Facts

Signal Products Inc. brought an action against American Zurich Insurance Co. and American Guarantee and Liability Insurance Co.

PLAINTIFF'S CONTENTIONS:
Signal alleged that it was the defendant in a trademark action and judgment was entered against it in that action. Signal argued that its insurers, American Zurich and American Guaranty, breached their duty to indemnify Signal on the judgment against it in the trademark action. Signal further argued that these insurers breached the duty to defend Signal by failing to pay its defense costs, relating to the defense provided by two separate law firms in the trademark action. Plaintiff filed suit for breach of contract and bad faith.

DEFENDANT'S CONTENTIONS:
American Zurich and American Guarantee argued that it was not liable for an interim payment Signal made to a co-defendant during the trademark lawsuit because it alleged that this payment was pursuant to a separate indemnification agreement between the co-defendants and, therefore, did not constitute defense costs. American Zurich and American Guarantee further argued that this interim payment was barred by a "no voluntary payments" provision in the policies. American Zurich and American Guarantee also argued that they were not required to pay the fees of one of the law firms used by Signal because under California Civil Code Section 2860, Signal was only allowed to hire one "independent counsel" law firm, the "no voluntary payments" provision required Signal to obtain Zurich's consent before hiring a second independent counsel firm, and notice of the retention of the second law firm to Zurich's appointed defense counsel could not be imputed to Zurich.

Result

The court denied both plaintiff's and defendants' separate motions for partial summary judgment on the issue of breach of duty to defend. The court found that genuine issues of material fact exist on whether American Zurich and American Guarantee's breached the duty to defend. The court did find, however, that the "no voluntary payments" provision did not bar reimbursement for the interim payment Signal made to a co-defendant for defense costs, or Signal's right to hire the second firm, without Zurich's consent. The court also ruled that Section 2860 did not prevent Signal from hiring more than one independent counsel law firm. The court further ruled that notice to Zurich's appointed defense counsel constituted notice to Zurich, even though Zurich argued that it hired the lawyer to represent Signal, not Zurich. The court had previously granted American Zurich and American Guarantee's motion for summary judgment, finding there was no breach of the duty to indemnify.