Gafcon, Inc. v. Ponsor & Associates

handling the case, Todd Lightbody. After setting forth the circumstances of his retention by Travelers, the fact of his employment with the company, and his later withdrawal from the underlying litigation, von Kaesborg averred generally that Ponsor “was not retained to represent Travelers” and at no time did he or the law firm place Travelers’ interests over Gafcon’s. According to von Kaesborg, he exercised his own professional judgment on Gafcon’s behalf at all times, and “Travelers never interfered with that judgment” nor did Travelers “in any manner limit or restrict our ability to represent Gafcon in the underlying litigation.” Finally von Kaesborg averred that while he was aware Travelers provided a defense under a reservation of rights, Ponsor & Associates had no responsibility for the coverage determination made by Travelers; that Ponsor & Associates “was not retained by Travelers, nor did [it] represent or advise Travelers, with respect to the scope of coverage for Gafcon, and [it] was not involved with any factual or legal investigation regarding the reservation of rights.” Lightbody similarly averred that Ponsor & Associates and its attorneys, including von Kaesborg, never had any responsibility regarding Travelers’ coverage determination. He stated Ponsor & Associates was never retained by Travelers regarding scope of coverage, and none of its lawyers were involved with any “factual or legal investigation regarding Travelers’ reservation of rights.” He averred, “Ponsor & Associates was retained for the sole purpose of representing Gafcon’s rights in the [underlying] litigation.”

Following the hearing on Ponsor’s motion, the parties stipulated to continue the hearing on Travelers’ motion in order to permit Gafcon time to conduct certain discovery and bring motions to compel discovery from Travelers before filing its opposition papers. Thereafter, in opposition to Travelers’ motion, Gafcon submitted its counsel’s declaration indicating Gafcon could not present certain evidence tending to establish facts relevant to the issues raised in its second amended complaint because the court had denied its various motions to compel.

The court granted summary judgment in favor of Travelers and Ponsor. Citing Cumis, supra, 162 Cal.App.3d 358 , and Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345 [ 2 Cal.Rptr.2d 884 ] (Blanchard), it ruled as a matter of law the employment of attorneys by insurance companies does not constitute the unauthorized practice of law. The court also ruled Gafcon failed to raise material issues of fact to show Travelers or Ponsor engaged in or aided the unauthorized practice of law or had a conflict

of the application of [summary judgment to] declaratory relief lies in the trial court’s function to render such a judgment when only legal issues are presented for its determination.” ’ [Citations.]” (Las Tunas Beach Geologic Hazard Abatement Dist. v. Superior Court (1995) 38 Cal.App.4th 1002 , 1015-1016 [ 45 Cal.Rptr.2d 529 ].) When summary judgment is appropriate, the court should decree only that plaintiffs are not entitled to the declarations in their favor. (Spencer v. Hibernia Bank (1960) 186 Cal.App.2d 702 , 712 [ 9 Cal.Rptr. 867 ], citing Essick v. City of Los Angeles (1950) 34 Cal.2d 614 , 624-625 [ 213 P.2d 492 ].) Thus, in a declaratory relief action, the defendant’s burden is to establish the plaintiff is not entitled to a declaration in its favor. It may do this by establishing (1) the sought-after declaration is legally incorrect; (2) undisputed facts do not support the premise for the sought-after declaration; or (3) the issue is otherwise not one that is appropriate for declaratory relief.

This court assesses the trial court’s ruling de novo, applying the same analysis as the superior court. (Johnson v. City of Loma Linda (2000) 24 Cal.4th 61 , 65, 67-68 [ 99 Cal.Rptr.2d 316 , 5 P.3d 874 ]; Norgan v. Upjohn Co. (1999) 21 Cal.4th 383 , 404 [ 87 Cal.Rptr.2d 453 , 981 P.2d 79 ]; Buss v. Superior Court (1997) 16 Cal.4th 35 , 60, 65 [ 65 Cal.Rptr.2d 366 , 939 P.2d 766 ]; Silva v. Lucky Stores, Inc. (1998) 65 Cal.App.4th 256 , 261 [ 76 Cal.Rptr.2d 382 ].) We construe the moving party’s affidavits strictly and the opponent’s affidavits liberally and resolve any doubts as to the propriety of granting the motion in favor of the opponent. (Silva v. Lucky Stores, Inc., at p. 261.) On appeal from a ruling on a motion for summary judgment we are not bound by the trial court’s stated reasons for its ruling on the motion; we review only the trial court’s ruling and not its rationale. (D’Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1 , 18-19 [ 112 Cal.Rptr. 786 , 520 P.2d 10 ]; Bed, Bath & Beyond of La Jolla, Inc. v. La Jolla Village Square Venture Partners (1997) 52 Cal.App.4th 867 , 873 [ 60 Cal.Rptr.2d 830 ]; El Centro Grain Co. v. Bank of Italy etc. (1932) 123 Cal.App. 564 , 567 [ 11 P.2d 650 ].)

We first conclude the court correctly granted summary judgment in favor of Ponsor given the lack of an actual, present controversy between it and Gafcon for which declaratory relief might have been appropriate. There is no dispute that as of November 1999, well before Gafcon filed its second amended complaint, Ponsor had been relieved as counsel and no longer represented Gafcon. Any relationship between Ponsor and Gafcon, and thus any controversy vis-a-vis those parties, had terminated by that time.

In response, Travelers concedes a corporation may not employ lawyers for customers where the corporation has no direct interest in the dispute at issue. It maintains its practice of employing lawyers to protect its own as well as its insureds’ interests is distinguishable and has gained acceptance as evidenced by State Bar Opinion 1987-91, which expressly concludes an insurance company’s in-house counsel may represent insureds in litigation without violating the prohibition against aiding the unauthorized practice of law, provided, among other things, the insurance company does not interfere with counsel’s professional independence or have in-house counsel also advise it on coverage issues concerning the insured. Travelers argues further that the undisputed facts demonstrate it did not engage in any conduct falling within any of the proscribed activities under State Bar Opinion 1987-91.

We reject the notion that an insurance company’s mere employment of attorneys to represent its insureds constituted the practice of law by the insurance company itself. Gafcon’s analysis ignores a critical element of the equation: the relationship between insurer, insured and counsel retained or employed by the insurer to act on the insureds’ behalf. When an insurance company in California arranges for a law firm to defend an insured under a contractual duty to do so under an insurance policy (regardless of whether that law firm is retained outside counsel or in-house counsel employed by the insurer), counsel is acting on the insurer’s behalf and representing the insurer’s own rights and interests as well as those of its insured. It is because of this distinction that we reach our limited holding in this case.

1. The Tripartite Insurer-Attomey-Insured Relationship

In California, it is settled that absent a conflict of interest, an attorney retained by an insurance company to defend its insured under the insurer’s contractual obligation to do so represents and owes a fiduciary duty to both the insurer and insured. (State Farm Mutual Automobile Ins. Co. v. Federal Ins. Co. (1999) 72 Cal.App.4th 1422 , 1428-1429 [ 86 Cal.Rptr.2d 20 ]; National Union Fire Ins. Co. v. Stites Prof. Law Corp. (1991) 235 Cal.App.3d 1718 , 1727 [ 1 Cal.Rptr.2d 570 ] [“So long as the interests of the insurer and the insured coincide, they are both the clients of the defense attorney and the defense attorney’s fiduciary duty runs to both the insurer and the insured.”]; Lysick v. Walcom (1968) 258 Cal.App.2d 136 , 146 [ 65 Cal.Rptr. 406 , 28 A.L.R.3d 368 ].) “It is a well accepted and oft repeated principle that the attorney retained by the insurance company for the purpose of defending the insured under the insurance policy owes the same duties to the insured as if the insured had hired the attorney him or herself.” (Bogard v. Employers Casualty Co. (1985) 164 Cal.App.3d 602 , 609 [ 210 Cal.Rptr. 578 ]; see also Kroll & Tract v. Paris & Paris (1999) 72 Cal.App.4th 1537 ,

1542-1543 [ 86 Cal.Rptr.2d 78 ]; Lysick v. Walcom, supra, 258 Cal.App.2d at pp. 146-147.)

In American Mut. Liab. Ins. Co. v. Superior Court (1974) 38 Cal.App.3d 579 , 591-592 [ 113 Cal.Rptr. 561 ], the court elaborated on the interests of the parties within this relationship: “In the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The insured and the insurer have certain obligations each to the other . . . arising from the insurance contract. Both the insured and the carrier have a common interest in defeating or settling the third party’s claim. If the matter reaches litigation, the attorney appears of record for the insured and at all times represents him in terms measured by the extent of his employment. [H In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. Conceptually, each member of the trio, attorney, client-insured, and client-insurer has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well. The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured. Communications are routinely exchanged between them relating to the joint and common purpose—the successful defense and resolution of the claim. Insured, carrier, and attorney, together form an entity—the defense team—arising from the obligations to defend and to cooperate, imposed by contract and professional duty. This entity may be conceived as comprising a unitary whole with intramural relationships and reciprocal obligations and duties each to the other quite separate and apart from the extramural relations with third parties or with the world at large. Together, the team occupies one side of the litigating arena.”

In certain circumstances (discussed more fully in pt. IDLC, post) a conflict of interest between insurer and insured will trigger the insured’s right to retain independent counsel at the insurer’s expense. (Civ. Code, § 2860, subd. (b).) But until such a conflict arises, the insurer has the right to control defense and settlement of the third party action against its insured, and is generally a direct participant in the litigation. (James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093 , fn. 3 [ 111 Cal.Rptr.2d 181 ]; Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2000) ¶ 15:1086, p. 15-191 (rev. #1 2001).)

2. Corporate Practice Doctrine in the Context of Law Practice

The corporate practice prohibition generally seeks to discourage any layperson or entity’s interference in a profession requiring the utmost

duties of loyalty and confidentiality to the client. In the context of the parallel doctrine of corporate practice of medicine, this court noted the “ ‘principal evils’ ” thought to spring from the doctrine are “ ‘the conflict between the professional standards and obligations of the doctors and the profit motive of the corporation employer.’ ” (Conrad v. Medical Bd. of California (1996) 48 Cal.App.4th 1038 , 1041, fn. 2 [ 55 Cal.Rptr.2d 901 ], quoting People v. Pacific Health Corp. (1938) 12 Cal.2d 156 , 158, 160 [ 82 P.2d 429 , 119 A.L.R. 1284 ]; Steinsmith v. Medical Board (2000) 85 Cal.App.4th 458 , 466 [ 102 Cal.Rptr.2d 115 ] [the basic rationale of the corporate practice prohibition is the potential for a secondary and divided loyalty to the patient].)

In furtherance of this policy and under the rationale that the practice of law is not a commercial business, in 1922, the California Supreme Court held corporations can neither practice law nor hire lawyers to practice law for it. (Merchants Protective, supra, 189 Cal. 531 .) Merchants Protective was followed by other decisions repeating those concerns and reaching similar conclusions. (See California Protective, supra, 76 Cal.App. at p. 360 [a corporation providing legal services to its patrons for a fee constitutes the unauthorized practice of law; “[a] corporation can neither practice law nor hire lawyers to carry on the business of practicing law for it”]; see also Parker v. Board of Dental Examiners (1932) 216 Cal. 285 , 298 [ 14 P.2d 67 ] [“That a corporation may not engage in the practice of the law, medicine, or dentistry is a settled question in this state. None of those professions which involves a relationship of a personal as well as a professional character, which has to do with personal privacy, can be placed in the same category as druggists, architects, or other vocations where no such relationship exists.”]; People v. Pacific Health Corp., supra, 12 Cal.2d at p. 158 [“It is an established doctrine that a corporation may not engage in the practice of such professions as law, medicine or dentistry.”]; Pacific Employers Ins. Co. v. Carpenter (1935) 10 Cal.App.2d 592 , 595 [ 52 P.2d 992 ].)

As Travelers points out, the early cases involving the corporate practice of law dealt with circumstances where the corporate entity was created for the sole purpose of retaining counsel for its customers. In Merchants Protective, a quo warranto proceeding, the state challenged the practices of a corporate entity known as the Lawyers’ Institute of San Diego as constituting the practice of law. The corporation was specifically formed for the purpose of having individuals, other firms and corporations pay a set price for the services of a central organization that would appoint attorneys to handle collections and “ ‘render such other professional services as is needed and required by the various members and subscribers thereto.’ ” (Merchants Protective, supra, 189 Cal. at p. 532.) The court held the corporation, which

duties to remain loyal to his client and avoid conflicts of interest, protect client confidences and maintain independence of judgment. Such duties are of paramount importance in the practice of law. (In re Jordan (1974) 12 Cal.3d 575 , 580 [ 116 Cal.Rptr. 371 , 526 P.2d 523 ].) In Anderson v. Eaton (1930) 211 Cal. 113 [ 293 P. 788 ], the California Supreme Court laid down the framework of an attorney’s duties of confidentiality and loyalty in a case involving an attorney’s concurrent representation of a plaintiff in a wrongful death action on behalf of their son’s estate and of the insurance company representing the son’s employer in worker’s compensation proceedings: “One of the principal obligations which bind an attorney is that of fidelity, the maintaining inviolate the confidence reposed in him by those who employ him, and at every peril to himself to preserve the secrets of his client. [Citation.] This obligation is a very high and stringent one. It is also an attorney’s duty to protect his client in every possible way, and it is a violation of that duty for him to assume a position adverse or antagonistic to his client without the . . . knowledge of all the facts and circumstances. [Citation.] By virtue of this rule, an attorney is precluded from assuming any relation which would prevent him from devoting his entire energies to his client’s interests. Nor does it matter that the intention and motives of the attorney are honest. The rule is designed, not alone to prevent the dishonest practitioner from fraudulent conduct, but as well to preclude the honest practitioner from putting himself in a position where he may be required to choose between conflicting duties, or be led to an attempt to reconcile conflicting interests, rather than to enforce to their full extent the rights of the interest which he should alone represent.” (Id. at p. 116; see also Flatt v. Superior Court (1994) 9 Cal.4th 275 , 288-289 [ 36 Cal.Rptr.2d 537 , 885 P.2d 950 ].)

These basic and paramount obligations of an attorney to his or her client have not changed since our high court decided Merchants Protective and California Protective. And they are reflected in various statutes, as well as the State Bar Rules of Professional Conduct. (In re Jordan (1972) 7 Cal.3d 930 , 940-941 [ 103 Cal.Rptr. 849 , 500 P.2d 873 ]; Bus. & Prof. Code, § 6068, subd. (e) [every attorney has a duty “[t]o maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client”].) But other changes have taken place in the practice of law since these cases were decided. It is simply no longer true that lawyers may not practice in a corporate framework. (See Bus. & Prof. Code, §§ 6160, 6161,

obligations otherwise imposed by the Rules of Professional Conduct. (E.g., Corp. Code, § 10830 [corporation may not perform corporate purposes unless the attorneys furnishing professional services are acting in compliance with the Rules of Professional Conduct].) All lawyers, whether employed by a corporation or by an independent law firm that is retained by a corporate entity, are bound by the same fiduciary and ethical duties to their clients. (PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084 , 1094 [ 95 Cal.Rptr.2d 198 , 997 P.2d 511 ], citing General Dynamics Corp. v. Superior Court, supra, 7 Cal.4th at p. 1190 [ 32 Cal.Rptr.2d 1 , 876 P.2d 487 ].) “Both [in-house and private counsel] are qualified to provide, and do provide, equivalent legal services.” (PLCM Group, Inc. v. Drexler, at p. 1094.) And all must comply with the Rules of Professional Conduct, including in those instances where counsel undertakes dual representation of the insurer and insured. For example, rule 1-600 of the Rules of Professional Conduct expressly addresses the concern arising from a nongovernmental entity that furnishes or pays for legal services, prohibiting any licensed attorney from belonging to any organization that interferes with his or her independent professional judgment. (Rules Prof. Conduct, rule 1-600 [“A member shall not participate in a nongovernmental program, activity, or organization furnishing, recommending, or paying for legal services, which allows any third person or organization to interfere with the member’s independence of professional judgment, or with the client-lawyer relationship, or allows unlicensed persons to practice law, or allows any third person or organization to receive directly or indirectly any part of the consideration paid to the member except as permitted by these rules, or otherwise violates the State Bar Act or these rules”].) It is true, the “discussion” section of rule 1-600 provides: “Rule 1-600 is not intended to override any contractual agreement or relationship between insurers and insureds regarding the provision of legal services.” (Discussion, 23 pt. 3 West’s Ann. Codes, Rules (1996 ed.) foll, rule 1-600, p. 340.) But we disagree with Travelers’ assertion that insurers and insureds are entirely exempted from this rule’s proscriptions. The clarification in the discussion section cannot be read to permit—in the context of an insurer/insured relationship—an unlicensed adjuster to practice law or the insurer to interfere with an attorney’s independence of professional judgment. (Discussion, 23 pt. 3 West’s Ann. Codes, Rules, supra, foll, rule 1-600, p. 340.)

Because the general ban on the corporate practice of law reflected in Merchants Protective and California Protective is subject to these exceptions, it is evident that the “chinks in the armor” of the corporate practice doctrine that this court found in the context of medical practice (Conrad v. Medical Board of California, supra, 48 Cal.App.4th at p. 1044) now extend to the legal profession. The California State Bar Standing Committee on

3. The Record Demonstrates That Travelers Did Not Engage in the Practice of Law

Notwithstanding the breadth of the judicial declaration sought by Gafcon, the question presented is a narrow one, confined to the record before us. We decline to render an advisory opinion purporting to extend to all circumstances in which an insurance company utilizes employee attorneys to represent its insured in third party actions. Instead, we assess only whether the trial court could properly determine based upon undisputed facts that Travelers was not engaged in the practice of law due to Ponsor’s brief representation of Gafcon in this case.

Travelers’ evidence (the declarations of von Kaesborg and Lightbody) demonstrated that the only involvement or decisionmaking Travelers had with respect to Ponsor’s defense of the Association’s action was to designate that law firm as Gafcon’s counsel. Travelers did not influence or interfere with von Kaesborg’s professional judgment. It did not “limit or restrict” von Kaesborg’s ability to represent Gafcon in the underlying litigation or that of any other Ponsor & Associates lawyer. Von Kaesborg did not participate in any investigation or determination with regard to Travelers’ insurance coverage. There is no evidence Travelers directed or controlled Ponsor’s representation in any way. These undisputed facts lead us to conclude that Travelers met its burden to show Gafcon was not entitled to a judicial declaration that Travelers impermissibly engaged in the practice of law. The undisputed evidence demonstrates nothing more than Ponsor’s employment relationship and the agency status created by that relationship.

Gafcon sought to dispute von Kaesborg’s claim he was free to exercise his professional judgment by pointing to the fact he prepared a declaration that Travelers submitted “in opposition to Gafcon’s complaint” before he filed a declaration on his own behalf. Gafcon surmised in its separate statement that his declaration had to have been “required” by Travelers, and “thus” interfered with his professional judgment. Gafcon further argued that additional discovery would show Ponsor was required to follow “restrictions on the practice of law similar to those insisted upon by Travelers with respect to panel counsel.” Gafcon points to no evidence in support of these argumentative and vague assertions other than Travelers’ panel counsel manual and “Construction Defect Expert Retention and Billing Guidelines,” which, by Gafcon’s own concession, apply only to Travelers’ panel counsel. These documents are insufficient to create a dispute as to whether Travelers in some manner controlled Ponsor’s professional judgment.

B. Fee Splitting

Gafcon’s third cause of action sought a judicial declaration that insurance companies profit directly and indirectly by using staff counsel to represent

its insureds, and that .Rules of Professional Conduct, rule 1-600 prohibited “the type of financial arrangement that exists between insurance companies and their staff counsel.” Gafcon contends Travelers’ practice of charging other insurance companies for the services of its staff counsel violates rules 1-600 and 1-320(A) of the Rules of Professional Conduct, which, respectively, prohibit attorneys from participating in any organization that “allows any third person or organization to receive directly or indirectly any part of the consideration paid to the member except as permitted by these rules . . .’’or “directly or indirectly shar[ing] legal fees” with a person who is not a lawyer.

We note preliminarily that Gafcon points out the trial court failed to address its claim regarding fee splitting. Interpreting this assertion as an argument that the judgment must be reversed for the trial court’s failure to address Gafcon’s request for declaratory relief on this point, we reject it. Because our review is de novo, the only question before us is whether the record establishes Gafcon’s entitlement to the declaration sought. (See Ruoff v. Harbor Creek Community Assn. (1992) 10 Cal.App.4th 1624 , 1627-1628 [ 13 Cal.Rptr.2d 755 ]; cf., e.g., Hagen v. Hickenbottom (1995) 41 Cal.App.4th 168 , 178 [ 48 Cal.Rptr.2d 197 ]; Goldrich v. Natural Y Surgical Specialties, Inc. (1994) 25 Cal.App.4th 772 , 782 [ 31 Cal.Rptr.2d 162 ].)

Reaching the merits, we conclude Gafcon has not met its burden to raise a triable issue of material fact as to its claim Ponsor and Travelers illegally split fees through Travelers’ sharing of its costs with other insurers. In support of its motion, Travelers presented von Kaesborg’s declaration, in which he averred that “at no time” did he or his law firm split fees with Travelers. In opposition to this evidence, Gafcon pointed to deposition testimony by Dennis Ponsor in which he generally discussed instances where other carriers share in Travelers’ litigation expenses. Dennis Ponsor stated that in such cases, his law firm sends a bill to those other carriers who make out a check payable to Travelers and give it to Ponsor, which then records the information and forwards the bill to Travelers’ claims department. Gafcon also referred to a declaration from James DiVirgilio, Travelers’ deputy general counsel, in which DiVirgilio similarly averred that in instances where a Travelers insured is also insured by one or more other carriers, the expense of staff counsel is allocated between Travelers and those insurers. DiVirgilio explained the hourly rate for Travelers’ staff counsel was based on “an estimate of the actual cost of such staff counsel, including overhead” and this was the rate other carriers were charged when fees were allocated; that Travelers did not “markup” the cost of its staff

Moreover, there is no evidence the sharing of Ponsor’s expenses in this case offends the policies underlying the rules against improper fee splitting. (See, e.g., Emmons, Williams, Mires & Leech v. State Bar (1970) 6 Cal.App.3d 565 , 573 [ 86 Cal.Rptr. 367 ] [listing the dangers of fee splitting prohibited by Rules of Prof. Conduct, former rule 3 and noting the rule seeks to bar both solicitation and the presence of a party demanding allegiance the lawyer owes his client].) One of those policies is to avoid instances of control over litigation by a layperson more interested in his or her own profit than the client’s fate. (See Gassman v. State Bar (1976) 18 Cal.3d 125 , 131 [ 132 Cal.Rptr. 675 , 553 P.2d 1147 ]; In re Arnoff (1978) 22 Cal.3d 740 , 748, fn. 4 [ 150 Cal.Rptr. 479 , 586 P.2d 960 ]; Utz v. State Bar (1942) 21 Cal.2d 100 , 108 [ 130 P.2d 377 ] [rules against fee splitting prohibit arrangements where attorneys accept employment solicited by a layperson intermediary who has entered into an agreement with an injured person having a legal claim and where attorney and solicitor share on a contingent basis in the proceeds of the attorney’s employment].) Another is to avoid facilitating a layperson intermediary’s tendency to select attorneys who will compensate him and not the most competent attorney for the client. (See Linnick v. State Bar (1964) 62 Cal.2d 17 , 21 [ 41 Cal.Rptr. 1 , 396 P.2d 33 ].) As Gafcon acknowledges, these policies are concerned with ensuring the best interests of the client remain paramount.

We have already concluded Gafcon has not shown Travelers exerted any influence or control over Ponsor’s professional judgment or advice during its brief representation, and, as we explain more fully below (pt. III.D, post), Gafcon has not rebutted Travelers’ showing it did not profit from its use of Ponsor’s services in this case. The absence of economic benefit to Travelers in recovering Ponsor’s expenses in particular compels us to conclude it did not engage in fee splitting. It is now settled that a corporation may recover fees incurred by its in-house counsel. In PLCM Group, Inc. v. Drexler, supra, 22 Cal.4th 1084 , the court held a corporation may recover fees for attorneys within its legal department under Civil Code section 1717 under prevailing market rates for attorney services. (PLCM Group, Inc. v. Drexler, supra, at pp. 1093-1094, relying in part on Garfield Bank v. Folb (1994) 25 Cal.App.4th 1804 [ 31 Cal.Rptr.2d 239 ], disapproved on other grounds in Trope v. Katz (1995) 11 Cal.4th 274 , 292 [ 45 Cal.Rptr.2d 241 , 902 P.2d 259 ].) In a concurring and dissenting opinion, Justice Chin urged the corporation’s fee recovery be limited to actual costs including overhead to avoid permitting a corporation to profit from its legal department, which would implicate the proscription against fee splitting. (PLCM Group, Inc. v. Drexler, supra, 22 Cal.4th at p. 1106 (cone. & dis. opn. of Chin, J.).) He pointed

out that several state and federal courts have held a market rate fee award implicates these proscriptions to the extent it enables a corporation to profit from its legal department. (Ibid) As stated, Travelers’ recovery from other insurers is limited to actual cost plus overhead; indeed it recovered less than Ponsor’s actual costs to Travelers in 1998 and 1999. Its arrangement does not implicate the concerns over unethical fee splitting raised by Justice Chin.

Emphasizing that we limit our consideration of the question to the facts presented here, we conclude Gafcon’s evidence did not raise a triable issue of fact regarding any possibility of fee splitting between Travelers and Ponsor in connection with Ponsor’s work in the Association’s action. Accordingly, Gafcon is not entitled to its sought-after judicial declaration on this point.

C. Conflict of Interest Triggering Travelers’ Duty to Pay for Independent Counsel

Gafcon’s fourth cause of action sought a declaration as to whether the facts and claims within the underlying lawsuit presented a conflict of interest triggering Travelers’ obligation to pay for independent Cumis counsel. Gafcon contends it presented evidence raising a triable issue of fact that Ponsor at the outset operated under such a conflict in its dual representation of both Travelers and Gafcon in the Association’s lawsuit. We do not reach Gafcon’s contention because we conclude Travelers did not conclusively establish the absence of a conflict sufficient to support summary judgment in its favor.

Our analysis of an insurer’s duty to pay for independent counsel begins with Cumis, supra, 162 Cal.App.3d 358 . In Cumis, this court held, “[wjhere there are divergent interests of the insured and the insurer brought about by the insurer’s reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured.” (Id. at p. 375.) There, the underlying action included claims for tortious wrongful discharge and intentional infliction of emotional distress. (Id. at p. 361.) The insurer provided its own counsel to defend the insured, but reserved its rights to disclaim coverage for willful misconduct and denied any coverage for punitive damages. (Id. at p. 362.) Noting it was uncontested that the basis for the insured’s liability “might rest on conduct excluded by the terms of the insurance policy” and that the insurer’s own counsel were privy to investigation and client communication that could provide information directly relating to the coverage issue, we held a conflict of interest arises “once the insurer takes the view a coverage issue is present.” We explained: “In the usual tripartite relationship existing

between insurer, insured and counsel, there is a single, common interest shared among them. Dual representation by counsel is beneficial since the shared goal of minimizing or eliminating liability to a third party is the same. A different situation is presented, however, when some or all of the allegations in the complaint do not fall within the scope of coverage under the policy. In such a case, the standard practice of an insurer is to defend under a reservation of rights where the insurer promises to defend but states it may not indemnify the insured if liability is found. In this situation, there may be little commonality of interest. Opposing poles of interest are represented on the one hand in the insurer’s desire to establish in the third party suit the insured’s ‘liability rested on intentional conduct’ [citation], and thus no coverage under the policy, and on the other hand in the insured’s desire to ‘obtain a ruling . . . such liability emanated from the nonintentional conduct within his insurance coverage’ [citation], . . . Although issues of coverage under the policy are not actually litigated in the third party suit, this does not detract from the force of these opposing interests as they operate on the attorney selected by the insurer, who has a dual agency status [citation].” (Id. at pp. 364-365, fns. omitted.) More generally, Cumis observed that an attorney having such dual agency status is subject to the rule that a “ ‘[c]onflict of interest between jointly represented clients occurs whenever their common lawyer’s representation of the one is rendered less effective by reason of his representation of the other.’ ” (Cumis, supra, 162 Cal.App.3d at p. 365, fn. 4, quoting Spindle v. Chubb/Pacific Indemnity Group (1979) 89 Cal.App.3d 706 , 713 [ 152 Cal.Rptr. 776 ].)

In 1987, the Legislature enacted Civil Code section 2860, which codified the right to independent or Cumis counsel but “clarifi[ed]”and “limit[ed]” Cumis's stated rights and responsibilities of insurer and insured. (Buss v. Superior Court, supra, 16 Cal.4th at p. 59; James 3 Corp. v. Truck Ins. Exhange, supra, 91 Cal.App.4th at p. 1101.) Under the statute, an insurer having a duty to defend its insured must provide its insured independent counsel when a “conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured” unless “at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel.” (Civ. Code, § 2860, subd. (a).) Subdivision (b) of the statute further explains when such a conflict might arise. It provides: “For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. No conflict shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an

insured is sued for an amount in excess of the insurance policy limits.” Thus, under the express language of the statute, the fact punitive damages are alleged does not itself create a conflict, nor does a conflict exist solely because the insured is sued for an amount in excess of insurance policy limits. (Blanchard, supra, 2 Cal.App.4th at p. 350, citing Civ. Code, § 2860 and Foremost Ins. Co. v. Wilks (1988) 206 Cal.App.3d 251 , 261 [ 253 Cal.Rptr. 596 ].)

But Civil Code section 2860 does not purport to address any and all conflicts that might arise: “It does not clearly state when the right to independent counsel vests.” (James 3 Corp. v. Truck Ins. Exchange, supra, 91 Cal.App.4th at p. 1101.) Civil Code section 2860, subdivision (b) is “an example of a conflict of interest which may require appointment of independent counsel. It is not, however, the only circumstance in which Cumis counsel may be required. The language of Civil Code section 2860 ‘does not preclude judicial determination of conflict of interest and duty to provide independent counsel such as was accomplished in Cumis so long as that determination is consistent with the section.’ [Citation.]” (Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372 , 1395-1396 [ 25 Cal.Rptr.2d 242 ].)

Gafcon focuses on Travelers’ reservation of rights to deny coverage and seek reimbursement for noncovered claims. Consistent with section 2860, subdivision (b), courts of appeal, including ours, repeatedly recognize a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights. There must also be evidence that “the outcome of [the] coverage issue can be controlled by counsel first retained by the insurer for the defense of the [underlying] claim.” (James 3 Corp. v. Truck Ins. Exchange, supra, 91 Cal.App.4th at p. 1102; see Novak v. Low, Ball & Lynch (1999) 77 Cal.App.4th 278 , 281 [ 91 Cal.Rptr.2d 453 ]; Dynamic Concepts, Inc. v. Truck Insurance Exchange (1998) 61 Cal.App.4th 999 , 1006 [ 71 Cal.Rptr.2d 882 ]; Truck Ins. Exchange v. Superior Court (1996) 51 Cal.App.4th 985 , 994 [ 59 Cal.Rptr.2d 529 ]; Blanchard, supra, 2 Cal.App.4th at p. 350; Golden Eagle Ins. Co. v. Foremost Ins. Co., supra, 20 Cal.App.4th at pp. 1394-1395; State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222 [ 265 Cal.Rptr. 372 ]; Native Sun Investment Group v. Ticor Title Ins. Co. (1987) 189 Cal.App.3d 1265 , 1277 [ 235 Cal.Rptr. 34 ].) In State Farm Fire & Casualty Co. v. Superior Court, a panel of this court observed: “Cumis can be read to suggest that a conflict arises whenever the insurer asserts a reservation of its right to assert noncoverage, while still providing a defense to the liability action. [Citation.] This interpretation of Cumis would be erroneous, as pointed out in McGee v. Superior Court (1985) 176 Cal.App.3d 221 , 227 [ 221 Cal.Rptr. 421 ]. It is only when

the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case that a conflict of interest sufficient to require independent counsel, to be chosen by the insured, will arise.” (State Farm Fire & Casualty Co. v. Superior Court, supra, at p. 1226, fn. 3; see also Native Sun Investment Group v. Ticor Title Ins. Co., supra, 189 Cal.App.3d at p. 1277, quoting McGee v. Superior Court, supra, 176 Cal.App.3d at p. 226 [the “ ‘crucial fact’ ” in Cumis was that the insurer’s reservation of rights “ ‘was based on the nature of the insured’s conduct, which as developed at trial [of the third party claim] would affect the determination as to coverage’ ”].) In the event of the insurer’s reservation of rights, the insured’s right to independent counsel “depends upon the nature of the coverage issue, as it relates to the issues in the underlying case.” (Blanchard, at p. 350.)

Under these authorities, there is no entitlement to independent counsel where the coverage issue is “ ‘independent of, or extrinsic to, the issues in the underlying action [citations].’ ” (Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114 , 130-131 [ 93 Cal.Rptr.2d 534 ], citing Dynamic Concepts, Inc. v. Truck Ins. Exchange, supra, 61 Cal.App.4th at p. 1006.) Stated otherwise, “where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent • counsel.” (Foremost Ins. Co. v. Wilks, supra, 206 Cal.App.3d at p. 261.) Thus, in Blanchard, where homeowners sued a general contractor alleging various construction defects, and the insurer agreed to defend the contractor under a reservation of rights involving only potential noncoverage of certain damages, the Court of Appeal concluded there was no right to independent Cumis counsel as a matter of law. There, under the insured’s policy, “[t]he contractor [bore] the risk of repairing or replacing faulty workmanship, while the insurer [bore] the risk of damage to the property of others. [Citation.] If, for instance, faulty workmanship in the framing of dry wall led to rainwater leaking in and damaging a homeowner’s furnishings, [the contractor] would be indemnified for the damage to the furnishings, but not for the cost of repairing or replacing the faulty workmanship. [Citation.]” (Blanchard, supra, 2 Cal.App.4th at pp. 348-349.) The insured did not dispute this interpretation of the damages payable under the policy. (Id. at p. 349.) But more fatal to its appeal of the jury’s verdict in the insurer’s favor, it produced no evidence to show in what specific way the defense attorney could have controlled the outcome of the damage issue to appellant’s detriment, or had incentive to do so. (Id. at p. 350.) It merely referred to “an unspecified possibility of a conflict.” (Ibid.) This was insufficient. Because “[t]he coverage issue involved only damages” and “[Insurance counsel had no incentive to attach liability to appellant,” the court

concluded the attorneys hired by the insurer faced no conflict, and the trial court should have decided the Cumis issue as a matter of law. (Ibid.)

Travelers’ motion was based on evidence demonstrating that neither von Kaesborg nor any other Ponsor lawyer participated in the determination as to Travelers’ reservation of rights, nor bore any responsibility for its coverage determination. Von Kaesborg further averred that Travelers did not interfere with his professional judgment and that he notified Gafcon that he “would not put any interests of Travelers above those of Gafcon.” But whether or not counsel participated in the preliminary assessment of coverage is not the sole or determinative test for whether an attorney representing both insurer and insured operates under a conflict of interest. To meet its threshold summary judgment burden, Travelers was required to demonstrate that Gafcon was not entitled to the judicial declaration it sought—that Gafcon could not establish Ponsor was able to control the outcome of coverage to Gafcon’s detriment by positions it might take in litigation nor was Ponsor’s representation rendered “less effective” by reason of its relationship with Travelers. (§ 437c, subd. (o)(2); see Aguilar, supra, 25 Cal.4th at pp. 853-854.) Alternatively, Travelers could have demonstrated, by pointing to Gafcon’s deficient discovery responses, that Gafcon did not possess and could not reasonably obtain needed evidence to show the existence of an actual conflict of interest. (Aguilar, supra, 25 Cal.4th at pp. 853-854.)

Although Travelers’ evidence was directed at the more general question of whether Ponsor’s representation of Gafcon was rendered less effective by Ponsor’s status as staff counsel, it did not address Ponsor’s ability to affect the question of coverage by its defense of the underlying action. It was not sufficient to show Ponsor & Associates’ lawyers were not influenced or controlled by Travelers and had no intent to affect the outcome of coverage. The statement in Cumis is still apt: “No matter how honest the intentions, counsel cannot discharge inconsistent duties.” (Cumis, supra, 162 Cal.App.3d at p. 366.) Travelers was required to show Ponsor & Associates’ lawyers could not impact coverage by the manner in which they defended the case. In order to meet its burden, Travelers was required to make some showing as to how the issues presented by Travelers’ reservation of rights differed from or were extrinsic to those issues that were developing or had developed in the Association’s action. The only evidence in the record on Travelers’ motion, however, was the Association’s complaint and Travelers’ policy exclusion for damages based upon errors or deficiencies in advice or consultation given by Gafcon. Travelers failed to establish, by attorney declaration or other admissible evidence, that the Association’s claims against Gafcon were not based upon conduct by Gafcon that would impact the ultimate coverage determination. Absent such a showing, Travelers did

not carry its burden on summary judgment to show Gafcon could not establish a conflict of interest requiring the retention of Cumis counsel.

Given our conclusion that the court erred in granting summary judgment on Gafcon’s fourth cause of action for declaratory relief, we need not address Gafcon’s claim with respect to the trial court’s refusal to take judicial notice of the unpublished decision of Division Three of the Court of Appeal, Second Appellate District in Pacific Greystone Corp. v. Aetna Insurance Co. (Apr. 26, 2000, B124297).

D. Unfair Competition Cause of Action

Gafcon contends the court erred in granting summary judgment on its sixth cause of action under the unfair competition law (UCL) (Bus. & Prof. Code, § 17200 et seq.). It asserts Travelers failed to address that cause of action in its motion and the court did not address it in its order. The contention is without merit.

Contrary to Gafcon’s assertions, Travelers indeed sought an adjudication of Gafcon’s sixth cause of action by including it in its separate statement of undisputed facts. Moreover, as Travelers points out, Gafcon’s unfair business practices cause of action was not based on the theory that Travelers “overstate[s] its cost of defense when it reports the amount it assesses its insureds (rather than the actual cost) to the Department of Insurance. . . .” Although Gafcon argued in opposition to Travelers’ motion that Travelers “may” be obtaining its rate approval from insurance regulators based upon false expense information and overstates these costs, no such allegations appear in its second amended complaint. Travelers was not bound to address unpleaded issues in its motion for summary judgment. (Bostrom v. County of San Bernardino (1995) 35 Cal.App.4th 1654 , 1663 [ 42 Cal.Rptr.2d 669 ] [summary judgment cannot be denied on a ground not raised by the pleadings]; see also Leibert v. Transworld Systems, Inc. (1995) 32 Cal.App.4th 1693 , 1699 [ 39 Cal.Rptr.2d 65 ].) While Gafcon argues the trial court should not have limited the scope of summary judgment based on perceived deficiency in the pleadings, it does not point out where in the record it requested leave to amend its .pleading. Absent such a request, we do not fault the trial court for limiting its ruling to those theories presently alleged in Gafcon’s second amended complaint. (Bostrom v. County of San Bernardino, at p. 1664.)

For the first time in its reply brief, Gafcon points out its unfair competition cause of action is based upon allegations that “insurance companies profit directly and indirectly by using employee attorneys to represent their

same evidence demonstrating its lack of control or interference in Ponsor’s defense, including the statement in von Kaesborg’s declaration averring, “At no time do we split fees with Travelers.” Such evidence was by itself insufficient to negate any possible unfair competition claim based upon Travelers’ profit. However, in reply to Gafcon’s opposition papers, Travelers presented an additional declaration by DiVirglio, Travelers’ deputy general counsel, in which he averred: “Travelers makes no profit from its use of staff counsel.”

DiVirglio’s declaration, while terse, was sufficient to meet Travelers’ threshold summary judgment burden. At no time during arguments on the matter did Gafcon object to the foundation or competency of this particular evidence, nor did it object to the inclusion of this new evidence included in Travelers’ reply papers. Absent any objection to the inclusion of new evidence in Travelers’ reply brief, the court was entitled to consider the evidence as within the record before it. (Plenger v. Alza Corp. (1992) 11 Cal.App.4th 349 , 362, fn. 8 [ 13 Cal.Rptr.2d 811 ]; Coy v. County of Los Angeles (1991) 235 Cal.App.3d 1077 , 1084 [ 1 Cal.Rptr.2d 215 ].) On appeal, Gafcon has not disputed the accuracy of that statement, nor has it presented evidence raising an inference to contradict it. In view of Gafcon’s failure to challenge this particular evidence either before the trial court or before us on appeal, we conclude the court properly granted summary judgment on this claim.

Gafcon challenges the trial court’s denial of its motions to compel discovery on matters it contends were necessary to establish certain facts, including the existence of restrictions Travelers imposed upon its staff counsel and Travelers’ reporting of false and misleading information to the Department of Insurance. We do not address this contention. For Gafcon to properly challenge the court’s discovery rulings as an abuse of discretion, it must provide this court, at a minimum, with a record and argument as to the scope of discovery it sought, its relevance to the issues in the underlying lawsuit, and the basis for the trial court’s ruling. Absent such matters before us, the record is simply inadequate to assess whether the court’s rulings on discovery were an abuse of discretion or reach any other conclusion on the propriety of the trial court’s decisions.

Disposition

The judgment with respect to Ponsor & Associates and von Kaesborg is affirmed. The judgment with respect to Travelers is reversed. On remand,

the trial court is directed to deny Travelers’ motion for summary adjudication as to Gafcon’s fourth cause of action for declaratory relief and enter summary adjudication of Travelers’ remaining causes of action. The parties are to bear their own costs on appeal.

Benke, Acting P. J., and Huffman, J., concurred.

A petition for a rehearing was denied June 26, 2002, and appellant’s petition for review by the Supreme Court was denied September 11, 2002.