CENTENNIAL INSURANCE COMPANY v. MURAT (1988)

This case raises for resolution the questions of the constitutionality and proper application of the legislative effort to define and regulate the rights and duties of the parties to a contract of insurance when a conflict of interest arises between insurer and insured and the latter's right to compensated independent counsel is claimed.  (See San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494.)

The defendant and appellant Susan Murat (“Murat”) appeals from an order of the Superior Court made on February 23, 1988,¹ which prohibited her attorney (who did not have the experience required by Civ.Code, § 2860, subd. (c)) from representing her in a Cumis capacity.

We agree that Murat does have the right to appeal from the trial court's order.   However, we affirm that order as we conclude that Civil Code section 2860 (hereinafter “section 2860”), which became effective on January 1, 1988, is (1) constitutional and (2) a codification of existing law and procedural in nature and may therefore be applied to cases pending prior to January 1, 1988.   As this was a proper case for the application of section 2860, the trial court did not abuse its discretion in doing so.

FACTUAL AND PROCEDURAL BACKGROUND

In February of 1982, Murat and her father, Joseph Murat, obtained a homeowner's policy of insurance from respondent Centennial Insurance Company (hereinafter, collectively with Atlantic Mutual Insurance Company, “Centennial”) on their residence in San Pedro, California.   This was in effect until February 1984.   In late 1982 or early 1983, Murat and her sister, Mary, purchased a commercial lot in Long Beach, California, as an investment.   In July 1985, this lot was sold to the Los Angeles County Transportation Commission (“LACTC”).   In late 1986, “LACTC” filed a law suit against Murat, Mary and others for rescission, damages, injunction, inverse condemnation and declaratory relief, alleging, among other things, that the lot was contaminated with hazardous waste and was unsuitable for the purpose for which it was purchased (Los Angeles County Transportation Commission v. Regency Outdoor Advertising, Inc., et al., (Super.Ct. Los Angeles County, No. C615157), hereinafter “the underlying action”).

In December 1986, Murat's attorney, Raphael Metzger (“Metzger”), tendered the “LACTC” claim to Centennial for defense and indemnification.   During various telephone conversations between representatives of Centennial and Metzger, it was learned that “Metzger had been out of law school only 21/212 years [Metzger graduated from law school in 1984 and was admitted to the bar that same year], that his undergraduate and graduate degrees were in music, that he never had a jury trial, that he had never had a toxic tort litigation case, and that his ‘specialty’ is ‘complex business' law.”

In April 1987, Centennial agreed to defend Murat with a reservation of rights to deny coverage and to seek reimbursement of defense costs.²  Centennial also informed Murat that it would be in everyone's best interests for her to select independent counsel to represent her in the underlying action.³  In the letter of reservation of rights Centennial stated, “Because of the specialized nature and complexity of this litigation we foresee the need of independent counsel which has experience in toxic tort litigation and which has the resources to represent your interests.”   Centennial then recommended four law firms that were “experienced in toxic tort litigation, have the highest possible ratings by the Martindale–Hubbell Law Directory, have multiple experienced trial attorneys and sufficient assets to sustain long term litigation.”   Centennial requested that if none of these firms were satisfactory to her, Murat should provide Centennial with a “list of law firms with equal experience and credentials which would be satisfactory․” ⁴

In April 1987, Metzger informed Centennial that he would be representing Murat in the underlying action.   Centennial requested that Metzger supply it with a resume of his past experience in general and with toxic tort litigation in particular.   Centennial repeatedly requested Metzger to “at least interview” the suggested law firms to discuss the complexity of toxic tort litigation.   It also requested that Metzger associate himself with a more experienced attorney.   It appears that Metzger failed to act on any of these requests.

On June 22, 1987, Centennial filed the present action for declaratory relief alleging, among other things, that Murat's continued employment of inexperienced counsel and her failure to have an attorney experienced in toxic tort litigation represent her in the underlying action was a breach of the implied covenant of good faith and fair dealing and her duty to cooperate with her insurer.   Murat cross-complained against Centennial alleging, among other things, that Centennial has breached its duty of good faith and fair dealing by refusing to agree to the employment of Metzger as independent counsel and by disputing some of Metzger's fees.

On September 30, 1987, the California Legislature enacted section 2860 as part of Senate Bill 241.⁵  (Stats.1987, ch. 1498, § 4.)   That section provides in pertinent part:  “(c) When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of tort litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage.   The insurer's obligation to pay fees to such independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.”   The statute became effective January 1, 1988.

On December 9, 1987, Centennial moved (in this action, not in the underlying action) to have the court order Murat to select experienced independent counsel pursuant to section 2860.   The motion was originally set for hearing on January 4, 1988, and continued to February 16, 1988, to permit supplemental briefing by the parties.   After further oral argument on that date, the court took the matter under submission.

After consideration of the written and oral arguments submitted by the parties on the constitutional and procedural questions presented by the enactment of section 2860, which included Murat's objection to having the motion heard in the declaratory relief action instead of the underlying action, the court granted the motion on February 23, 1988.   In support of and as a part of its order, the trial court stated “that California Legislature had power to enact [Civil Code section] 2860 [subdivision] (c) based on its power to regulate the insurance industry, as well as its power to regulate the practice of law.   [Civil Code section] 2860 [subdivision] (c) is not an unreasonable encroachment upon the powers of the judiciary under separation of powers doctrine, nor does it violate any due process or equal protection rights of civil litigants.  [¶] Allowing an insurance company to insist on Cumis counsel with at least five years litigating experience in torts is a reasonable means of protecting the interests of the insurance industry.  [¶] ․ [¶] Because Mr. Metzger clearly does not have at least five years of litigation experience, [Centennial's] Motion to Enforce Insurer's Rights pursuant to [Civil Code section] 2860 [subdivision] (c) and for an Order regarding Defendant Susan Murat to select independent counsel to represent her in the LACTC case is granted.  [¶] Defendant Susan Murat is ordered within 30 days of this date to select counsel to represent her in [the underlying case] who has:  1) at least 5 years tort litigation practice which includes substantial defense experience and 2) errors and omissions coverage.  [Centennial] is not obligated to continue paying Mr. Metzger's fees;  ․ [¶] Defendant Murat may, of course, at her own expense continue to use Mr. Metzger as her counsel in said litigation, either alone or to assist counsel with the requisite 5–years experience.”

Murat's petition for writ of mandate was denied and Murat then filed a notice of appeal from the February 23rd order.⁶  On June 29, 1988, Murat retained the law firm of Perona, Langer, LaTorraca & Beck to represent her in the underlying action.   Centennial agrees that this firm is experienced and qualified to represent her.   Between February 23, 1988 (the date of the order on Centennial's motion) and June 29, 1988, Metzger allegedly incurred $60,000 in fees while continuing to represent Murat in the underlying action.⁷

ISSUES

These facts present the following issues for resolution:

1. Whether an order pursuant to section 2860, subdivision (c) that terminates counsel's participation as counsel paid by the insurer is directly appealable as the equivalent of (a) an order disqualifying counsel or (b) an injunction disqualifying Murat's current counsel from acting in a Cumis capacity;

2. If such an order is appealable, then whether the provisions of section 2860 are unconstitutional on due process, equal protection or separation of powers grounds;  and

3. Whether section 2860, subdivision (c) applies to Cumis counsel retained by an insured prior to the January 1, 1988 effective date of the statute.

DISCUSSION

 1. The Order Compelling Murat to Obtain New Counsel Was Directly Appealable

Centennial contends that the trial court's order is not directly appealable because Metzger was not disqualified from participation in the litigation and the order is not an injunction because the insured has another appropriate course of action (e.g., an action at law for damages calculated by the amount of Metgzer's fees).   Centennial also argues that Murat may continue to choose to employ Metzger as her counsel at her own expense, either alone or in conjunction with her other selected experienced independent counsel.   Centennial finally argues that in the present matter there has been “no final judgment” from which an appeal will lie because there are still unresolved issues before the lower court (e.g., whether Centennial ever owed Murat a defense in the underlying action and, if not, is it entitled to reimbursement of any defense costs which it may have expended).⁸

Under Code of Civil Procedure section 904.1 an “appeal may be taken from a superior court in the following cases:  [¶] (a) From a judgment, except (1) an interlocutory judgment, other than as provided in subdivisions (h) and (i),․  [¶] ․ [¶] (f) From an order granting or dissolving an injunction, or refusing to grant or dissolve an injunction․”

 Numerous cases have held that orders disqualifying counsel from representing a party in litigation or refusing to restrain counsel from participating in an action are directly appealable as orders granting or refusing to grant an injunction.   Such orders are also appealable as a final order upon a collateral issue based upon conflicting evidence which the trial court resolved as a question of fact.  (Code Civ.Proc., § 904.1, subds. (a) and (f);  River West, Inc. v. Nickel, supra, 188 Cal.App.3d 1297, 1302, 234 Cal.Rptr. 33;  Vivitar Corp. v. Broidy, supra, 143 Cal.App.3d 878, 881, 192 Cal.Rptr. 281;  Kraus v. Davis (1970) 6 Cal.App.3d 484, 486, 85 Cal.Rptr. 846;  Jacuzzi v. Jacuzzi Bros., Inc. (1963) 218 Cal.App.2d 24, 32 Cal.Rptr. 188.)

 Although the order in question did not disqualify Metzger from continuing in his representations of Murat at Murat's own expense, the court restrained Metzger from participating in the underlying action as Cumis counsel due to his lack of “litigation experience.”   The fact that Murat could continue to employ Metzger at her own expense and prosecute her cross-complaint for “bad faith” using Metzger's fees as a measure of damages does not make the order any less appealable.   The effect of the order was to compel Murat to obtain new counsel to represent her if she desired to obtain payment of her counsel's fees for such representation from Centennial.   Because this ruling is the equivalent of an injunction ⁹ disqualifying counsel from acting in a Cumis capacity, the order is directly appealable.¹⁰  (See Code Civ.Proc., § 904.1, subd. (f);  Vivitar Corp. v. Broidy, supra, 143 Cal.App.3d 878, 881, 192 Cal.Rptr. 281.)

 2. Civil Code Section 2860 Is Constitutional

Murat argues that section 2860 is unconstitutional as (1) a denial of due process, (2) a violation of the right to equal protection and (3) a violation of the separation of powers.¹¹

a. Due Process

 Murat claims that section 2860 violates due process in that it (1) “delegates an unfettered discretion” to insurance companies to determine who may represent insureds as independent counsel, (2) “delegates legislative power to private parties” by giving “absolute discretion” to insurance companies to reject an attorney without providing any standards by which such discretion is to be exercised, (3) burdens the right to retained counsel in civil proceedings and (4) “nullifies judicially-decreed conflicts of interest” by forcing a party to accept representation without his consent in circumstances in which the courts have previously held that the insurer's attorney has a conflict of interest and by forcing the insured to accept representation by an attorney with “divided loyalties.”

These contentions are without merit.   While it is true that “the right to be represented by retained counsel in civil actions is not expressly enumerated in the federal or state Constitution, [the] cases have long recognized that the constitutional due process guarantee does embrace such a right.”  (Roa v. Lodi Medical Group, Inc., supra, 37 Cal.3d 920, 925–926, 211 Cal.Rptr. 77, 695 P.2d 164;  accord Powell v. Alabama (1932) 287 U.S. 45, 68–69, 53 S.Ct. 55, 63–64, 77 L.Ed. 158.)   However, section 2860 does not in any way abrogate or constitutionally impair the right of an insured to obtain independent counsel when a conflict arises.   To the contrary, it simply sets qualifications for competency and limits the compensation that independent counsel may recover.   It does not deprive the insured of an attorney of choice.   In fact, it only impacts that choice in those cases where the insured seeks paid Cumis counsel who (1) happens to have less than five years experience litigating similar issues and (2) does not carry errors and omission insurance.   Thus, the statute does nothing more than limit the selection of Cumis counsel to those more experienced and presumably more qualified and place a limit on the fees which the insurer will be compelled to pay.

Attorney qualifications, conduct and competence, as well as fees, have long been the subject of valid legislative regulation.

(1) While Murat is certainly correct in stating that under the constitutional doctrine of separation of powers, the court rather than the Legislature has an inherent and primary regulatory power over the practice of law (Brydonjack v. State Bar (1929) 208 Cal. 439, 443, 281 P. 1018), it is also true that the Legislature properly has the constitutional authority to exercise a reasonable degree of regulation and control.  (In Re McKenna (1940) 16 Cal.2d 610, 611, 107 P.2d 258;  In Re Lavine (1935) 2 Cal.2d 324, 328, 41 P.2d 161.)   Such reasonable regulation has found its most obvious expression in the 17 articles of the State Bar Act (Bus. & Prof.Code, §§ 6000–6228) which has been held to be a valid regulatory measure under the police power.   (Hill v. State Bar of California (1939) 14 Cal.2d 732, 735, 97 P.2d 236.) ¹²  The intended consequences of section 2860 to (i) reduce the cost and (ii) increase the competence and efficiency of Cumis representation, are clearly reasonable and proper subjects of legislative attention.

(2) Likewise, the statutory regulation of attorney fees is not at all uncommon, either in California or throughout the country generally.   The validity of such legislative regulation has been well established for over sixty years.  (Calhoun v. Massie (1920) 253 U.S. 170, 173–174, 40 S.Ct. 474, 475, 64 L.Ed. 843.)  “ ‘The constitutionality of such legislation ․ resembling in its nature the exercise of the police power, has long been settled.  [Citations.]’ ”  (Roa v. Lodi Medical Group, Inc., supra, 37 Cal.3d 920, 927, 211 Cal.Rptr. 77, 695 P.2d 164, quoting Calhoun v. Massie, supra, 253 U.S. at pp. 174–175, 40 S.Ct. at pp. 475–76;  italics added by Roa.)   The decisions establish that “legislative ceilings on attorney fees are in no respect ‘constitutionally suspect’ or subject to ‘strict’ judicial scrutiny.”  (Id., 37 Cal.3d at pp. 926–927, 211 Cal.Rptr. 77, 695 P.2d 164.)   It need only appear that the Legislature rationally provided for limitations which were reasonable and fair.   Certainly, it can hardly be argued that the limits on the fees set by section 2860 are unconstitutionally low since they are the same as those paid by the insurer to its own attorneys retained in the ordinary course of business.

Clearly, section 2860 comports with due process requirements.

b. Equal Protection

 Murat claims that section 2860 “impermissibly discriminates against certain attorneys”;  does not bear a “ ‘rational relationship to a conceivable state purpose,’ ” and does not rest upon “some ground of difference having a fair and substantial relation to the object of the legislation.' ”   Again, we disagree.

As with the statute in Roa, section 2860 does not violate equal protection if it bears a rational relationship to a legitimate state objective.   It seems clear that the “rational relationship” test is the proper one to apply here.   As the Supreme Court has noted in a different professional context, that is the conventional test which has been traditionally applied in cases involving the licensing or regulation of occupations.  (D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 17, 112 Cal.Rptr. 786, 520 P.2d 10.)  “We simply ask whether the legislation adopted, for whatever purposes disclosed or undisclosed, is reasonably supportable․  We do not substitute our judgment for [that of the Legislature].”  (Cory v. Shierloh (1981) 29 Cal.3d 430, 437–438, 174 Cal.Rptr. 500, 629 P.2d 8.)   The burden of demonstrating the invalidity of the challenged classification “under this standard rests squarely upon the party who assails it.  [Citations.]”  (Emphasis in original.)  (D'Amico v. Board of Medical Examiners, supra, 11 Cal.3d at p. 17, 112 Cal.Rptr. 786, 520 P.2d 10.)   Murat has not carried that burden.

The terms of section 2860 suggest that the Legislature could reasonably have determined that (1) the limitations on attorneys' fees would reduce litigation costs which in turn would reduce insurance premiums;  (2) insureds would be able to obtain the services of qualified attorneys who would be more efficient with their time in working on the case and also with the court's time;  and (3) the regulation of fee disputes would similarly reduce the consumption of judicial time and expense.

Thus, by protecting the insured from inexperienced or incompetent counsel practicing without professional liability coverage, reducing insurance premiums and reducing congested court calendars, section 2860 fulfills legitimate state objectives.   There has been no denial of equal protection.

c. Separation of Powers

 Finally, Murat's argument that section 2860 violates the separation of powers doctrine must also fail.   She contends that regulation of the practice of law is a power reserved to the judiciary and, even assuming the Legislature could regulate the practice of law, section 2860 is an unreasonable restriction.

However, section 2860 does not even purport to regulate attorneys or the right of attorneys to practice law.   It regulates only the extent of the insurance companies' burden to pay for the services of attorneys who meet certain specified minimum qualifications.  Section 2860 does not provide for the discipline of attorneys.   It merely codifies the rights and duties which the parties to an insurance contract have in those situations where a conflict of interest exists.   Under the statute, the insured has the right to independent counsel which the insurer has the duty to provide if the insured does not breach the duty to select counsel with the specified minimum qualifications.   An insured is still free to hire any counsel of choice, irrespective of qualifications, if the insured is willing personally to pay for that representation.

Regulation of the competency and experience of Cumis counsel and the fees to be paid to such counsel does not violate the separation of powers doctrine.   A similar contention was made in Roa when the attorney's sliding contingency fee scale was challenged.   The court in rejecting the argument, stated 37 Cal.3d at pages 933–934, 211 Cal.Rptr. 77, 695 P.2d 164, “Plaintiffs' final claim is that section 6146 violates the separation of powers doctrine.   They argue that in light of this court's inherent power to review attorney fee contracts and to prevent overreaching and unfairness [citation], the question of the appropriateness of attorney fees is a matter committed solely to the judicial branch․  Applicable California authority expressly refutes the claim that the Legislature has no power to act in this setting.  [Citations.]” ¹³  (Roa v. Lodi Medical Group, Inc, supra, 37 Cal.3d 920, 211 Cal.Rptr. 77, 695 P.2d 164.)

It is well settled that the Legislature and judiciary are co-equal and active participants in the shaping of tort and insurance liability doctrines.   As the court noted in Cory v. Shierloh, supra, 29 Cal.3d at p. 438, 174 Cal.Rptr. 500, 629 P.2d 8, “Appellate courts sensitive to the restraints imposed by article III, section 3, of the California Constitution, fully respect the deference which must uniformly and reciprocally be extended between equal and coordinate branches of government.”  (See also Hustedt v. Workers' Comp. Appeals Bd. (1981) 30 Cal.3d 329, 337–338, 178 Cal.Rptr. 801, 636 P.2d 1139.)

Thus, Murat's three constitutional challenges are rejected.

3. Civil Code Section 2860 Is Essentially a Codification of Prior Law and Is Basically Procedural in Nature.   It Is Therefore Applicable to Pending Cases

 Murat contends that the trial court erred in applying section 2860.   She argues the section does not contain any retroactivity provision and has no language which would indicate retroactive intent by the Legislature.¹⁴  Centennial, on the other hand, maintains that based upon the wording of the statute, in its entirety, there is a “clear inference that the Legislature intended the statute to be applied to those situations which were in progress at the time it was enacted”;  that the insurer had an existing right to insist on qualified counsel which was simply codified with specific qualifications in section 2860;  and, in any event, section 2860 is a remedial and procedural measure that becomes operative when and if it is invoked.   Centennial emphasizes that it is not asking the court to apply section 2860 back to the time when Murat first selected Metzger to represent her but only to the point where, on February 23, 1988, the court first made its order requiring Murat to select qualified independent counsel.

We concur with Centennial's contentions that section 2860 is essentially a codification of existing law and is procedural in nature.   Therefore, no question of retrospective application arises.

a. Codification of Existing Law

Section 2860 was enacted on September 30, 1987 (effective January 1, 1988) as part of the “Tort Reform Compromise,” between the California Trial Lawyers Association and a coalition of representatives from the insurance industry, the Association for California Tort Reform, the California Medical Association and the California Chamber of Commerce, which was embodied in Senate Bill 241.   The reforms covered punitive damages, products liability, conflicts in insurance defense, and certain modifications to MICRA.¹⁵

In the present case, Murat erroneously assumes that before the enactment of section 2860 only an insured had rights under a policy of insurance.   This is not the case.   An insurance company, even though it is defending an insured with a reservation of rights, has an underlying interest in the outcome of the action.   Since the course of the litigation is determined and controlled by independent counsel representing the insured (Tomerlin v. Canadian Indemnity Co. (1964) 61 Cal.2d 638, 39 Cal.Rptr. 731, 394 P.2d 571), the insured's selection of counsel should not interfere with the rights of the insurer.   As the court noted in Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688, 705–706, 201 Cal.Rptr. 528, “In addition to the duties imposed upon the parties to a contract by the express terms of their agreement, the law implies in every contract a covenant of good faith and fair dealing.  [Citations.]  The implied promise requires each contracting party to refrain from doing anything to impair the right of the other to receive the benefits of the agreement.   [Citations.]  [¶] ․ [¶] The duty to deal in good faith with the other party to the contract of insurance ‘is a duty imposed by law, not one arising by the terms of the contract itself.’  (Gruenberg v. Aetna Ins. Co., [1973] 9 Cal.3d [566,] 574 [108 Cal.Rptr. 480, 510 P.2d 1032] italics added.)”

Although the court in Betts was discussing the wrongful acts of an insurance carrier and its selected defense counsel, the duty of good faith is not limited to the insurer.   To the contrary, the duty is imposed on all parties to the insurance contract.  (California Casualty Gen. Ins. Co. v. Superior Court (1985) 173 Cal.App.3d 274, 283–284, 218 Cal.Rptr. 817.)  “[W]hat that duty embraces is dependent upon the nature of the bargain struck between the insurer and the insured and the legitimate expectations of the parties which arise from the contract.”  (Commercial Union Assurance Companies v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 918, 164 Cal.Rptr. 709, 610 P.2d 1038.)

Thus, an insured has the duty to act as a reasonable person and to refrain from doing anything which would impair the right of the insurer to receive the benefits of the insurance agreement.   For example, this has been held to include not contracting away subrogation rights before occurrence of a loss (Liberty Mut. Ins. Co. v. Altfillisch Constr. Co. (1977) 70 Cal.App.3d 789, 797, 139 Cal.Rptr. 91) and prompt furnishing of information to the insurer under an uninsured motorist policy so as not to delay and prejudice an investigation (California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d. at p. 283, 218 Cal.Rptr. 817).   In our view, this duty of good faith clearly imposed on an insured, even before the enactment of section 2860, the burden of acting reasonably in the selection of Cumis counsel.   The discharge of that duty required the employment of an experienced attorney qualified to present a meaningful defense.   The considerable exposure to an insurer, in the event of the selection of an incompetent independent counsel, reasonably justifies such a requirement.   We see no inherent objection to the imposition of such a good faith burden upon an insured nor can it be construed as an unreasonable interference with an insured's right to independent counsel.

The Legislature, recognizing that both the insurer and the insured had certain rights regarding the selection of independent counsel, codified those rights into subdivision (c) which states, in part:  “When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications․”  (Emphasis added.)   Thus, it appears that the Legislature recognized that while an insured had the right to select independent counsel, the insurer had the right to require that such counsel be competent by some reasonable standard.   The particularization of that standard by statutory enactment did not create a new right.   These general rights of both the insured and insurer existed before the enactment of section 2860 and the statute merely was a codification thereof.

By requiring selected counsel to have five years experience defending similar tort litigation and requiring that counsel have errors and omissions coverage, the Legislature did not basically change the law;  it merely set minimum qualifications.   Thus, the statute need not be applied retroactively in order for Centennial to exercise its right to have qualified counsel represent Murat.   An analysis of the other provisions of section 2860 further substantiates that the Legislature enacted the statute as a codification of existing case law.

(1) Subdivision (a) ¹⁶ is merely a codification of the duty imposed on the insurance company to provide independent counsel by Cumis.   The second part of subdivision (a), dealing with waiver, is a codification of the decision in Roberts v. Superior Court (1973) 9 Cal.3d 330, 343, 107 Cal.Rptr. 309, 508 P.2d 309.   In Roberts the court determined that a waiver of rights “must be a voluntary and knowing act done with sufficient awareness of the relevant circumstances and likely consequences.”

(2) Subdivision (b),¹⁷ defining under what circumstances a conflict of interest exists, is a codification of the decision in McGee v. Superior Court (1985) 176 Cal.App.3d 221, 221 Cal.Rptr. 421, which held that where the reservation of rights is based on coverage disputes which do not deal with the issues being litigated in the third party action, there is no conflict of interest requiring independent counsel.   That portion of subdivision (b) stating, “No conflict of interest 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,” codifies the decisions of Bogard v. Employers Casualty Co. (1985) 164 Cal.App.3d 602, 210 Cal.Rptr. 578 and Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co. (9th Cir.1983) 724 F.2d 1343.

(3) As previously noted, the insured had a pre-section 2860 obligation, based on the covenant of good faith, to make a full and prompt disclosure of relevant information to the insurer.  (California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d 274, 283, 218 Cal.Rptr. 817.)   In addition, in D.I. Chadbourne, Inc. v. Superior Court (1964) 60 Cal.2d 723, 36 Cal.Rptr. 468, 388 P.2d 700 and Sierra Vista Hospital v. Superior Court (1967) 248 Cal.App.2d 359, 56 Cal.Rptr. 387, it was held that communications from the insured to the insurer are subject to the attorney-client privilege.   Subdivision (d) ¹⁸ essentially codified these two propositions.

(4) Subdivision (e) ¹⁹ is an example of the wording of a waiver provided for in subdivision (a).

(5) Subdivision (f) ²⁰ also relates to the insured's duty to cooperate with the insurer as noted in California Casualty Gen. Ins. Co. v. Superior Court, supra, 173 Cal.App.3d 274, 283, 218 Cal.Rptr. 817.)

b. Procedural Nature of Statute

Section 2860 essentially implemented procedural changes which would not unreasonably disappoint a party's expectations based on a reliance on prior rules.   In Evangelatos v. Superior Court (1988) 44 Cal.3d 1188, 1218, fn. 21, 246 Cal.Rptr. 629, 753 P.2d 585, the court, in distinguishing the cases cited by the dissent, held that statutes which implement procedural changes in circumstances wherein it is unlikely that retroactivity would defeat a party's reasonable reliance on the “displaced procedural rule,” can be applied to pending litigation.  “A statute does not operate retroactively merely because some of the facts or conditions upon which its application depends came into existence before the enactment.  [Citations.]  Thus, the application of a statute effecting a change in ‘procedure’ or ‘remedy’ to pending litigation is not violative of the principle of presumed nonretroactivity even though the event giving rise to the cause of action antedated the statute.   [Citations.]”  (Coast Bank v. Holmes (1971) 19 Cal.App.3d 581, 593–594, 97 Cal.Rptr. 30.)

 A statute which is procedural in nature is given effect as to pending and future litigation, even if the underlying event occurred before the effective date of the statute.  (Pacific Coast Medical Enterprises v. Department of Benefit Payments (1983) 140 Cal.App.3d 197, 204, 189 Cal.Rptr. 558.)  “[P]rocedural changes ‘operate on existing causes of action and defenses, and it is a misnomer to designate them as having retrospective effect.’  [Citations].  In other words, procedural statutes may become operative only when and if the procedure or remedy is invoked, and if the trial postdates the enactment, the statute operates in the future regardless of the time of occurrence of the events giving rise to the cause of action.  [Citation.]  In such cases the statutory changes are said to apply not because they constitute an exception to the general rule of statutory construction [against retroactivity], but because they are not in fact retrospective.   There is then no problem as to whether the Legislature intended the changes to operate retroactively.”  (Aetna Cas. & Surety Co. v. Ind. Acc. Com. (1947) 30 Cal.2d 388, 394, 182 P.2d 159, quoting Morris v. Pacific Electric Ry. Co. (1935) 2 Cal.2d 764, 768, 43 P.2d 276.)

Section 2860, subdivision (c) does not affect substantive rights.   It is a procedural measure merely providing a remedy for the enforcement of existing rights, and is thus applicable at the time it is invoked.   The application of section 2860 to already chosen Cumis counsel does not result in any substantial impairment of the rights of the insured.   It does not create a new cause of action nor deprive a defendant of a defense on the merits.   Instead, section 2860 deals exclusively with the procedures regarding the selection and payment of Cumis counsel.   Thus, subject to the discretionary authority of the court to prevent injustice, unfairness or inequity, section 2860 applies to all pending actions.

c. Trial Court Discretion

A strict or automatic application of section 2860 could result, under certain circumstances, in unjust, unfair or inequitable consequences.   For example, substitution of Cumis counsel could seriously prejudice an insured in a complex case which was in the midst of trial with all the work having been done by Cumis counsel selected before the effective date of section 2860 or before a motion to enforce the section was brought.   Clearly, the application of section 2860 must involve the exercise of discretion by the trial court which is subject to an abuse standard of review.²¹  Further, the insurer's right to raise an objection to counsel under section 2860, subdivision (c), is subject to waiver and estoppel principles.

Here, however, Centennial's motion was merely “to enforce the rights recognized by the statute on the day the statute became effective.”   It did not ask to have section 2860 retroactively applied to the date when Murat first hired Metzger but only sought to exercise its now codified right to require Murat to select qualified counsel.²²  The record shows that Centennial, practically from the onset of Metzger's employment (and long before the enactment of section 2860), stressed to Murat the importance of selecting experienced counsel with a background in toxic tort litigation.   At the time that the order was made the underlying action had not been assigned a trial date and ample opportunity existed for qualified counsel to become familiar with the case.   As we have already noted, counsel satisfactory to Centennial was in fact retained by Murat on June 29, 1988.   Under these circumstances, the court did not err in granting Centennial's motion.

DISPOSITION

The order of the trial court dated February 23, 1988, is affirmed.   Our order of August 5, 1988, granting a stay of the trial court's order, is hereby vacated.   Centennial shall recover its costs on appeal.

FOOTNOTES

1.   We initially dismissed Murat's appeal as one from a nonappealable order.   The California Supreme Court granted Murat's petition for review.   The Supreme Court then transferred the cause to this court with directions to vacate the order dismissing the appeal and for reconsideration in light of Vivitar Corp. v. Broidy (1983) 143 Cal.App.3d 878, 881, 192 Cal.Rptr. 281 and River West, Inc. v. Nickel (1987) 188 Cal.App.3d 1297, 234 Cal.Rptr. 33.   Pursuant to that mandate, we vacated our order of dismissal, reinstated Murat's appeal and stayed the trial court's order of February 23, 1988.

2.   This reservation was based, in part, on the “intentional act” exclusion set forth in California Insurance Code section 533 which states, “An insurer is not liable for a loss caused by the wilful act of the insured;․”  (See also, Civ.Code, § 1668.)

3.   We deem this to be a concession on Centennial's part that a conflict of interest was created by its assertion of such reservation within the meaning of section 2860, subdivision (b), as well as San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d 358, 208 Cal.Rptr. 494.

4.   The question of whether an insurer can participate in the selection of independent counsel has not been determined in California;  however, where it has been, the courts have held that “It is not inherently objectionable to permit an insurer to participate in the selection of independent counsel for the insured as long as the insurer discharges its obligation in good faith and the attorney chosen is truly independent and otherwise capable of defending the insured.  [Citation.]”  (New York State Urban Development Corporation v. VSL Corporation (2nd Cir.1984) 738 F.2d 61, 65;  accord, Suffolk County Patrolmen's Benevolent Association, Inc. v. County of Suffolk (2nd Cir.1985) 751 F.2d 550, 551.)

5.   Senate Bill 241 (known as the Willie L. Brown Jr.–Bill Lockyer Civil Liability Reform Act of 1987) contains six operative sections.   Section 2 of the bill amended Business and Professions Code Section 6146, revising the sliding scale contingency fee limitation that attorneys may obtain in cases against health care providers in malpractice lawsuits in which the recovery is more than $200,000.   Current law limited such fees to 40% of the first $50,000 in damages, 331/313% of the next $50,000, 25% of the next $100,000 and 10% of any amount in excess of $200,000.   The amendment increased the limit to 40% of the first $50,000, 331/313% of next $50,000, 25% of the next $500,000 and 15% of any amount over $600,000.The formula increased the maximum fee for a $1 million award from $141,000 to $221,000.   In return for this upward revision the representative of the California Trial Lawyers Association signed an agreement that the association would not attack the provisions of MICRA by legislation or initiative for the next five years.Section 3 added Civil Code section 1714.45, which codified appellate court decisions that products such as high-cholesterol foods, alcohol and cigarettes that are inherently unsafe and known to be unsafe by ordinary consumers, are not to be subject to product liability lawsuits.Section 4 added Title 13.5 (commencing with § 2860) to Part 4 of Division 3 of the Civil Code.   This section clarified when an insurance company must provide separate independent legal counsel to one of its insureds.   Under current law, an insurance company client could hire a defense attorney at the company's expense when the client was sued for damages that the insurance company does not promise to pay.   The bill specified criteria for the selection and payment of such counsel, allowing insurance companies to require that attorneys retained by their clients have at least five years of experience in the field and have lawyers' malpractice insurance coverage.   Fees paid to such attorneys are limited to prevailing local rates or, if in dispute, settled by binding arbitration.   Proponents of the bill contended that these “procedures for the selection and payment of independent counsel by an insurer when a conflict arises, as proposed by this measure, ‘are necessary to implement the rights of the insured created by the Cumis decision.’ ”  (Assem.Com. on Judiciary, Sen.Bill No. 1221, Comments, p. 3.)Section 5 which amended Civil Code section 3294, addressed the problem of excessive punitive damage awards by enacting the following:  (1) raises the evidence standard for punitive damages to “clear and convincing” from the current “preponderance of evidence”;  (2) revises the definition of “malice” and “oppression” to require “despicable conduct” to establish liability for punitive damages.Section 6 which amended Civil Code section 3295, prohibits claims for punitive damages from stating amounts to prevent use of it as a publicity tactic, requires the court, upon defendant's motion, to divide the trial into separate parts to first determine fault and then, if fault is found, to deciding on whether punitive damages are justified.Section 7 added Code of Civil Procedure section 425.13 prohibiting claims for punitive damages against a health care provider unless allowed by court order.Only sections 5 and 6 make any express reference to retroactive application.   The amendments to Civil Code sections 3294 and 3295 expressly shall “apply to all actions in which the initial trial has not commenced prior to January 1, 1988.”

6.   See footnote 1, ante.

7.   On July 27, 1988, Metzger sued Centennial for the disputed fees, arguing that section 2860 is applicable to the fee dispute and demanding final and binding arbitration under the provisions of that section.   (Metzger v. Centennial Insurance Company (Super.Ct. Orange County, 1988, No. 563489).)   Metzger conceded at oral argument that his position in that litigation was inconsistent with the arguments he was advancing on behalf of Murat in this matter.

8.   We are advised by counsel that on October 27, 1988, the trial court granted Centennial's motion for summary adjudication of issues which determined that Centennial did not owe Murat a duty of defense under the subject policy.

9.   Murat argues that the order “was also in excess of jurisdiction, because the complaint sought only declaratory relief whereas the order constitutes a mandatory injunction.”   However, the record shows that in both its complaint and motion, Centennial sought a determination of its rights to require the insured to select experienced independent counsel.   In its complaint, Centennial prayed for “․ a judicial order of the parties [sic] respective rights and obligations under the terms of ․ [the] homeowners insurance policy ․ that neither Centennial ․ nor Atlantic ․ owe a duty of indemnification ․ if judgment is rendered against Murat ․ where the employment of an inexperienced attorney is a proximate cause of such judgment ․ and that the duty to defend Murat ․ is limited to the reasonable expenses which would be incurred by the employment of experienced counsel․”Centennial, in its motion, sought an order directing Susan Murat to make a selection of an attorney with the minimum qualifications required by section 2860.   This was an integral part of the relief sought in the complaint.   Thus, the court's order of February 23, 1988, was not in excess of jurisdiction.

10.   We also take this opportunity to dispose of Murat's claim that Centennial brought this motion in the wrong action.   That contention is without merit.   While it is true that the subject order was made in this declaratory action but directed to Murat's legal representation in the underlying action, there are at least two reasons why this was proper.   First, Centennial's motion could not have been brought in the underlying action since Centennial was not a party thereto and thus would have had no standing.   Second, the whole thrust and purpose of this declaratory relief action is to determine the rights and obligations of the parties with respect to the defense of the claims asserted against Murat in the underlying action.   One of the central issues in this case is the nature and extent of Centennial's duty to provide compensated independent counsel to Murat to handle such defense.

11.   This same assault was made on the attorney fee regulation provisions (Bus. & Prof. § 6146) of the Medical Injury Compensation Reform Act of 1975 (“MICRA”).  In Roa v. Lodi Medical Group, Inc. (1985) 37 Cal.3d 920, 925–934, 211 Cal.Rptr. 77, 695 P.2d 164, our Supreme Court firmly rejected each of these constitutional challenges.   As we discuss in more detail below, the reasoning of Roa is equally applicable here.

12.   More specifically, the Legislature has provided for statutory regulation covering (1) special burdens on attorneys with respect to (a) reporting offers of settlement (§ 6103.5), (b) presenting false claims under a policy of insurance (§ 6106.5), and (c) collecting fees under a professional sports contract negotiated by the attorney (§ 6106.7);  (2) contingency fee contracts (§§ 6146–6149);  (3) solicitation of legal business (§§ 6150–6155);  (4) law corporations (§§ 6160–6172);  (5) cessation of, or incapacity to engage in, the practice of law (§§ 6180–6180.14 and 6190–6190.6);  (6) arbitration of attorney fee disputes (§§ 6200–6206);  and (7) establishment of a program for mandatory attorney deposit to trust fund to provide legal services to indigent persons (§§ 6210–6228).

13.   As we have already noted in some detail, the Legislature's constitutional authority in this area is both considerable and extensively asserted.   See footnote 12, ante.

14.   Indeed, she notes with emphasis that while sections 5 and 6 of Senate Bill No. 241, amending Civil Code sections 3294 and 3295 (relating to punitive damages), were expressly made applicable to all actions in which the initial trial had not commenced prior to January 1, 1988, section 4 (in which section 2860 is set forth) has no such provision.   See footnote 5, ante.

15.   See footnote 5, ante.

16.   Subdivision (a) states:  “If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide such counsel to represent 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 such counsel.   An insurance contract may contain a provision which sets forth the method of selecting such counsel consistent with this section.”

17.   Subdivision (b) states:  “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 of interest 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.”

18.   Subdivision (d) states:  “When independent counsel has been selected by the insured, it shall be the duty of such counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action.   Any claim of privilege asserted is subject to in camera review in the appropriate law and motion department of the superior court.   Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party.”

19.   Subdivision (e) states:  “The insured may waive its right to select independent counsel by signing the following statement:  ‘I have been advised and informed of my right to select independent counsel to represent me in this lawsuit.   I have considered this matter fully and freely waive my right to select independent counsel at this time.   I authorize my insurer to select a defense attorney to represent me in this lawsuit.’ ”

20.   Subdivision (f) states:  “Where the insured selects independent counsel pursuant to the provisions of this section, both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation.   Counsel shall cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured.   Nothing in this section shall relieve the insured of his or her duty to cooperate with the insurer under the terms of the insurance contract.”

21.   The absence of mandatory language in the portion of section 2860 relating to the qualifications to be required of independent counsel makes clear that the Legislature intended for the trial court to exercise its discretion in the application of this section.  (Cf. Rhyne v. Municipal Court (1980) 113 Cal.App.3d 807, 817, 170 Cal.Rptr. 312;  58 Cal.Jur.3d, Statutes, § 147, pp. 541–545.)

22.   We construe the trial court's order as relieving Centennial only of the obligation to pay, on behalf of Murat, those legal fees generated by Metzger in the underlying action on or after February 23, 1988, the day when the court issued its order granting Centennial's motion.   The phrase used by the trial court (i.e., that Centennial was “not obligated to continue paying Mr. Metzger's fees”) is capable of the possible but erroneous construction that Centennial was also relieved of the obligation to pay fees earned prior to February 23, 1988, but which remained unpaid as of that date.   At the risk of being accused of a commentary on the obvious, we emphasize here our view of the trial court's order so as to avoid any possible future dispute between the parties with respect to the payment of those fees earned by Mr. Metzger prior to February 23, 1988 (subject, of course, to the legal impact on such pre-February 23, 1988 fees, if any, of the final determination in this declaratory relief proceeding of Centennial's duty to provide a defense for Murat in the underlying action).

CROSKEY, Associate Justice.

KLEIN, P.J., and DANIELSON, J., concur.