mere Cumis attorney's fees dispute (including allegations of malpractice and fraud). The Second District, Division Seven recently departed company with this reasoning in Younesi. The case in which this occurred is Compulink Management Center, Inc. v. St. Paul Fire & Marine Ins. Co., Case No. B204797 (2d Dist., Div. 7 Dec. 17, 2008) (certified for publication), the subject of this post.
St. Paul allowed Compulink to select independent Cumis counsel to defend it in a third party suit. After the case settled, Compulink sued St. Paul for breach of contract, breach of the implied covenant, and declaratory relief. St. Paul filed a petition to compel arbitration pursuant to section 2860(c), arguing that the central issue was the amount of Cumis fees allegedly owed to Compulink. Based on Compulink’s primary opposition argument, the trial court denied the petition to compel arbitration because its complaint included allegations beyond a mere attorney’s fees dispute (focusing especially on the bad faith allegations) and based on the reasoning in Younesi.
Justice Zelon, writing for a 3-0 panel, reversed and remanded to require arbitration of all Cumis fee issues (with the remaining issues to be adjudicated in the trial court).
The issue mainly involved statutory interpretation of section 2860(c), which was facially clear and had no exception for fee disputes in cases where other claims or issues are also alleged. (Accord, Long v. Century Indemnity Co., 163 Cal.App.4th 1460 (2008).)
The Compulink court then parted ways with the reasoning of Younesi. The main problem with this earlier decision, according to Justice Zelon, was Younesi’s misreading of Caiafa Prof. Law Corp. v. State Farm Fire & Cas. Co., 15 Cal.App.4th 800 (1993). Caiafa was distinguishable because it involved staying a federal court proceeding based on section 2860(c), with federal courts not bound by state law arbitration procedures. Nothing in Caiafa suggested that state courts were not obliged to follow section 2860(c) procedures, which they are bound to follow. “We accordingly decline to follow the decision in Younesi to the extent it holds that section 2860’s arbitration provision only applies when the sole issue in dispute is the amount or rate of Cumis counsel’s fees. The plain language of the statute contains no such limitation.” (Slip Opn., at p. 11.) However, the non-fee issues would still be adjudicated in the trial court.
BLOG UNDERVIEW—For those of you wanting more information on the nature of Cumis arbitrations, see our June 20, 2008 post summarizing the last session of the NALFA seminar held earlier this year in Los Angeles.