Coverage Analysis
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An insurer must provide independent counsel to defend its insured where a conflict of interest exists between the insurer and insured. Civil Code § 2860 codified (and was intended to clarify) the rules set forth in San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358 ("Cumis"), in which the court made clear that an insured has a right to be provided independent counsel, paid for by the carrier, in a conflict of interest situation. 

Section 2860 provides, in part:

(a) 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 . . . the insured expressly waives in writing, the right to such counsel . . . . 
(b) 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 a 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 . . ." 
Under § 2860, a conflict of interest exists where the insurer's reservation of rights is based upon an issue that can be controlled by counsel retained by the insurer. The concern is that counsel selected by the insurer owes an allegiance to the insurer, and such counsel might be inclined to manipulate the facts of the case in a way that would enable the insurer to deny coverage. In most cases today, if an insurer agrees to provide defense, it does so under a reservation of rights which creates such a conflict of interest. For instance, in the context of underlying environmental claims, insurers rely upon exclusions for "expected or intended" injury, and contend that the underlying damage was "expected or intended" by the insured. Counsel selected by the insurer, if allowed to control the insured's defense, can manipulate the outcome of the underlying litigation towards a finding of intentional injury.

Where an actual conflict of interest exists, California requires an insurer to pay for independent counsel.  San Diego Federal Credit Union v. Cumis Ins. Society, 162 Cal. App.2d 358 (1984).  However, insurers are no longer required to pay Cumis counsel where they have reserved rights on an issue that is independent of the questions that will be litigated in the underlying case.  Blanchard v. State Farm, 2 Cal. Rptr. 884 (1982). 

Under the Cumis doctrine, as codified under Civil Code Section 2860 (1996), the insured may select counsel in the event of a genuine conflict.  However, the insurer need only pay the customary hourly rate for defense counsel and may require that the counsel selected by the insured possess certain minimum qualifications, including at least five years of civil litigation experience, including substantial defense experience in the subject at issue in the litigation as well as malpractice coverage. 

Not every reservation of rights entitles an insured to select Cumis counsel.  There is such entitlement, for example, where the coverage issue is independent of, or extrinsic to, the issues in the underling action.  Native Sun Investment Group v. Ticor Title Ins. Co., 189 Cal. App. 3d 1265, 235 Cal. Rptr. 34 (1987).  Nor is there entitlement where the damages are only partially covered by the policy or where some of the claims are covered and others are not.  Dynamic Concepts; Blanchard v. St. Farm Fire & Casualty Co., 2 Cal. App. 4th 345, 350, 2 Cal. Rptr. 2d 884 (1991) and Foremost Ins. Co. v. Wilks, 206 Cal. App. 3d 251, 253 (1988) (punitive damages).  Further, the conflict must be significant and actual, not merely theoretical or potential.  Lehto v. Allstate Ins. Co., 31 Cal. App. 4th 60, 71, 36 Cal. Rptr. 2d 814 (1994).

The California Court of Appeal has ruled that Civil Code Section 2860(c), which provides that the obligation of insurers to pay for independent counsel for insureds is limited to the hourly rate that they customarily pay for similar work in that jurisdiction, applies to all claims presented since the statute’s enactment in 1988, even if the policies in question were issued prior to 1988.  In affirming a trial court’s ruling for the insurers in this pollution case, the Second Appellate District further ruled in San Gabriel Water Valley Company v. Hartford Acc. & Ind. Co., 82 Cal. App.4th 1230 (2d Dist. 2000)  that in cases where multiple insurers have a defense obligation, the statute imposes a collective “cap” that applies to all the carriers and does not permit the insured to compel each individual insurer to pay up to its own ordinary rate.

The California Court of Appeal has refused to find that an insurer breached its duty to defend or that a policyholder was necessarily entitled to Cumis counsel merely because the insurer asserted its rights under Buss to later recover defense costs that might be attributable to non-covered claims for economic loss. Dynamic Concepts, Inc. v. Truck Ins. Exchange, 61 Cal. App.4th 999, 71 Cal. Rptr.2d 882 (1st Dist. 1998).

Failure to retain Cumis counsel where requires constitutes a breach of the duty to defend and may free an insured from its reciprocal obligations under the policy, including the "no action" clause.  Villicana v. Evanston Ins. Co., 28 Cal. App.4th 631 (1994).  However, a mere delay in reimbursing Cumis counsel for fees is not bad faith unless it materially impairs the quality of the defense provided to the insured.  Richardson v. State Farm Fire & Cas. Co., 37 Cal. Rptr.2d 824 (Cal. App. 1995).

An insurer hires counsel to provide a "courtesy defense"  the sole purpose of which is to minimize the liability of insured co-defendants, the insurer may be liable for bad faith and fraud if it fails to disclose that conflict of interest to the insured.  Mosier v. Southern California Physicians Ins. Exchange, 74 Cal. Rptr. 2d 550 (Cal. App. 1998). 

The California Court of Appeal declared in Unigard Insurance Company v. O’Flaherty and Belgum, 38 Cal. App. 4th 1229, 45 Cal. Rpt. 2nd 565 (1995) that “where the insurer hires counsel to defend its insured and does not raise or reserve any coverage dispute, and where there is otherwise no factual or apparent conflict of interest between the insurer and the insured that would preclude an attorney from representing both, the attorney has a dual attorney/client relationship with both insurer and insured.”  See also Gulf Insurance Company v. Berger Kahn, 79 Cal. App. 4th 114, 93 Cal. Rpt. 2nd 534 (2000).   As the Court of Appeal later stated in California State Automobile Association Inter-Insurance Bureau v. Parichan, Renberg, Crossman & Harvey, A081931 (Cal. App. October 31, 2000), an insurer may reasonably expect defense counsel to assist it in meeting its obligation to properly evaluate settlement opportunities and to otherwise resolve a claim. 

Right to Independent Counsel - Copyright Infringement

Midiman v. Farmers Insurance Company Court of Appeal, Second District (November 4, 1999)
On the duty to appoint Cumis counsel, the Court examined all of the cases concerning this issue and the duty to appoint independent counsel. The only issues in the litigation was the liability of Midiman and its defenses. The Court stated an insured cannot manufacture a conflict by pointing out that an undisputed position might one day work to the insurer's advantage when coverage is litigated. As long as only liability was at issue, there was no actual conflict and no need for Cumis counsel. The Court stated for Cumis counsel to be required the conflict must be actual and significant, not merely theoretical. The potential for conflict must be based upon an actual conflict of interest which would preclude the insurer appointed defense counsel from presenting a quality defense for the insured.
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