What is "Cumis"?
a. An English cucumber
b. A spice commonly found in curry dishes
c. California's right to independent counsel
d. Puffy or cotton-like clouds
Answer: "c" – the seminal California case on when an insurer is required to provide its insured with independent counsel – that is, the insured's right to select its own counsel. San Diego Navy Federal Credit Union, et al. v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984), later codified at Cal. Civ. Code § 2860.
Under standard general liability policies, the insurer is contractually entitled to control the defense of its insured. This is based on the language which grants to the insurer "the right and [imposes the] duty to defend any suit."
The relationship between policyholder, insurer, and insurer-retained defense counsel (the "tripartite relationship") creates a situation where the insurance defense counsel has two clients – the policyholder being defended and the insurer that retains and pays counsel. Having multiple clients creates the possibility of a conflict of interest for defense counsel where the insurer reserves its right to deny coverage.
The "Cumis" Case
In 1984, the California Court of Appeal for the Fourth Appellate District issued its opinion in San Diego Navy Federal Credit Union, et al. v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984) ("Cumis"). In Cumis, the underlying plaintiffs sued the insured for tortious wrongful discharge, breach of contract, wrongful interference with contract, breach of covenant of good faith, and punitive damages. The insurer agreed to defend but denied coverage for willful conduct and punitive damages and reserved its right to seek reimbursement for noncovered claims. The insured then retained independent counsel. Although the insurer initially paid the independent counsel's fees, it later decided there was no conflict and refused to pay. The insured subsequently sued for reimbursement of its independent counsel's fees.
Without discussing the specific facts of the underlying action in detail, the appellate court, citing California's Rules of Professional Conduct, held in a situation where a potential conflict of interest arises, an insurer is contractually obligated to pay for independent counsel. Cumis, supra, 162 Cal.App.3d 373-74. The court explained:
[W]hen some or all of the allegations in the complaint do not fall within the scope of coverage under the policy ? [o]pposing poles of interest are represented on the one hand in the insurer's desire to establish...the insured's 'liability rested on intentional conduct' ? 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.
Id. at 364.
Three years later, the California Legislature responded by enacting California Civil Code § 2860. This was the first attempt by a state legislature to address insurance defense conflicts of interest through legislation. The California Legislature in preparing Section 2860 rejected the notion that a mere potential conflict of interest creates a right to independent counsel. Section 2860 provides that a conflict of interest exists when an insurer reserves its rights on a coverage issue and the outcome of that coverage issue can be controlled by defense counsel retained by the insurer. Cal. Civ. Code § 2860(b).
When California's Cumis statute applies, what does it mean?
Whether identified as an issue by the insurer or raised as an issue by the insured, the insurer has the right to a reasonable opportunity to examine any purported conflict and determine whether there is an obligation to provide the insured with independent counsel. Dynamic Concepts, Inc. v. Truck Ins. Exchg., 61 Cal.App.4th 999 (1998).
Assuming the statute applies, the insured has the right to select independent counsel. The right to select independent counsel can be waived by the insured, and the statute provides the language required in that waiver. Cal. Civ. Code § 2860(e).
If the insurer also retains counsel, both counsel provided by the insurer and independent counsel selected by the insured are allowed to participate in all aspects of the litigation. Cal. Civ. Code § 2860(f).
Insurers have the right to require that independent counsel carry errors and omissions insurance, and possess "substantial defense experience in the subject area of the litigation." Cal. Civ. Code § 2860(c).
An insurer is only obligated to pay independent counsel "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." Cal. Civ. Code § 2860(c).
Further, any dispute regarding the amount of fees owed to independent counsel must be resolved though binding arbitration. Cal. Civ. Code § 2860(c); Fireman's Fund Ins. Cos. v. Younesi, 48 Cal.App.4th 451 (1996).
Situations where there is a "conflict":
There is a conflict requiring the insurer to allow the insured to select its own counsel in the following situations
1. Where there is a significant, not merely theoretical, conflict of interest; where the conflict is actual and not merely potential. Dynamic Concepts, Inc. v. Truck Ins. Exchg., 61 Cal.App.4th 999 (1998). "The potential for conflict requires a careful analysis of the parties' respective interests to determine whether they can be reconciled . . . or whether an actual conflict of interest precludes insurer-appointed defense counsel from presenting a quality defense for the insured." Id. at 1007-08.
2. Where defense counsel can control the outcome of the litigation [so as to avoid coverage for the claim]. Cal. Civ. Code § 2860(b); Blanchard v. State Farm Fire & Cas. Co., 2 Cal.App.4th 345, 350 (1991).
3. In the "classic" situation where damages are caused by conduct of the insured that may either be covered or not covered (e.g., negligent versus intentional conduct, accidental or not, expected/intended damages or not). See e.g., Cumis, supra, 162 Cal.App.3d at 364-366 (insured's liability depended upon nature of his conduct); Foremost Ins. Co. v. Wilks, 206 Cal.App.3d 251 (1988) (defamation claim); Nike v. Atlantic Mutual, 578 F.Supp. 948 (N.D. Cal. 1983) (libel with malice); United States Fid. & Guar. Co. v. Sup. Ct., 204 Cal.App.3d 1513 (1988) (fraud allegations).
4. Where the insurer pursued a settlement above policy limits without the insured's consent with the insured expected to contribute and defense counsel did not oppose the insurer's petition for permission to settle although he knew the insured opposed the settlement and would be exposed to excess liability. Golden Eagle Ins. Co. v. Foremost Ins. Co., 20 Cal.App.4th 1372 (1993).
5. At times, where the insurer insures both plaintiff and defendant. O'Morrow v. Borad, 27 Cal.2d 794, 800 (1946).
Situations where there is no conflict:
1. Reservation of rights (alone not enough). Cal. Civ. Code § 2860(b); Dynamic Concepts, supra, 61 Cal.App.4th 999; Native Sun Inv. Group v. Ticor Title Ins. Co., 189 Cal.App.3d 1265 (1987); McGee v. Sup. Ct.,176 Cal.App.3d 221 (1985); Blanchard, supra, 2 Cal.App.4th 345.
2. Mere possibility of unspecified conflict. Dynamic Concepts, supra, 61 Cal.App.4th 999.
3. Insured sued for an amount in excess of policy limits. Cal. Civ. Code § 2860(b).
4. Allegations of punitive damages. Cal. Civ. Code § 2860(b); Wilks, supra, 206 Cal.App.3d 251.
5. Some damages not covered by policy. Blanchard, supra, 2 Cal.App.4th 345 (exclusions in construction context).
6. Coverage issue is "extrinsic to and independent of the issue of [the insured's] liability for [the claimant's] injuries." McGee, supra, 176 Cal.App.3d at 226-227 (coverage issue whether defendant was an insured turned on application of "resident-relative exclusion" in policy, an issue not addressed in underlying litigation); Native Sun, supra, 189 Cal.App.3d 1265 (coverage issue – which damages covered by title policy - was not issue to be determined in underlying case).
7. Where insurer reserves right to get defense and indemnity costs back relating to noncovered claims, per Buss v. Sup. Ct., 16 Cal.4th 35 (1997). James 3 Corp. v. Truck Ins. Exchg., 91 Cal.App.4th 1093 (2001); Long v. Century Indemnity Co., 163 Cal.App.4th 1460, 1471, fn. 10 (2008) (dicta – noting that reserving right of reimbursement is a "relatively common occurrence").