The moral foundation of the Cumis Rule is that Cumis counsel must be “independent” of the insurer. Cumis counsel may not ethically: 1) represent the interests of the insurer; 2) have a financial relationship with the insurer; or 3) accept compensation from the insurer without the policyholder’s informed written consent.
Yet when an insurer creates disqualifying conflicts of interest, it must discharge its promise to defend the policyholder by paying for independent counsel. No reported California opinion addresses the apparent dilemma produced by the insurer’s obligation to pay independent counsel in contravention of the ban on Cumis counsel accepting compensation.
THE INSURER OWES CONTRACTUAL OBLIGATIONS
TO THE POLICYHOLDER, NOT TO CUMIS COUNSEL
“Insurance is a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.” The parties to an insurance policy contract are the insurer and the policyholder, not any attorney. Thus, pursuant to the terms of the contract, the insurer owes obligations only to the policyholder.
THE INSURER MUST PAY INDEPENDENT COUNSEL
“We conclude the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage. If the insured does not give an informed consent to continued representation, counsel must cease to represent both. Moreover, in the absence of such consent, where there are divergent interests of the insured and the insurer 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. The insurer may not compel the insured to surrender control of the litigation. Disregarding the common interests of both insured and insurer in finding total nonliability in the third party action, the remaining interests of the two diverge to such an extent as to create an actual, ethical, conflict of interest warranting payment for the insureds’ independent counsel.”
ETHICS RESTRAIN CUMIS COUNSEL ACCEPTANCE OF INSURER PAYMENT
Cumis counsel is ethically restricted from entering into a separate retainer agreement with a client’s insurer. By definition, independent counsel is “independent” of the insurer. Cumis counsel may not ethically establish a direct financial relationship with nor accept money from a client’s insurer without informed written consent. A lawyer “shall not accept or continue representation of a client without providing written disclosure to the client where . . . (3) The [lawyer] has . . . a . . . financial . . . relationship with another . . . entity the [lawyer] knows or reasonably should know would be affected substantially by resolution of the matter [ie. an insurer].” Cumis counsel may not ethically accept money directly from a client’s insurer “unless: (1) There is no interference with the [lawyer]’s independence of professional judgment or with the client-lawyer relationship; and (2) [secret] Information relating to representation of the client is protected . . . and (3) The [lawyer] obtains the client’s informed written consent.”
Insurer lucre may tempt independent counsel as easily as it may tempt dependent counsel and threatens to undermine the underlying principle of the Cumis Rule – independence from the insurer. “Since it is almost unavoidable that, in the course of investigating and preparing the insured’s defense to the third party’s action, the insured’s attorney will come across information relevant to a coverage or similar issue, it is quite difficult for an attorney beholden to the insurer to represent the insured where the insurer is reserving its rights regarding coverage (unless, of course, the insured consents).”
INFORMED WRITTEN CONSENT
Rule 3-310 is clear that an attorney may ethically establish a financial relationship with a client’s insurer and accept payment from the insurer with the client’s informed written consent. Rule 3-310(A) provides: “Informed written consent” means the client’s . . . written agreement to the representation following written disclosure. “Disclosure” means informing the client . . . of the relevant circumstances and of the actual and reasonably foreseeable adverse consequences to the client.” A formal, written retainer agreement with the client may include both disclosure and consent.
ATTORNEY LIEN LAW
The client may expressly grant to Cumis counsel an attorney lien by which the lawyer may acquire a superior claim to defense cost owing to the client. When notified of the attorney lien, the insurer will be obligated to acknowledge its obligation to pay its policyholder for the fees and costs of defense, but issue a check payable to Cumis counsel as required by the lawyer’s lien rights. The client may also expressly consent to the insurer paying Cumis counsel directly. Cumis counsel may then notify the insurer of the attorney lien and direct that the insurer discharge its obligation to pay the policyholder by honoring the attorney lien.
One case found that a contingent fee retainer agreement between Cumis counsel and a policyholder/client at twice the lawyer’s normal hourly rate was not reasonable because it was entered into after the insurer agreed to defend. However, such a retainer may pass muster if independent counsel and the policyholder enter into it prior to the time the insurer accepts the defense.
 See, Article: Cumis Rule.
 See, Article: Disqualifying Conflicts of Interest.
 “[T]he insurer must pay the reasonable cost for hiring independent counsel by the insured.” (San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375 (Cumis).)
 “A member shall not accept compensation for representing a client from one other than the client unless: . . . (3) The member obtains the client’s informed written consent.” (Rules of Professional Conduct, Rule 3-310(F).)
 See, Model Contract: Cumis Retainer Agreement.
 See, Article: Attorney Liens.
 Ins. Code §22.
 Cumis, supra, 162 Cal.App.3d at 375 (citations omitted).
 “The obligation of an insurer to provide independent Cumis counsel for an insured is premised on the ethical inability of an attorney to represent conflicting interests.” (United Pac. Ins. Co. v. Hall (1988) 199 Cal. App.3d 551, 556.) “The Cumis opinion was based heavily on the canons of ethics and the possibly conflicting choices confronting an attorney” (Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350.) “[T]he Cumis rule is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests.” (Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal. App.4th 1372, 1394.) “Cumis is based on ethical standards, not on insurance concepts.” (Mosier v. S. Cal. Physicians Ins. Exch. (1998) 63 Cal. App.4th 1022, 1042; See, Article: Cumis Rule.
 Rule 3-310(B).
 Rule 3-310(F).
 Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 87.
 See, Cumis Retainer Agreement.
 See, Article: Attorney Liens.
 See, State of Calif. v. Pacific Indem. Co. (1998) 63 Cal.App.4th 1535.