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LEGEND
&Client& means the policyholder
&DC& means dependent counsel
&InsCo& means liability insurer
&Blank& means supply appropriate information
&Victim& means the injured third party plaintiff
Attorneys for Plaintiff,
&Client&
CAPTION
TABLE OF CONTENTS
PROLOGUE
INTRODUCTION
FACTUAL STATEMENT
DISCUSSION
- The Trial Court Has the Authority to Disqualify Counsel
- The Attorney-Client Relationship Is Fiduciary, Including Duties of
Undivided Loyalty, Disclosure, and Confidentiality
- &DC& Owe Fiduciary Duties to Clients to &Client&
- &DC& Owe a Duty of Undivided Loyalty to &Client&
- &DC& Owe a Duty of Disclosure to &Client&
- &DC& Owe a Duty of Confidentiality to &Client&
- Rules 1.7 Prohibits Conflicted Dual Representation
- Rules 1.8.6 Prohibits Insurer Compensation
- &DC& Has Violated Duties to &Client&
- The Two Part Cumis Rule
- Part One – The Wrong
- Part Two – A Remedy
- &DC& Has Wronged &Client&
- The Remedy for &DC&’s Wrong Is Disqualification
- The Cumis Quality of Conflict of Interest Analysis
- The Cumis Test
- &DC& Has Failed to Investigate or Analyze Potential Conflicts of Interest
- &DC& Has Failed to Make Required Disclosure to &Client&
- &DC& Has Failed to Seek or Obtain &Client&’s Informed Written Consent
- The Remedy for &DC&’ Wrong Is Disqualification
CONCLUSION
TABLE OF AUTHORITIES
State Cases
American Mut. Liab. Ins. Co. v. Superior Court
(1974) 38 Cal.App.3d 579
Anderson v. Eaton
(1930) 211 Cal. 113
Blanchard v. State Farm Fire & Casualty Co.
(1991) 2 Cal.App.4th 345
Buss v. Superior Court (1997)
16 Cal.4th 35
Calvert v. State Bar
(1991) 54 Cal.3d 765
Canton Poultry & Deli, Inc. v. Stockwell, Harris, Widom & Woolverton
(2003) 109 Cal App 4th 1219
Cox v. Delmas
(1893) 99 Cal. 104
Dynamic Concepts, Inc. v. Truck Ins. Exchange
(1998) 61 Cal.App.4th 999
Flatt v. Superior Court
(1994) 9 Cal.4th 275
Foremost Ins. Co. v. Wilks
(1988) 206 Cal.App.3d 251
Gafcon, Inc. v. Ponsor & Associates
(2002) 98 Cal.App.4th 1388
Golden Eagle Ins. Co. v. Foremost Ins. Co.
(1993) 20 Cal. App. 4th 1372
Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone
(2000) 79 Cal.App.4th 114
Haraguchi v. Superior Court
(2008) 43 Cal.4th 706
Haskel, Inc. v. Superior Court
(1995) 33 Cal.App.4th 963
TABLE OF AUTHORITIES
State Cases
Industrial Indem. Co. v. Great American Ins. Co.
(1977) 73 Cal.App. 3d 529
In re Jordan
(1972) 7 Cal.3d 930
Ishmael v. Millington
(1966) 241 Cal.App.2d 520
James 3 Corp. v. Truck Ins. Exchange
(2001) 91 Cal.App.4th 1093
Jeffry v. Pounds
(1977) 67 Cal.App.3d 6
Long v. Century Indemnity Co.
(2008) 163 Cal.App.4th 1460
Lysick v. Walcom
(1968) 258 Cal.App.2d 136
McGee v. Superior Court
(1985) 176 Cal.App.3d 221
Montrose Chemical Corp. v. Superior Court
(1993) 6 Cal.4th 287
Neel v. Magana, Olney, Levy, Cathcart & Gelfand
(1971) 6 Cal.3d 176
Novak v. Low, Ball & Lynch
(1999) 77 Cal.App.4th 278
People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc.
(1999) 20 Cal.4th 1135
Purdy v. Pacific Automobile Ins. Co.
(1984) 157 Cal.App.3d 59
San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc.
(1984) 162 Cal.App.3d 358
TABLE OF AUTHORITIES
State Cases
Santa Clara County Counsel Attorneys Assn. v. Woodside
(1994) 7 Cal.4th 525
Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc.
(2016) 244 Cal.App.4th 590
Spindle v. Chubb/Pacific Indemnity Group
(1979) 89 Cal.App.3d 706
State Farm Fire & Cas. Co. v. Superior Court
(1989) 216 Cal.App.3d 1222
Truck Ins. Exchange v. Superior Court
(1996) 51 Cal.App.4th 985
United Enterprises, Inc. v. Superior Court
(2010) 183 Cal. App. 4th 1004
Woods v. Superior Court
(1983) 149 Cal.App.3d 931
Out of California Cases
Allstate Ins. Co. v. Campbell,
334 Md. 381, 392, 639 A.2d 652, 657 (1994
Amer. Family Mut. Ins. Co. v. W.H. McNaughton Builders, Inc.,
843 N.E.2d 492, 498, 501 (Ill. 2006)
Armstrong Cleaners, Inc. v. Erie Ins. Exch.
(S.D. Ind. 2005) 363 F.Supp.2d 797
Auto-Owners Ins. Co. v. Lake Erie Land Co.
2:12-CV-184 JD (N.D. Ind. 2013)
Belanger v. Gabriel Chemicals, Inc.,
787 So.2d 559, 565-66 (2001)
CHI of Alaska, Inc. v. Employers Reinsurance Corp.,
844 P.2d 1113, (Alaska 1993)
Coats, Rose, Yale, Ryman & Lee, P.C., v. Navigators Specialty Ins. Co.,
830 F. Supp.2d 216, 219 (N.D. Tex. 2011)
TABLE OF AUTHORITIES
Out of California Cases
Hartford Acc. & Indem. Co. v. Foster
528 So.2d 255, 269, 274 (Miss. 1988)
Nisson v. Am. Home Assur. Co.,
917 P.2d 488, 490 (Okla. 1996)
Partain v. Mid-Continent Spec. Ins. Serv.,
838 F.Supp2d 547, 555 (S.D. Tex. 2012)
Pub. Serv. Mut. Ins. Co. v. Goldfarb,
425 N.E.2d 810, 53 N.Y.2d 392, 401 (1981)
Rector v. Amer. Nat’l Fire Ins. Co.
No. Civ.A. 00-2806 (E.D. Pa. 2002)
Red Head Brass, Inc. v. Buckeye Union Ins. Co.,
135 Ohio App.3d 616, 735 N.E.2d 48 (Ohio Ct. App. 1999)
State Farm Mut. Auto. Ins. Co. v. Hansen,
131 Nev. Adv. Op. 74 (2015)
Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of S.C., LP,
336 F. Supp.2d 610 (D.S.C., 2004)
In re Youngblood,
895 S.W.2d 322, 328 (Tenn. 1995)
Statutes
Bus. & Prof. Code § 6068(m)
Civ. Code § 2860
Evid. Code §500
Evid. Code § 952
Evid. Code § 954
Regulations
Cal. Code Regs. § 2695.4
TABLE OF AUTHORITIES
Rules of Professional Conduct
Rule 1.0.1(e)
Rule 1.4
Rule 1.7
Rule 1.8.6
Rule 5-102(B)
Treatises
The Bible: Matthew 6:24
Fifty State Survey: http://dutytodefend.com/50-state-survey-does-rpc-rule-1-7-
disqualify-insurance-defense-counsel-and-require-liability-insurers-to-pay-
independent-counsel-when-reserving-rights-to-deny-coverage/
Rest.3d Law Governing Lawyers § 20
Rest. Liab. Ins. § 16
MEMORANDUM OF POINTS AND AUTHORITIES
PROLOGUE
“No one can serve two masters.” (Matthew 6:24.)
INTRODUCTION
This is a motion to disqualify &DC& as counsel[1] for &Client& in this action. &Client& notified its liability insurer, &InsCo&, of this action, in response to which it agreed to defend &Client& under a broad reservation of rights. &InsCo& hired &DC& to defend &Client&, but &DC& has failed to comply with Rules of Professional Conduct, Rules 1.7 and 1.8.6. &DC& owes fiduciary duties to &Client& including duties of undivided loyalty, disclosure, and confidentiality, all of which duties &DC& has violated.
Under the Cumis Rule, &DC& is required to always investigate potential conflicts of interest created by &InsCo&’s reservation of rights, always analyze potential conflicts of interest thoroughly, and always make written disclosure to &Client& and &InsCo&. &DC& has failed to do any of this.
Under the Cumis Test, &DC& is required to obtain &Client&’s informed written consent if any one ground upon which &InsCo& has reserved its rights raises any disputed issue of fact or law in common with this action. &InsCo&’s reservation of rights triggers the Cumis Test and &DC& has failed to seek or obtain &Client&’s informed written consent. Thus, &DC& should be disqualified from representing &Client&.
FACTUAL STATEMENT
&InsCo& issued a policy of liability insurance to &Client&. &Victim& sued &Client& (the &Victim& Action). &InsCo& agreed to defend &Client& in the &Victim& Action under a reservation of rights to deny coverage. &InsCo& appointed one of its panel counsel, &CD& to defend &Client& in the &Victim& Action. &CD& accepted the assignment from &InsCo& to represent &Client& in the &Victim& Action. &CD& accepted compensation from &InsCo& to represent &Client& in the &Victim& Action. &CD& did not comply with the Rules of Professional Conduct (Rule). The attorney-client relationship between &Client& and &DC& is established by the fact that &DC& has entered an appearance in this action purporting to represent &Client&’s interests.
DISCUSSION
- The Trial Court Has the Authority to Disqualify Counsel
“A trial court’s authority to disqualify an attorney derives from the power inherent in every court ‘[t]o control in furtherance of justice, the conduct of its ministerial officers, and of all other persons in any manner connected with a judicial proceeding before it, in every matter pertaining thereto.’ [Citations.]” (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1145.) “[T]he trial court’s conclusions of law, however, review is de novo; a disposition that rests on an error of law constitutes an abuse of discretion. (Haraguchi v. Superior Court (2008) 43 Cal.4th 706, 711-712.)
“The primary value at stake in cases of simultaneous or dual representation is the attorney’s duty-and the client’s legitimate expectation-of loyalty. ¶ The paradigmatic instance of such prohibited dual representation – one roundly condemned by courts and commentators alike – occurs where the attorney represents clients whose interests are directly adverse in the same litigation. ¶ Indeed, in all but a few instances, the rule of disqualification in simultaneous representation cases is a per se or ‘automatic’ one.” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 284, 285, fn.3 (Flatt).) “[T]he purpose of the rules against representing conflicting interests is not only to prevent dishonest conduct, but also to avoid placing the honest practitioner in a position where he may be required to choose between conflicting duties or attempt to reconcile conflicting interests. [Citations.]” (Woods v. Superior Court (1983) 149 Cal.App.3d 931, 936.)
- The Attorney-Client Relationship Is Fiduciary, Including Duties of
Undivided Loyalty, Disclosure, and Confidentiality
- &DC& Owes Fiduciary Duties to &Client&
“The relation between attorney and client is a fiduciary relation of the very highest character, and binds the attorney to most conscientious fidelity.” (Cox v. Delmas (1893) 99 Cal. 104, 123.) “[A]n attorney is precluded from assuming any relation which would prevent him from devoting his entire energies to his client’s interests. Nor does it matter that the intention and motives of the attorney are honest. The rule is designed not alone to prevent the dishonest practitioner from fraudulent conduct, but as well to preclude the honest practitioner from putting himself in a position where he may be required to choose between conflicting duties, or be led to an attempt to reconcile conflicting interests, rather than to enforce to their full extent the rights of the interest which he should alone represent.” (Anderson v. Eaton (1930) 211 Cal. 113, 116 (Anderson) (citations omitted.))
- &DC& Owes a Duty of Undivided Loyalty to &Client&
“An attorney’s duty of loyalty to a client is not one that is capable of being divided, at least under circumstances where the ethical obligation to withdraw from further representation of one of the parties is mandatory, rather than subject to disclosure and client consent.” (Flatt, supra, 9 Cal.4th at 282.)
“It is . . . an attorney’s duty to protect his client in every possible way, and it is a violation of that duty for him to assume a position adverse or antagonistic to his client without the latter’s free and intelligent consent given after full knowledge of all the facts and circumstances.” (Anderson, supra, 211 Cal. at 116 (citations omitted).)
[Discuss facts showing &DC& is loyal to &InsCo&]
- &DC& Owes a Duty of Disclosure to &Client&
“It is the duty of an attorney to do all of the following: . . . To respond promptly to reasonable status inquiries of clients and to keep clients reasonably informed of significant developments in matters with regard to which the attorney has agreed to provide legal services.” (Bus. & Prof. Code § 6068(m); see also, (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 188-89 (Neel).) “Adequate communication with clients is an integral part of competent professional performance as an attorney.” (Calvert v. State Bar (1991) 54 Cal.3d 765, 782.) The duty may require the lawyer to disclose one’s own malpractice. (See, Rest.3d Law Governing Lawyers § 20, Comment c.) “[T]he disclosure must be full and complete, and any material concealment or misrepresentation will amount to fraud. Cases in which the defendant stands in a fiduciary relationship to the plaintiff are frequently treated as if they involved fraudulent concealment of the cause of action by the defendant. The theory is that although the defendant makes no active misrepresentation, this element is supplied by an affirmative obligation to make full disclosure, and the non-disclosure itself is a ‘fraud.”’ (Neel, supra, 6 Cal.3d at 188-89.)
&DC&, not &Client&, must initiate disclosure. “The relation between attorney and client is a fiduciary relation of the very highest character. [An attorney] owes a duty to communicate to his client whatever information he acquires in relation to the subject matter involved in the transaction.” (Neel, supra, 6 Cal.3d at 189-190 (citations, ellipses, and quotation marks omitted).) “[T]he existence of a conflict of interest should be identified early in the proceedings so it can be treated effectively before prejudice has occurred to either party.” (Cumis, supra, 162 Cal.App.3d at 371, fn.7.)
[Discuss facts showing &DC& has failed to make required disclosures to &Client&]
- &DC& Owes a Duty of Confidentiality to &Client&
&DC& may not communicate to &InsCo& confidential information received by &DC& from &Client& that may impact &Client&’s insurance coverage with &InsCo&. “It is the duty of an attorney to . . . maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client.” (Bus. & Prof. Code. § 6068(e)(1).) “A lawyer shall not reveal information protected from disclosure by Business and Professions Code section 6068, subdivision (e)(1) unless the client gives informed consent.” (Rule 1.6.) “‘[C]onfidential communication between client and lawyer’ means information transmitted between a client and his or her lawyer in the course of that relationship and in confidence by a means which, so far as the client is aware, discloses the information to no third persons. . . .” (Evid. Code § 952.) “[T]he client, whether or not a party, has a privilege to refuse to disclose, and to prevent another from disclosing, a confidential communication between client and lawyer if the privilege is claimed by: (a) The holder of the privilege; (b) A person who is authorized to claim the privilege by the holder of the privilege; or (c) The person who was the lawyer at the time of the confidential communication, but such person may not claim the privilege if there is no holder of the privilege in existence or if he is otherwise instructed by a person authorized to permit disclosure.” (Evid. Code § 954.)
“[T]he purpose and necessities of the relation between a client and his attorney require, in many cases, on the part of the client, the fullest and freest disclosure to the attorney of the client’s objects, motives, and actions. Thus the protection of confidences and secrets is not a rule of mere professional conduct, but instead involves public policies of paramount importance which are reflected in numerous statutes. (In re Jordan, (1972) 7 Cal.3d 930, 940-41.)
[Discuss facts showing &DC& has communicated confidential information to &InsCo& impacting coverage]
- Rule 1.7 Prohibits Conflicted Dual Representation
Rule 1.7 prohibits &DC& from representing &InsCo& and &Client& whose interests potentially conflict without their informed written consent where: 1) &InsCo& and &Client& are directly adverse; or 2) there is a significant risk that &DC&’s representation of &Client& will be materially limited by &DC&’s responsibilities to or relationships with &InsCo&. &DC& may ethically represent &Client& only if all of the three following conditions exist: 1) &DC& reasonably believes that it will be able to provide competent and diligent representation to each &InsCo& and &Client&; and; 2) the representation is not prohibited by law; and 3) the representation “does not involve” the assertion of a claim by &InsCo& against &Client&. It is insufficient that &DC& believes that it can represent &Client& if such representation is unlawful or if it “involves” &InsCo&’s reservation of rights. As explained below, the Cumis Test tracks these requirements rendering it unlawful to &DC& to represent &Client& and prohibiting &DC& from representing &Client& unless &InsCo&’s reservation of rights it limited to grounds that have “nothing to do with” issues raised in this action. (Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1470 (Long).)
California is a two-client state which recognizes that dependent counsel represents both the insurer and the policyholder as a client. “In the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. If the matter reaches litigation, the attorney appears of record for the insured and at all times represents him. In such a situation, the attorney has two clients.” (American Mut. Liab. Ins. Co. v. Superior Court (1974) 38 Cal.App.3d 579, 591-92 (ellipses omitted).) “The signed defense guidelines, with the negotiated hourly rate, and subsequent correspondence, along with the subsequent dealings between the [dependent counsel] defendants and [the insurer], reflected an agreement between them and an attorney-client relationship as a matter of law.” (Berger, Kahn, supra, 79 Cal.App.4th at 127.)
Even if the insurer were not considered to technically be a “client”, &DC& must still comply with Rule 1.7. &DC& has a relationship with &InsCo&, which is “another person who may be affected substantially by resolution of the matter.” (Rule 1.7, Comment [4].) Because a liability insurance policy is a contract of indemnity, all liability insurers are always and necessarily “affected substantially by resolution” of a judgment entered against its policyholder.
&DC& accepted an assignment from &InsCo& to represent the interests of both &InsCo& and &Client&. However, because &InsCo& has issued a reservation of rights, &DC& may not ethically appear as &Client&’s attorney of record in this matter without complying with Rule 1.7.
- Rule 1.8.6 Prohibits Insurer Compensation
Rule 1.8.6 prohibits &DC& from charging or accepting compensation for representing &Client& from &InsCo& unless: 1) the insurer does nothing to interfere with dependent counsel’s independent professional judgment; 2) dependent counsel protects the policyholder’s confidential information potentially impacting coverage; and 3) dependent counsel obtains the policyholder’s informed written consent.
Any violation of these Rules renders the contract between &InsCo& and &DC& void as against public policy. “A lawyer engaging in clear and serious violation of duty to a client may be required to forfeit some or all of the lawyer’s compensation for the matter. . . . California cases have drawn a line between cases involving serious ethical violations such as conflicts of interest, in which compensation is prohibited, and technical violations or potential conflicts, in which compensation may be allowed.” (Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2016) 244 Cal.App.4th 590, 614-17.) The court went on to discuss Jeffry v. Pounds (1977) 67 Cal.App.3d 6, 11 in which a law firm breached the Rule [then numbered 5-102(B)] requiring informed written consent to represent dual clients with conflicting interests, and denied recovery of any fees for work performed after the conflict arose. (Id. at 617-18.)
&DC& may not ethically accept compensation from &InsCo& to defend &Client& in this matter without &Client&’s informed written consent, which &Client& has not given.
- &DC& Has Violated Duties to &Client&
[Discuss facts showing &DC& has violated its duties to &Client&.]
- The Two Part Cumis Rule
In the landmark Cumis case in 1984, California lead the way for the nation that attorney ethics prohibit dependent counsel like &DC& from representing the interests of a liability insurer and its policyholder whenever the insurer and policyholder have potential conflicts without complying with the Rules.
- Part One – The Wrong
It is wrong for &DC& to fail to make disclosure to &Client&. “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.” (Cumis, supra, 162 Cal.App.3d at 375.)
- Part Two – A Remedy
An appropriate remedy for this wrong is that &DC& may not represent &Client&. “If the insured does not give an informed consent to continued representation, counsel must cease to represent both.” (Ibid.)
- &DC& Has Wronged &Client&
&DC& has failed to investigate or analyze potential conflicts of interest. &DC& has failed to make the required disclosure to &Client&. &DC& has failed to seek or obtain &Client&’s informed written consent.
- The Remedy for &DC&’s Wrong Is Disqualification
[Discuss facts showing &DC& has not investigated, analyzed, or disclosed potential conflicts of interest created by &InsCo&’s reservation of rights.]
- The Cumis Quality of Conflict of Interest Analysis
Dependent counsel must thoroughly investigate and analyze potential conflicts of interest in order to obtain a client’s “informed written consent” to ethical representation. Rule 1.0.1(e) defines informed consent to mean the policyholder’s “agreement to a proposed course of conduct after the lawyer has communicated and explained (i) the relevant circumstances and (ii) the material risks, including any actual and reasonably foreseeable adverse consequences of the proposed course of conduct.” Rule 1.4 elaborates on what a lawyer must explain to the client: “A lawyer shall promptly inform the client of any decision or circumstance with respect to which disclosure or the client’s informed consent is required; reasonably consult with the client about the means by which to accomplish the client’s objectives in the representation; keep the client reasonably informed about significant developments relating to the representation, including promptly complying with reasonable requests for information and copies of significant documents when necessary to keep the client so informed; and advise the client about any relevant limitation on the lawyer’s conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law. A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.”
The purpose of dependent counsel’s written disclosure is to warn the policyholder to at least consider distrusting a reserving insurer and its dependent counsel. “Through reservation, the insurer gives the insured notice of how it will, or at least may, proceed and thereby provides it an opportunity to take any steps that it may deem reasonable or necessary in response – including whether to accept defense at the insurer’s hands and under the insurer’s control . . . or, instead, to defend itself as it chooses.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 61, fn.27.)
Building on a foundation of the Canons of Ethics, case law clearly illuminates what dependent counsel must communicate and explain. “There is no talismanic rule that allows a facile determination of whether a disqualifying conflict of interest exists. Instead, ‘[t]he 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.’” (Berger, Kahn, supra, 79 Cal.App.4th at 131 quoting Dynamic Concepts, supra 61 Cal.App.4th at 1007-1008.)
One court elaborated upon the questions to be asked and answered by a Proper Cumis Analysis: “(1) what is the exact nature of the claims asserted in the underlying action, (2) what defenses to coverage are asserted by the insurers, and to what extent, if at all, are they logically related to the liability issues raised in the underlying action, (3) what factual questions have to be resolved in order to sustain or defeat such defenses, (4) what is the likely nature of the available evidence, (5) to what extent, if at all, will [the policyholder] suffer prejudice by the enforced discovery of the evidence which tends to support or defeat its claim of coverage or the defenses raised by the insurers and (6) to what extent, if at all, will a confidentiality order realistically protect [the policyholder] from prejudicial disclosure.” (Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 980; see also Armstrong Cleaners, Inc. v. Erie Ins. Exch. (S.D. Ind. 2005) 363 F.Supp.2d 797, 816 (“fact- intensive and case-specific nature of the inquiry.”).)
The duty to initiate an investigation, analysis, and written disclosure falls only on the lawyer, not on the lay policyholder. Thus, dependent counsel has “the obligation to render a full and fair disclosure to the [client] of all facts which materially affect his rights and interests. . . . [Lawyers have] an affirmative obligation to make full disclosure, and the non-disclosure itself is a ‘fraud.” (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 188-89.) Dependent counsel also owes a duty to the policyholder “under Civil Code, section 2860, to disclose potential conflicts of interest.” (Canton Poultry & Deli, Inc. v. Stockwell, Harris, Widom & Woolverton (2003) 109 Cal App 4th 1219, 1224.)
If a policyholder sues dependent counsel or a reserving insurer, it assumes the evidentiary “burden of proof as to each fact the existence or nonexistence of which is essential to the claim for relief or defense that he is asserting.” (Evid. Code §500.) However, the plaintiff’s burden of proof at trial in a coverage contest should not be confused with dependent counsel’s ethical burden to clear conflicts of interest before starting work on a third party liability dispute. Dependent counsel’s burden to clear conflicts or quit does not shift simply because the policyholder is forced to sue. Thus, the policyholder is only required to show that dependent counsel failed to comply with Rule 1.7, not that dependent counsel had a disqualifying conflict of interest.
[Discuss facts showing &DC& has not done an adequate analysis.]
- The Cumis Test
About two-thirds of American jurisdictions follow the “per se” rule that all reservations of rights require a reserving insurer to pay for independent counsel. (See, http://dutytodefend.com/ 50-state-survey-does-rpc-rule-1-7-disqualify-insurance-defense-counsel-and-require-liability-insurers-to-pay-independent-counsel-when-reserving-rights-to-deny-coverage/).
However, in California, “not every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer’s expense.” (James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1101; see also, Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1006 (“But not every reservation of rights entitles an insured to select Cumis counsel.”)
Thus, the California rule requires dependent counsel, insurers, and courts to answer this question: “What potential conflicts of interest ethically disqualify dependent counsel from representing a policyholder whose insurer has reserved its rights to later deny coverage to its policyholder? The answer to this question is well established in California law.
Perhaps the best expression of the test is this: “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.” (State Farm Fire & Casualty Co. v. Superior Court (Durant) (1989) 216 Cal.App.3d 1222, 1231, fn.3 (citations omitted, emphasis added).)
However, the California test has been expressed by fourteen published opinions in a variety of ways, both negatively and positively. Expressed negatively, dependent counsel has no disqualifying conflict of interest and the liability insurer that reserves its rights is not required to pay for independent counsel if each ground upon which the insurer may later deny coverage: 1) has “nothing to do with the issues being litigated in the underlying action” (Long, supra, 163 Cal.App.4th at 1470 (citation and ellipsis omitted)); 2) “is logically unrelated to the issues of consequence in the underlying case” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 302; 3) “is independent of the issues in the underlying case;” (Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345, 350; see also, Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1422 (Gafcon)); or 4) “is extrinsic to the issues in the underlying action.” (Gafcon, supra, 98 Cal.App.4th at 1422.)
Expressed positively, dependent counsel has no disqualifying conflict of interest and the liability insurer that reserves its rights is required to pay for independent counsel: 1) “whenever [the insurer’s and policyholder’s] common lawyer’s representation of the one is rendered less effective” (Spindle v. Chubb/Pacific Indemnity Group (1979) 89 Cal.App.3d 706, 713); 2) if coverage issues “overlap” issues in the third party liability action (United Enterprises, Inc. v. Superior Court (2010) 183 Cal. App. 4th 1004, 1010); 3) if any coverage question depends “upon the insured’s own conduct” (Foremost Ins. Co. v. Wilks (1988) 206 Cal.App.3d 251, 261); 4) if “[i]nsurance counsel had [an] incentive to attach liability to [the insured]” (Berger, Kahn, supra, 79 Cal.App.4th at 131; 5) if “the ground of noncoverage was based on the nature of the insured’s conduct” (McGee v. Superior Court (1985) 176 Cal.App.3d 221, 226); 6) if “the outcome of the coverage issue can be controlled by the way counsel defends the case” (Novak v. Low, Ball & Lynch (1999) 77 Cal.App.4th 278, 282; Civ. Code § 2860(a)); 7) “can be controlled by counsel first retained by the insurer for the defense of the claim” (Civ. Code § 2860(b)); 8) “the way counsel retained by the insurance company defends the action will affect an underlying coverage dispute between the insurer and the insured” (James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1108); 9) “the basis for the reservation of rights is such as to cause assertion of factual or legal theories which undermine the positions to be asserted in the liability case” (State Farm Fire & Cas. Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 1226, fn.3.) and 10) “where the issue creating the conflict is one which must be decided in the underlying action.” (Truck Ins. Exchange v. Superior Court (1996) 51 Cal.App.4th 985, 994; see also, Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal. App. 4th 1372, 1395-1396.)
The Cumis Test is also supported by out-of-state reliable authorities, although these are not binding on this court. The A.L.I. Restatement of Liability Insurance expresses the Cumis Test in terms of “facts at issue in common” as follows:
“When an insurer with the duty to defend provides the insured notice of a ground for contesting coverage under § 15 and there are facts at issue that are common to the legal action for which the defense is due and to the coverage dispute, such that the action could be defended in a manner that would benefit the insurer at the expense of the insured, the insurer must provide an independent defense of the action.” (Rest. Liab. Ins. § 16. The Obligation to Provide an Independent Defense)
Illinois: “[I]f insurer-retained counsel would have the opportunity to shift facts in a way that takes the case outside the scope of policy coverage, then the insured is not required to defend the underlying suit with insurer-retained counsel.” (Amer. Family Mut. Ins. Co. v. W.H. McNaughton Builders, Inc., 843 N.E.2d 492, 498, 501 (Ill. 2006). Indiana: “[T]he very real probability that the jury in the [underlying liability] Lawsuit will decide issues of fact potentially dispositive of the coverage dispute . . . entitles [the policyholder] to independent defense counsel at the . . . Insurers’ expense.” (Auto-Owners Ins. Co. v. Lake Erie Land Co. 2:12-CV-184 JD (N.D. Ind. 2013) Maryland: “Because it was in the insurer’s interest to establish noncoverage, and in the insured’s interest to be found liable only for the covered claims, it was necessary for the insurer to allow the insured to choose independent counsel.” (Allstate Ins. Co. v. Campbell, 334 Md. 381, 392, 639 A.2d 652, 657 (1994).) Mississippi: “Any lawyer who attempts to represent two adverse masters places himself in a precarious, perilous position. [Rules of ethics] are distilled principles of ancient, time-honored, and judicially-enforced conduct on the part of lawyers in representing clients. Without them our system of justice would be doomed. It hardly needs to be added that no insurance policy can validly diminish a lawyer’s duty to his insured client. In sum, the ethical dilemma thus imposed upon the carrier-employed defense attorney would tax Socrates, and no decision or authority we have studied furnishes a completely satisfactory answer.” (Foster, supra, 528 So.2d at 269, 274.) (Hartford Acc. & Indem. Co. v. Foster 528 So.2d 255, 269, 274 (Miss. 1988).) New York: “Independent counsel is only necessary in cases where the defense attorney’s duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only upon grounds which would render the insurer liable. When such a conflict is apparent, the insured must be free to choose his own counsel whose reasonable fee is to be paid by the insurer.” (Pub. Serv. Mut. Ins. Co. v. Goldfarb, 425 N.E.2d 810, 53 N.Y.2d 392, 401 (1981).) Oklahoma: “Independent counsel is only necessary in cases where the defense attorney’s duty to the insured would require that he defeat liability on any ground and his duty to the insurer would require that he defeat liability only upon grounds that would render the insurer liable.” (Nisson v. Am. Home Assur. Co., 917 P.2d 488, 490 (Okla. 1996).) Pennsylvania: Where “the loyalty of the insurer’s counsel to that insured is raised, the insured is entitled to select its counsel. . . . [and the insurer] is obligated to provide conflict-free counsel and relinquish control of the defense.” (Rector v. Amer. Nat’l Fire Ins. Co. No. Civ.A. 00-2806 (E.D. Pa. 2002).) Texas: “[I]f the attorney appointed by the insurance company would have an incentive to act for the insurance company’s interest rather than the insured’s interest, and therefore deprive the insured of its right to independent counsel, a conflict of interest exists triggering the insured’s right to select counsel.” (Coats, Rose, Yale, Ryman & Lee, P.C., v. Navigators Specialty Ins. Co., 830 F. Supp.2d 216, 219 (N.D. Tex. 2011).) “A disqualifying conflict of interest exists where the facts to be adjudicated in the liability lawsuit are the same facts upon which coverage depends.” (Partain v. Mid-Continent Spec. Ins. Serv., 838 F.Supp2d 547, 555 (S.D. Tex. 2012).) See also: Alaska: CHI of Alaska, Inc. v. Employers Reinsurance Corp., 844 P.2d 1113, (Alaska 1993); Louisiana: Belanger v. Gabriel Chemicals, Inc., 787 So.2d 559, 565-66 (2001); Nevada: State Farm Mut. Auto. Ins. Co. v. Hansen, 131 Nev. Adv. Op. 74 (2015); Ohio: Red Head Brass, Inc. v. Buckeye Union Ins. Co., 135 Ohio App.3d 616, 626, 735 N.E.2d 48, 55 (Ohio Ct. App. 1999): South Carolina: Twin City Fire Ins. Co. v. Ben Arnold-Sunbelt Beverage Co. of S.C., LP, 336 F. Supp.2d 610 (D.S.C., 2004); Tennessee: In re Youngblood, 895 S.W.2d 322, 328 (Tenn. 1995).)
- &DC& Has Failed to Investigate or Analyze Potential Conflicts of Interest
[Discuss facts showing &DC& failed to investigate and do an adequate analysis.]
- &DC& Has Failed to Make Required Disclosure to &Client&
[Discuss facts showing &DC& failed to make disclosure.]
- &DC& Has Failed to Seek or Obtain &Client&’s Informed Written Consent
[Discuss facts showing &DC& failed to seek or obtain &Client&’s informed written consent.]
- The Remedy for &DC&’ Wrong Is Disqualification
Accordingly, &DC& should be disqualified from representing &Client& in this action.
CONCLUSION
&CD&’s purported representation of &Client& as its attorneys in this action is prohibited by law because of &InsCo&’s reservations of rights to deny coverage to &Client&. The court should disqualify &DC& from representing &Client&.
October _, 2020
__________________________
By:
Attorneys for Plaintiff,
&Client&
[1] &DC& qualifies as “dependent counsel”, which describes and differentiates their counterpart, “independent counsel.” This term acknowledges that “[a]s a practical matter . . . in reality, the insurer’s attorneys may have closer ties with the insurer and a more compelling interest in protecting the insurer’s position, whether or not it coincides with what is best for the insured” (Purdy v. Pacific Automobile Ins. Co.(1984) 157 Cal.App.3d 59, 76), “[i]nsurance companies hire relatively few lawyers and concentrate their business. A lawyer who does not look out for the Carrier’s best interest might soon find himself out of work.” (San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 364 (Cumis)), and “defense counsel and the insurer frequently have a longstanding, if not collegial, relationship” (Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131 (Berger, Kahn)). “In California, an attorney may usually, under minimum standards of professional ethics, represent dual interests as long as full consent and full disclosure occur.” (Lysick v. Walcom (1968) 258 Cal.App.2d 136, 147; See, also Ishmael v. Millington (1966) 241 Cal.App.2d 520, 528; Industrial Indem. Co. v. Great American Ins. Co. (1977) 73 Cal.App. 3d 529, 537.)