Generally, when defense of a lawsuit is tendered to an insurer, the insurer has the right to appoint counsel for the insured and control the defense. In such circumstances, appointed counsel owes both the insured and the insurer a duty of care and allegiance. Where, however, there are “divergent interests” between the insurer and the insured, the insured is entitled to independent counsel paid for by the insurer.
Specifically, if a conflict arises, “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.” (San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 374 (Cumis).)
Independent counsel, paid for and chosen by the insured, is commonly knows as Cumis counsel after the case, cited above, which first recognized the right. In Cumis the underlying lawsuit contained allegations that the insured’s conduct was intentional, which would not be covered under the policy. There was a clear divergent of interests operating on the attorney selected by the insurer, since a finding of intentional conduct on the part of the insured would be excluded from coverage while nonintentional conduct would be included. In such circumstances the court held that the insurer must pay the reasonable cost of hiring independent counsel for the insured.
The holding in Cumis has since been codified: “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 independent counsel to represent the insured” unless the insured waives its right to independent counsel. A conflict of interest may arise “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 . . . .” (Civil Code § 2860.)
Not every reservation of rights, however, creates a conflict of interest requiring appointment of independent counsel. (See, Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345.) If the issue on which coverage turns is independent of the issues in the underlying case, Cumis counsel is not required. A conflict of interest does not arise unless the outcome of the coverage issue can be controlled by counsel first retained by the insurer for the defense of the underlying claim. Further, “[n]o 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.” (Id.) When asserting a right to Cumis counsel, the burden is upon the insured to show in what specific way the defense attorney chosen by the insured could control the outcome of the particular coverage issue giving rise to the reservation of rights to the insured’s detriment.
In Schaefer v. Elder, Schaefer contracted with Elder to design and build a house. The underlying lawsuit alleged causes of action against Elder for breach of contract, negligence, breach of implied warranty, strict liability, money lent, diversion of funds, failure to enter into a written contract, and excessive down payment.
Elder tendered defense to his insurer who agreed to defend the action under a reservation of rights alleging that the policy did not cover the claims alleged in the underlying lawsuit. Subsequently, the insurer also filed a declaratory relief action against Elder. The coverage issue turned on a “contractor’s special condition” in the policy which provided that the policy would not cover work performed by independent contractors hired by Elder unless Elder first obtained from those independent contractors an indemnity agreement and a certificate of insurance.
The coverage issue thus turned on the question of whether the workers who allegedly did defective work on the Schaefer house were employees or independent contractors since, if they were employees, the special condition would not apply.
The court had little difficulty in determining that there was an actual conflict of interest between Elder and his insurer and that Elder was entitled to Cumis counsel. The court reasoned that it was in Elder’s interest to argue that the work was done by employees since the insurance policy would apply even if Elder did not comply with the contractor’s special condition. On the other hand, it was in the insurer’s interest to argue that the work was done by independent contractors so that, in the declaratory relief action, the insurer could argue that Elder was not covered because he failed to comply with the contractor’s special condition.
An ancillary issue on appeal was whether the firm that had represented the insurer and Elder in the underlying case should be disqualified from continuing to represent the insured. The court disposed of this issue quickly: The firm simultaneously represented Elder and his insurer and it must therefore be assumed that the firm received confidential information from Elder. The only proper course, therefore, was to disqualify the firm. (Flatt v. Superior Court (1994) 9 Cal.4th 275, 284.)
I consult with clients and accept cases involving insurance coverage issues, including the insured’s right to independent Cumis counsel. For other types of cases I accept, please scroll my Home and My Practice pages. If you are seeking a legal consultation or representation, please give me a call at 818.971.9409. – Michael Daymude