Cumis Test Conflict Analysis



“In the landmark Cumis opinion[1], the court held that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer’s expense. The Cumis opinion was codified in 1987 by the enactment of Civil Code section 2860, which ‘clarifies and limits’ the rights and responsibilities of insurer and insured as set forth in Cumis.”[2]

“Subsequent case law . . . have made clear, however, that not every reservation of rights creates a conflict of interest requiring appointment of independent counsel. It depends upon the nature of the coverage issue, as it relates to the issues in the underlying case. If the issue on which coverage turns is independent of the issues in the underlying case, Cumis counsel is not required.”[3] “An insurer’s reservation of rights may create a disqualifying conflict of interest requiring the insurer to pay the cost of Cumis counsel to represent the insured in the underlying action.”[4]

Conflict of Interest Analysis

“The potential for conflict requires a careful analysis of the parties’ respective interests.”[5] “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.’”[6]

The courts have addressed the impact of a coverage dispute on the pending liability action on motions to stay or dismiss the coverage action and in discovery disputes.[7] One opinion offered guidance how to analyze conflict issues including the following: “In doing so it should determine: (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.”[8]

“Of course, the insurer may have more than one defense to coverage. In that event, the trial court will need to consider each defense separately to decide whether it can be determined without prejudice to the insured and whether it is amenable to resolution by summary judgment or summary adjudication.”[9] “[T]he California Supreme Court recognized where . . . multiple theories of recovery are alleged and some theories involve uncovered conduct under the policy, a conflict of interest exists. Tomerlin concluded: ‘In actions in which . . . the insurer and insured have conflicting interests, the insurer may not compel the insured to surrender control of the litigation.’”[10] Pursuant to the “no automatic waiver rule”, no basis to deny coverage is waived by an insurer’s failure to mention it in a reservation of rights letter.[11]

Burden of Conflict Analysis

A liability insurer that agrees to defend under a reservation of rights and hires dependent counsel to control the policyholder’s defense has a duty to the policyholder to analyze whether its reservation of rights creates a disqualifying conflict of interest and advise the policyholder whether it must pay for independent counsel. Dependent counsel has an independent duty to the policyholder/client to analyze the insurer’s reservation of rights and make written disclosure to the policyholder. The policyholder has no duty to analyze conflicts.

      Conflict Analysis Can Be Difficult

Analyzing disqualifying conflicts of interest can be difficult. “[T]he professional obligations of counsel who represents a liability insurer as well as its insured needs clarification.”[12] “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’”[13]

      The Insurer Has a Duty to Analyze Conflicts

The policyholders has duty to an insurer nor to dependent counsel to analyze conflicts of interest. In contrast, the insurer does have duty to accurately determine and communicate whether its reservation of rights is based on grounds that are related to the liability dispute or creates a disqualifying conflict of interest for dependent counsel. “Every insurer shall disclose all benefits that may apply to the claim. When additional benefits might reasonably be payable under an insured’s policy, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer’s additional liability.”[14]

      Dependent Counsel Has a Duty to Analyze Conflicts

Similarly, dependent counsel has an ethical duty to analyze potential conflicts of interest,[15] make written disclosure to the policyholder, and obtain informed written consent.[16] “[W]hen coverage is disputed, the interests of the insured and the insurer are always divergent. [L]awyers hired by the insurer [have] an obligation to explain to the insured the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage.”[17]

      Policyholders Have No Duty to Analyze Conflicts

Nothing in a standard insurance policy, the State Bar Act, the Insurance Code, nor the common law imposes upon the policyholder any obligation to an insurer or to a lawyer any duty to analyze conflicts of interest. However, policyholders who sue a breaching insurer or unethical dependent counsel must carry the initial burden of proof to establish a conflict at trial.[18]

Remedies for Erroneous Conflict Analysis

Potential conflicts of interest should be addressed and resolved at an early date before they cause harm that is difficult to unwind. It is like planning a cake recipe before starting work rather than trying to extract a whole raw egg from a baked cake.

      Conflict Rules Are Prophylactic

Conflicts of interest obligations of insurers and their lawyers are intended to be preventative, not remedial. “The primary purpose of this prophylactic rule [Rule 3-310] is to prevent situations in which an attorney might compromise his or her representation of the client in order to advance the attorney’s own financial or personal interests.”[19]

      Procedural Options to Resolve Conflicts

There are at least ten procedural options available to resolve conflict of interest disputes, some quick and easy, others difficult and expensive and ranging from doing nothing,[20] to talking, to filing motions in the liability lawsuit, to filing additional complaints. However, perhaps the most efficient option is for the policyholder to expressly withhold consent and authorization for dependent counsel’s representation.[21]

Practice Pointer

Policyholders who are suspicious that an insurer and/or dependent counsel have not properly analyzed conflicts of interest and the insurer’s obligation to pay for independent counsel may send a Coverage Questionnaire[22] to the insurer and an Ethical Compliance Questionnaire[23] to dependent counsel to compel a dialogue of conflict issues by expressly withholding consent[24] and authority[25] to representation pending receipt of satisfactory written responses.

[1] San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis). Cumis Test.

[2] James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093, 1100 (citation omitted). (A claim of reimbursement of defense costs did not create a disqualifying conflict because the insurer expressly waived all other grounds to deny coverage.)

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

[4] Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1006 (Dynamic Concepts) (Citation omitted.)

[5] Dynamic Concepts, supra, 61 Cal.App.4th at 1007.

[6] Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131 (Berger, Kahn).

[7] See, Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287; (Montrose I) Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co.) (1994) 25 Cal.App.4th 902.

[8] Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 980.

[9] Montrose I supra, 6 Cal.4th at p. 306.

[10] Cumis, supra, 162 Cal.App.3d at 369.

[11] Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31 (“We conclude that an insurer does not impliedly waive coverage defenses it fails to mention when it denies the claim.”)

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

[13] Berger, Kahn, supra, 79 Cal.App.4th at 131, quoting Dynamic Concepts, supra, 61 Cal.App.4th at 1007-1008.

[14] Cal. Code Regs. § 2695.4 (ellipses omitted).

[15] Duty to Analyze Conflicts.

[16] “A [lawyer] shall not accept representation of a client without providing written disclosure [of the relevant circumstances and adverse consequences] to the client where [the lawyer] has a business, [or] financial relationship with another entity [such as an insurer that] would be affected substantially by resolution of the matter. A [lawyer] shall not, without the informed written consent of each client [a]ccept representation in a matter in which the interests of the clients potentially or actually conflict.” (Rule 3-310 (ellipses omitted).)

[17] Cumis, supra, 162 Cal.App.3d at 375 (ellipses omitted).

[18] “[A] party has the 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. )

[19] Santa Clara County Counsel Attorneys Assn. v. Woodside (1994) 7 Cal.4th 525, 546.

[20] Acquiescence Is Dangerous

[21] Top Ten Procedural Options to Resolve Conflicts of Interest

[22] Coverage questionnaire

[23] Ethical Compliance Questionnaire

[24] Rule 3-310.

[25] “Corruptly or wilfully and without authority appearing as attorney for a party to an action or proceeding constitutes a cause for disbarment or suspension.” (Bus. & Prof. Code § 6104.)

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