It was undisputed that some time elapsed between the tender of defense and Traveler's decision to provide defense subject to a reservation of rights. In the interim, Centex retained a law firm to defend it in the underlying actions. When Travelers finally agreed to provide a defense, it insisted on appointing its own counsel, but Centex insisted on retaining its chosen law firm, arguing that Travelers lost its right to control the defense by waiting too long to provide one.

Travelers filed an action seeking a declaration that it had the right to control the defense. The United States District Court for the Northern District of California found that since the duty to defend is immediate, Travelers lost its right to control the defense. The court also ruled that Centex did not need to show that Travelers intended to waive its right to control, holding that a delay is evidence enough. However later on, the court reconsidered its decision and reversed its own ruling. Centex then asked the court for a reconsideration.

The court noted that a party moving for reconsideration must generally show the following: an intervening change in controlling law; the emergence of new material facts; or, a manifest failure by the court to consider material facts or dispositive legal arguments. The court also noted that an insurer loses its right to control the insured's defense upon breach of its duty to defend. Moreover, the court said that a holding that an insurer can lose its right to control the defense solely through waiver, forfeiture, or estoppel is not correct.

In this instance, the court found that Travelers' response took over four months during which time Centex hired its own counsel and incurred legal expenses. Travelers argued that it did not breach its duty to defend because it had a right to conduct a reasonable investigation before accepting Centex's tender and it did reimburse Centex for legal costs incurred prior to accepting the tender. The court answered that a failure to provide counsel or to guarantee the payment of legal fees immediately after an insurer's duty to defend has been triggered constitutes a breach of the duty to defend, even if the insurer later reimburses the insured. The court noted that an insurer is free to conduct an investigation beyond the point at which its duty to defend has been triggered, but an insurer may not deprive an insured of the security implicit in the duty to defend, specifically, the right to immediately call on the insurer's superior resources as opposed to having to marshal its own resources to mount a defense against a claim that possibly falls within the policy's coverage.

Accordingly, the court found that Travelers breached its duty to defend by failing to provide Centex with a defense at least 30 days after the complaints were filed. Upon breaching its duty to defend, Travelers also lost its right to control the defense. The court granted Centex's motion for reconsideration and finds that Travelers lost its right to control the defense.

Editor's Note: The U.S. District Court, N.D. California, rules that an insurer has the right to control the defense it provides to its insurer in general, but when an insurer breaches its duty to defend, the insurer forfeits its right to control the defense. In this instance, Travelers' delay in providing a defense to the insured did breach its duty and so, the insurer lost its right to control the defense.