Compendium of Cases: Failure of Proof of Disqualifying Conflict of Interest

Introduction

Proof by admissible evidence is required to establish that a liability insurer’s reservation of rights creates a disqualifying conflict of interest. Many courts have found that no conflicts of interest existed based upon a complete evidentiary vacuum where litigants have foolishly assumed that conflicts of interest are somehow self-evident. Proof of conflicts by admissible evidence is required to: 1) compel an insurer to pay for independent counsel;[1] 2) resist a Buss reimbursement claim;[2] 3) recuse conflicted dependent counsel;[3] and 4) apply the provisions of Civil Code § 2860.[4] Therefore, parties who wish to prove that conflicts of interest exist need to actively develop admissible evidence.[5] Civil Code § 2860 “does not clearly state when the right to an independent counsel vests”[6] and “the professional obligations of counsel who represents a liability insurer as well as its insured — needs clarification.”[7]

Recognized Conflict Circumstances

“Some of the circumstances that may create a conflict of interest requiring the insurer to provide independent counsel include: (1) where the insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by the insurer’s retained counsel; (2) where the insurer insures both the plaintiff and the defendant; (3) where the insurer has filed suit against the insured, whether or not the suit is related to the lawsuit the insurer is obligated to defend; (4) where the insurer pursues settlement in excess of policy limits without the insured’s consent and leaving the insured exposed to claims by third parties; and (5) any other situation where an attorney who represents the interests of both the insurer and the insured finds that his or her ‘representation of the one is rendered less effective by reason of his [or her] representation of the other.’”[8]

Many Reported Opinions Turn On Lack of Evidence

[The policyholder] is alleging conclusions without substance, not facts. As Gertrude Stein famously said about Oakland, there is no there there.”[9] The policyholder’s “pleading fails to allege the facts constituting a conflict [or] that the expense of independent counsel is an injury for which [the policyholder] is seeking compensation”[10] The policyholder “produced no evidence to show in what specific way the defense attorney could have controlled the outcome of the damage issue to [the policyholder’s] detriment, or had incentive to do so. The policyholder merely urged that there was an unspecified possibility of a conflict.”[11] The policyholder “provided no evidence to establish how defense counsel could have controlled the issue [and] failed to present evidence demonstrating a triable issue of material fact on the question of whether there exists a conflict of interest under section 2860.”[12] “[W]e have concluded that petitioner has failed to establish any conflict of interest on the part of [dependent counsel] disqualifying it from acting as [the policyholder’s] attorney.”[13] “There is no evidence [the insurer] directed or controlled [dependent counsel]’s representation in any way. [The policyholder] points to no evidence in support of these argumentative and vague assertions.”[14] “The supposed Cumis conflict for the covered libel claim was vague, ephemeral and highly theoretical. Its underpinnings even eluded [independent counsel]; as [the policyholder] now says, ‘[N]one of us will ever know why [independent counsel] did not fully articulate each and every reason why he was entitled to be the Cumis lawyer.’”[15] “I am surprised that [the policyholder] has not argued that [the] insurer is liable for damages where the damages may be concurrently caused by both covered and uncovered claims.”[16] “Since the enactment of Civil Code, section 2860, it has been uniformly held to be the rule that the right to independent counsel does not arise in every situation where the insurance company defends under a reservation of rights. There must also be evidence that ‘the outcome of the coverage issue can be controlled by counsel first retained by the insurer for the defense of the underlying claim.’”[17] “We are not prepared to assume appointed defense counsel’s misfeasance in the absence of any evidence.”[18]

No Presumption of Conflict

Cumis can be read to suggest that this conflict arises whenever the insurer asserts a reservation of its right to assert noncoverage, while still providing a defense to the liability action. This interpretation of Cumis would be erroneous. It is only when the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case that a conflict of interest sufficient to require independent counsel, to be chosen by the insured, will arise.”[19] “There is no basis on the record to presume [dependent counsel] would have violated their stringent ethical responsibilities to completely defend [the policyholder] for all allegations of the entire complaint, covered or uncovered. There similarly is no support for the proposition [the insurer] intended to offer merely a token defense for uncovered claims or that either [dependent counsel] or [dependent counsel] were retained to act as ‘coverage spies’ to generate potential coverage defenses.”[20]

Proof Required On Various Motions

Generally, “a party has the burden of proof as to each fact the existence or nonexistence of which is essential to the claim for relief.”[21] In the absence of any evidence regarding conflicts of interest, “the trial court should have decided the Cumis issue as a matter of law and granted respondent’s motions for nonsuit or directed verdict.”[22]

A “motion for summary judgment shall be granted if all the papers submitted show that there is no triable issue as to any material fact. In determining whether the papers show that there is no triable issue as to any material fact the court shall consider all of the evidence set forth in the papers.”[23] On an insurer’s motion, it “was required to show [dependent counsel] could not impact coverage by the manner in which they defended the case. In order to meet its burden, [the insurer] was required to make some showing as to how the issues presented by [the insurer]’ reservation of rights differed from or were extrinsic to those issues that were developing or had developed in the [injured plaintiff]’s action. [The insurer] failed to establish, by attorney declaration or other admissible evidence, that the [injured plaintiff]’s claims against [policyholder] were not based upon conduct by [policyholder] that would impact the ultimate coverage determination. Absent such a showing, [the insurer] did not carry its burden on summary judgment to show [policyholder] could not establish a conflict of interest requiring the retention of Cumis counsel.[24]

Buss Reservation Does Not Create a Disqualifying Conflict

“Here, the allocation of defense costs between covered and noncovered claims is not an issue that will be litigated in the underlying action. Moreover, there is nothing in the record to suggest that defense counsel would violate his ethical duties to completely defend the insureds ‘as if [they] had retained [him] personally’ against all the allegations in the complaint, both covered and uncovered. Accordingly, the insureds have not rebutted [the insurer’s] showing that there is no actual conflict of interest and that, therefore, the insureds are not entitled to insurer-paid independent counsel.”[25]

Assumptions on Motion to Disqualify Dependent Counsel

Some courts presume that the conduct of liability insurers and their dependent counsel is proper, unless proven otherwise.

Informed Written Consent Assumed

“By the same token, the record before us is devoid of any evidence that [policyholder] did not give informed consent to representation by [dependent counsel]. Thus, even if a conflict were present such as the court found in [Cumis], petitioner did not establish in the court below any basis for compelling [dependent counsel]’s withdrawal as [the policyholder]’s attorney.[26]

Authority to Appear in Court Is Presumed

“In the absence of a contrary showing, it is presumed that an attorney who enters an appearance on behalf of a party in litigation is authorized to do so. The presumption is rebuttable (ibid.) but there is nothing in the record to rebut the presumption.”[27]

Policyholder Consent Assumed

“[P]etitioner presented nothing whatever showing that representation by [dependent counsel] was forced upon [policyholder].[28]

A Failure to Complain Implies Assent

“[T]here is notably absent any declaration from [the policyholder] complaining in any respect about the representation being afforded him by [dependent counsel].[29] “Here, the insured, [policyholder], in his declaration quoted earlier, appears to have affirmed the authority of [dependent counsel] to represent him and, indeed, there is nothing whatever in the record indicating any desire on his part to the contrary.”[30]

________

[1] Cumis Rule Is Based on Attorney Ethics

[2] Buss Defense Cost Reimbursement

[3] Dependent Counsel Conflicts Arise When the Insurer Reserves Rights

[4] Civil Code § 2860 – Limited Application

[5] Develop Admissible Evidence of a Coverage Contest Promptly

[6] Dynamic Concepts, Inc. v. Truck Insurance Exchange (1998) 61 Cal.App.4th 999, 1007 (Dynamic Concepts).

[7] Industrial Indem. Co. v. Great American Ins. Co. (1977) 73 Cal.App.3d 529, 531.

[8] James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1101 (James 3) (citations omitted).

[9] Centex Homes v. St. Paul Fire & Marine Ins. Co. (2015) 237 Cal.App.4th 23, 32.

[10] Blain v. Doctor’s Co. (1990) 222 Cal.App.3d 1048, 1066, fn.6 (ellipsis omitted).

[11] Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350 (Blanchard).

[12] Federal Ins. Co. v. MBL, Inc. (2013) 219 Cal.App.4th 29, 47-48 (MBL) (ellipsis omitted).

[13] McGee v. Superior Court (1985) 176 Cal.App.3d 221, 225 (McGee) (ellipsis omitted).

[14] Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1415 (Gafcon).

[15] Dynamic Concepts, supra, 61 Cal.App.4th at 1009-10 (emphasis added).

[16] Native Sun Investment Group v. Ticor Title Ins. Co. (1987) 189 Cal.App.3d 1265, 1279 (Wiener dis. opn.)

[17] Midiman v. Farmers Ins. Exchange (1999) 76 Cal.App.4th 102, 119-20 (Midiman); see also, Blanchard, supra, 2 Cal. App. 4th at 350; Truck Ins. Exchange v. Superior Court (Cherng) (1996) 51 Cal. App. 4th 985, 994 (Cherng).

[18] Midiman, supra, 76 Cal.App.4th at 120; see also Dynamic Concepts, supra, 61 Cal.App.4th 999, 1007-1009.

[19] State Farm Fire & Casualty Co. v. Superior Court (Durant) (1989) 216 Cal.App.3d 1222, 1226, fn. 3 (Durant) (emphasis added; ellipses omitted); see also, Gafcon, supra, 98 Cal.App.4th at 1421-22.

[20] Dynamic Concepts, supra, 61 Cal.App.4th at 1008 (emphasis added).

[21] Evid. Code § 500.

[22] Blanchard, supra, 2 Cal.App.4th at 350 (ellipses omitted.)

[23] Code Civ. Proc. § 437c(c) (ellipsis omitted.)

[24] Gafcon, supra, 98 Cal.App.4th at 1423-24.

[25] James 3, supra, 91 Cal.App.4th at 1109 (ellipses omitted).

[26] McGee, supra, 176 Cal.App.3d at 226 (Note: A plaintiff, not a policyholder, sought disqualification of the dependent counsel).

[27] Id. at 225.

[28] Ibid.

[29] Ibid.

[30] Id. at 227 (ellipsis omitted).

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