CUMIS LINE OF CASES

Introduction

California case law has developed two distinct and incompatible lines of common law authority addressing whether an insurer that reserves its rights to later deny coverage to its policyholder must pay for independent counsel. The Cumis1 line of cases is the majority rule2 and reasons that an insurer must pay for independent counsel because its chosen dependent counsel cannot ethically represent the interests of both the reserving insurer and the policyholder. Dependent counsel must analyze potential3 conflicts, and make written disclosure to and obtain informed written consent from both the insurer and the policyholder in compliance with Rules of Professional Conduct, Rule 3-310. Alternatively, the minority view of the Dynamic Concepts4 line of cases reasons that an insurer is not obligated to pay for independent counsel without regard to dependent counsel's conflicts of interests unless the policyholder proves that a reservation of rights creates a conflict of interest that is significant and actual, not merely theoretical or potential.

Table of Cases

The following cases contribute to the substantive body of Cumis law.5 The following excerpts from the cases are in chronological order, tracing the development of the law. Omitted from this table are scores of reported opinions that quote from the Cumis opinion without adding to the substantive law, merely use the phrase Cumis counsel, or explore the scope of Civil Code § 2860.6

Supreme Court

Buss v. Superior Court (1997) 16 Cal.4th 35 (Buss)

Hartford Cas. Ins. Co. v. J.R. Marketing (2015) 61 Cal.4th 988 (J.R. Marketing)

J. C. Penney Casualty Ins. Co. v. M. K. (1991) 52 Cal.3d 1009 (JC Penney)

Court of Appeal

American Mut. Liab. Ins. Co. v. Superior Court (1974) 38 Cal.App.3d 579 (Nork)

Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78 (Haven)

Blanchard v. State Farm Fire & Casualty Co. (1991) 2 Cal.App.4th 345 (Blanchard)

Bogard v. Employers Casualty Co. (1985) 164 Cal.App.3d 602 (Bogard)

Center Foundation v. Chicago Ins. Co. (1991) 227 Cal.App.3d 547 (Center Foundation)

Compulink Inc. v. St. Paul Fire & Marine Ins. Co. (2008) 169 Cal.App.4th 289 (Compulink)

Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999 (Dynamic Concepts)

Emp. Ins. of Wausau v. Albert D. Seeno Const. Co. (ND Cal. 1988) 692 F.Supp. 1150 (Seeno)

Federal Ins. Co. v. MBL, Inc. (2013) 219 Cal.App.4th 29 (MBL)

Foremost Ins. Co. v. Wilks (1988) 206 Cal.App.3d 251 (Wilks)

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

Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372 (Berkovich)

Grissom v. Vons Companies, Inc. (1991) 1 Cal.App.4th 52, 59 (Grissom)

Handy v. First Interstate Bank (1993) 13 Cal.App.4th 917 (Handy)

Kroll & Tract v. Paris & Paris (1999) 72 Cal. App. 4th 1537 (Kroll)

Laws v. County of San Diego (1990) 219 Cal.App.3d 189 (Laws)

McGee v. Superior Court (1985) 176 Cal.App.3d 221 (McGee)

Mosier v. S. Cal. Physicians Ins. Exch. (1998) 63 Cal. App. 4th 1022 (Mosier)

Northern Ins. Co. Oof N.Y. v. Allied Mut. Ins. Co. (9th Cir. 1992) 955 F.2d 1353 (Northern)

Novak v. Low, Ball & Lynch (1999) 77 Cal.App.4th 278 (Novak)

San Gabriel Basin Water Qual. Auth. v. Aerojet-General Corp. (C.D. Cal. 2000) 105 F.Supp.2d 1095 (San Gabriel)

Seltzer v. Barnes (2010) 182 Cal.App.4th 953 (Seltzer)

State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, (Durant)

Truck Ins. Exchange v. Superior Court (Cherng) (1996) 51 Cal.App.4th 985 (Cherng)

United Pac. Ins. Co. v. Hall (1988) 199 Cal. App. 3d 551 (Hall)

United States Fid. & Guar. Co. v. Superior Court (1988) 204 Cal.App.3d 1513 (Gar May)

Federal Cases

Seeno

"Cumis law . . . has been undergoing a somewhat uncertain evolution."7

Northern

In resolving a choice of laws question, the Court addressed "whether [the insurer] fulfilled its duty to provide a defense. Under Washington law, it did; under California law, it did not. California protects insureds by requiring insurers to pay the reasonable costs of independent counsel when a conflict of interest exists between the insured and insurer. Conflicts arise when the insurer reserves its rights on an issue over which defense counsel exerts some degree of control. The underlying concern is not the enforcement of ethical rules, but rather the protection of the insured when its interests conflict with those of its insurer. Cumis, and now section 2860, accomplishes this by requiring insurers to provide independent counsel when a conflict arises. California has a strong interest in protecting its insureds from the risks inherent in a defense provided under a reservation of rights. The obligation to provide a defense is one of the two essential promises in the [the insurer] policy. Given the central role this obligation plays in the contract, we find that rules such as the Cumis rule, which play a defining role in determining the scope of this obligation, relate to a substantial right rather than a mere detail of performance."8

San Gabriel

In San Gabriel, the Court denied a motion to disqualify a law firm in lawsuit #2 whose associate had previously been dependent counsel representing an insurer only but not the policyholder in lawsuit #1 where the associate had been shielded from lawsuit #2. The Court observed that counsel's disclosures to an insurer "are strictly of an informational character, and arise only because of the unique three-cornered arrangement that carriers create when they agree to defend only under a reservations of rights. Indeed, the tension created by the potential conflict of interests between insured and carrier is fundamentally inconsistent with a basic requirement of all attorney-client relationships: the requirement that the client have a reasonably based expectation that the communications will not be used against the client. Moreover, the insured and its independent counsel retain fully the right to communicate between themselves in private - and to shield those communications from the carrier."9

Supreme Court

Buss

"Civil Code section 2860 simply 'clarifies and limits' [Cumis]."10 "Although California case and statutory law have imposed limits on the ability of liability insurers to control third party litigation against the insured, CGL carriers have not responded to this changed legal climate by altering the scope of their defense obligation. Redrafting the standard policy language to narrow the defense obligation would not be particularly difficult."11

JC Penney

"The purpose of requiring Cumis counsel is to protect an insured's interest. If [an insurer] breached a duty to its insured by interfering with or discharging Cumis counsel, the insured is the proper party to seek redress."12

J.R. Marketing

"The Cumis decision held that where the insurer provides a defense, but reserves the right to contest indemnity liability under circumstances suggesting that the insurer's interest may diverge from that of its insured, a conflict arises between insured and insurer. In such circumstances, a single counsel cannot represent both the insurer and the insured unless the insured gives informed consent. Absent the insured's consent to joint representation, the insurer must pay the insured's 'reasonable cost' for hiring independent counsel to represent the insured's litigation interests under the insured's control."13 "We have long recognized that [t]he Cumis doctrine requires complete independence of counsel who represents solely the insured. In other words, Cumis counsel represents the insured independently of the insurer, and its attorney-client relationship exists with the insured, not the insurer. Thus, when it comes to defending the third party action, the insured retains ultimate decision-making authority. An important corollary of the Cumis doctrine is that if the insured is entitled to Cumis counsel, the insured is entitled to control the defense of the case."14 "In the ordinary situation that requires appointment of Cumis counsel, the insurer acknowledges that some or all of the third party claims are at least potentially covered under the policy and on that basis agrees to defend its insured. If the 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 the claim, a conflict of interest may exist that gives rise to the need for Cumis counsel. But the existence of that conflict does not mean the insurer and insured are entirely at odds. Their interests remain aligned as to third party claims unaffected by the coverage dispute. And even as to the claims implicating that dispute, [b]oth the insured and the insurer, of course, share a common interest in defeating the claims. The conflict exists only to the extent that if liability is found, their interests diverge in establishing the basis for that liability."15

Court of Appeal

Nork

Nork predates and lays the ethical foundation for Cumis. "In the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The insured and the insurer have certain obligations each to the other, as previously noted, arising from the insurance contract. In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. Conceptually, each member of the trio, attorney, client-insured, and client-insurer has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well. The three parties may be viewed as a loose partnership - the defense team. The tranquility of this coalition is disturbed however, where disagreement arises between the members. Dissatisfaction flowering into litigation may disrupt the harmony of the arrangement. The attorney who formerly represented two clients in a special and unique relationship now must choose among alternative courses of action. He may totally withdraw from the entire relationship. The situation has changed. Partners have become adversaries. The closely knit fabric of confidentiality is torn and shredded."16

Bogard

"Conflict of interest between jointly represented clients occurs whenever their common lawyer's representation of the one is rendered less effective by reason of his representation of the other. Once a conflict of interest arises, it is well established in California that the insurer may not compel the insured to surrender control of the litigation, and the insured is entitled to retain independent counsel to participate in and protect his/her interest in the underlying action. Indeed, when such a conflict arises, the insurer's duty to defend requires it to notify the insured of that conflict. When the insurer has properly appraised the insured of his/her right to independent counsel, it has still not yet fully met its duty to defend, however. [I]n a conflict of interest situation, the insurer's obligation to defend extends to paying the reasonable value of the legal services and costs performed by independent counsel, selected by the insured."17

McGee

"The crucial fact in Cumis was that the insurer's reservation of rights on the ground of noncoverage was based on the nature of the insured's conduct, which as developed at trial would affect the determination as to coverage. Thus, several things are clear from the Cumis decision. One: it is applicable only when the basis for the insurer's reservation of rights creates a conflict of interest such as that of which the Cumis court spoke; two: the right to insist on independent counsel is the right of the insured, and the insured may, if he or she chooses, waive or otherwise forgo the right. [Where a reservation of rights raises] an issue extrinsic to and independent of the issue of [the policyholder's] liability[, n]o Cumis-type conflict of interest is shown to exist. The right to independent representation [is] a right belonging to the insured, not the insured's adversary."18

Hall

Cumis "held that where an insurer has reserved its right to deny coverage, and where the reservation creates a conflict of interest between insurer and insured, the same attorney should not represent both the insurer and the insured in an action brought against the insured unless the insured knowingly consents to such representation. Absent such consent, the insured is entitled to independent counsel paid for by the insurer. ¶ 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. [T]he Cumis doctrine cannot expand the contractual obligation of an insurer to provide a defense to actions where the insurance policy plainly fails to provide for a defense."19

Gar May

"Cumis emphasized ethical considerations applicable to the attorney representing the insured and not necessarily applicable to the insurer itself. [On appeal, an insurer] seeks primarily to overturn the Cumis decision. [W]e find no flaw in the Cumis reasoning. Moreover, more recent appellate court decisions and the Legislature's enactment of Civil Code section 2860 furnish an affirmative basis for following the decision. Later decisions have refined and limited the scope of Cumis. While these cases limit the broad language of Cumis, they do not support rejection of its basic premise. We point out, too, that the denial of review of Cumis by the Supreme Court accords the case some additional significance. Cumis is to be followed."20

Wilks

"The insurer's duty to defend the insured obligates it to furnish independent counsel to represent the insured if a conflict of interest has arisen between the insurer and the insured. A conflict of interest between jointly represented clients is likely to arise in the insurance context where coverage under the policy is disputed. Moreover, if there is a coverage dispute and the insurer elects to defend the insured under a reservation of rights, the conflict created thereby may require the insurer to furnish independent counsel. However, not every reservation of rights creates a conflict of interest; rather, the existence of a conflict depends upon the grounds on which the insurer is denying coverage. If the reservation of rights arises because of coverage questions which depend upon the insured's own conduct, a conflict exists. On the other hand, where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel.21

Durant

"The Cumis rule requires complete independence of counsel when an insurance company interposes a reservation of rights, the basis of which creates a conflict of interest. As Cumis counsel, it was [the lawyer's] obligation to guard against improvident revelations [of confidential coverage information] to the insurance company"22

Laws

"[T]his court has recently emphasized that we adhere to the principles announced in Cumis for various convincing reasons, including the denial of hearing on Cumis by the Supreme Court, the Legislature's apparent endorsement of the Cumis conflict premise by its enactment of Civil Code section 2860, and the development of subsequent case law."23

Center Foundation

"Section 2860 of the Civil Code codifies the Cumis rule by identifying the conflict which arises when an insurer reserves its rights on a given issue, by requiring the insurer to provide independent counsel to its insured under certain circumstances and by clarifying the insurer's role in the selection of independent counsel."24

Grissom

"The 'Cumis' doctrine was developed in the context of contracts of indemnity specifically obligating insurers to 'defend' their insureds. Because insurance companies cannot themselves practice law, they must delegate their duty to defend to attorneys. The 'Cumis' doctrine was born of the commercial reality that attorneys who regularly receive defense work from insurers may find themselves subject to conflicting loyalties when there is a dispute between the insurer and the insured which might be affected by the way the defense is conducted."25

Blanchard

"If the issue on which coverage turns is independent of the issues in the underlying case, Cumis counsel is not required. A conflict of interest does not arise unless the outcome of the coverage issue can be controlled by counsel first retained by the insurer for the defense of the underlying claim. The Cumis opinion was based heavily on the canons of ethics and the possibly conflicting choices confronting an attorney In the absence of dispute over some underlying fact, the existence of a conflict is a question of law for the trial judge to decide, not a jury question."26

Handy

"The Cumis decision held that in the absence of consent by the insured, whenever there are differing interests between the insurance company and the insured brought about by a reservation of rights based upon possible noncoverage of the insurance policy, the insurer must pay the reasonable fees for hiring independent counsel selected by the insured and the control of the litigation must be in the hands of the insured. The Legislature's enactment of Civil Code section 2860, implementing Cumis, furnishes an extremely weighty reason for concluding the precedent of Cumis was correctly followed in this case by the trial court and is to be followed by this court."27

Berkovich

"California courts have long recognized an insurer's duty to defend its insured may conflict with the insurer's own interests resulting in the need for independent counsel to protect the insured when the interests of insurer and insured diverge. [T]he mere fact the insurer disputes coverage does not entitle the insured to Cumis counsel. The insurer owes no duty to provide independent counsel in these situations because the Cumis rule is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests. Attorney control of the outcome of a coverage dispute is not, however, the only circumstance in which Cumis counsel may be required. The language of Civil Code section 2860 does not preclude judicial determination of conflict of interest and duty to provide independent counsel such as was accomplished in Cumis so long as that determination is consistent with the section. [T]he governing principle underlying Cumis and section 2860 is the attorney's ethical duty to the clients."28

Haven

"[A] liability insurer can sue its insured's Cumis counsel for negligence based on a breach of statutory duty for failing to inform and consult with the insurer in a timely manner, to disclose to the insurer all known, nonprivileged information, and to cooperate in exchanging information with insurer-provided counsel. Cumis counsel cannot be held negligently or statutorily liable to the insurer for failing to investigate, prepare, assert, establish, or perform similar functions regarding that complete defense. This distinction is drawn in recognition of the duties specified in section 2860 and in recognition of the independence of Cumis counsel who represents the insured, not the insurer. [A] conflict of interest or a potential conflict of interest between the insurer and the insured involve[s] the insured trying to obtain coverage and the insurer trying to avoid it. When this happens, defense counsel may not be permitted to represent both the insurer and the insured. The insurer may be required to provide the insured, at the insurer's expense, with independent counsel. Cumis counsel represent[s] solely the insured. The basic premise for this view is well established. 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). [T]he Cumis doctrine intended to eliminate the ethical dilemmas and temptations that arise along with conflict in joint representations through mandating the insured's right to Cumis counsel that represent[s] only the insured. An important corollary of the Cumis doctrine is that if the insured is entitled to Cumis counsel, the insured is entitled to control the defense of the case. Cumis counsel is under no duty to the insurer to investigate or make determinations regarding how the case will be handled. It is the insurer's duty to make its own investigation and determinations, if needed, using, among other sources, the section 2860 information provided by Cumis counsel. Cumis counsel represents the insured independently of the insurer. The need for Cumis counsel arises only when there is a conflict or potential conflict of interest between the insured and the insurer. Ethical dilemmas and temptations preclude joint representation at this juncture (unless the insured waives its right to independent counsel. For these reasons, there is no attorney-client relationship between Cumis counsel and the insurer. To allow an insurer to sue a Cumis counsel for negligence for failing to pursue or establish a complete defense would undermine the very foundation of the Cumis doctrine, which contemplates a counsel independent of the insurer.29

Cherng

"If the reservation of rights creates a conflict of interest between the insurer and the insured, the insured has the right to demand independent counsel."30

Dynamic Concepts

"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. There is no such entitlement [to Cumis counsel], for example, where the coverage issue is independent of, or extrinsic to, the issues in the underlying action or where the damages are only partially covered by the policy. Given the complexities of any Cumis analysis, [an insurer does] not breach any legal obligation to defend [its policyholder] when it offered to fully defend at its own expense through appointed counsel pending further coverage analysis of the Cumis issue."31

Moiser

"In Cumis, the problem presented was loyalty of counsel retained by an insurance carrier to defend an insured after the carrier issued a reservation of rights contesting the duty to indemnify."32

Kroll

Cumis "held that an insurance company must pay for independent counsel for its insured when there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights to deny coverage under an insurance policy. The possibility that the interests of the insured may become adverse to those of the insurer, and thus to those of the insurer's attorney, is exactly the reason Cumis counsel exists."33

Novak

"(Cumis) articulates the responsibility of an insurer to pay the reasonable cost for hiring independent counsel by the insured when the insured and insurer have divergent interests brought about by the insurer's reservation of its right to deny coverage. Such a conflict of interest may arise when the insurer reserves its rights on a particular issue and the outcome of the coverage issue can be controlled by the way counsel defends the case."34

Gafcon

Although Gafcon raises bizaar legal issues on peculiar facts, it includes an excellent comparison of how relationships change when an insurer reserves rights. "[A]bsent a conflict of interest, an attorney retained by an insurance company to defend its insured under the insurer's contractual obligation to do so represents and owes a fiduciary duty to both the insurer and insured. [T]he attorney retained by the insurance company for the purpose of defending the insured under the insurance policy owes the same duties to the insured as if the insured had hired the attorney him or herself. In the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The insured and the insurer have certain obligations each to the other arising from the insurance contract. Both the insured and the carrier have a common interest in defeating or settling the third party's claim. If the matter reaches litigation, the attorney appears of record for the insured and at all times represents him in terms measured by the extent of his employment. In such a situation, the attorney has two clients whose primary, overlapping and common interest is the speedy and successful resolution of the claim and litigation. Conceptually, each member of the trio, attorney, client-insured, and client-insurer has corresponding rights and obligations founded largely on contract, and as to the attorney, by the Rules of Professional Conduct as well. The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured. Communications are routinely exchanged between them relating to the joint and common purpose - the successful defense and resolution of the claim. Insured, carrier, and attorney, together form an entity - the defense team - arising from the obligations to defend and to cooperate, imposed by contract and professional duty. This entity may be conceived as comprising a unitary whole with intramural relationships and reciprocal obligations and duties each to the other quite separate and apart from the extramural relations with third parties or with the world at large. Together, the team occupies one side of the litigating arena.

"In certain circumstances a conflict of interest between insurer and insured will trigger the insured's right to retain independent counsel at the insurer's expense. But until such a conflict arises, the insurer has the right to control defense and settlement of the third party action against its insured, and is generally a direct participant in the litigation. [Where] the basis for the insured's liability might rest on conduct excluded by the terms of the insurance policy and that the insurer's own counsel were privy to investigation and client communication that could provide information directly relating to the coverage issue, a conflict of interest arises once the insurer takes the view a coverage issue is present. In this situation, there may be little commonality of interest. More generally, Cumis observed that an attorney having such dual agency status is subject to the rule that a [c]onflict of interest between jointly represented clients occurs whenever their common lawyer's representation of the one is rendered less effective by reason of his representation of the other. 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. Under these authorities, there is no entitlement to independent counsel where the coverage issue is independent of, or extrinsic to, the issues in the underlying action. Stated otherwise, where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, there is no conflict of interest requiring independent counsel."35

Long

"Under certain circumstances, a conflict of interest or potential conflict of interest may impose upon the insurer a duty under section 2860 to provide independent counsel. The attorney, who typically has a long-standing relationship with the insurer and none with the insured (including little prospect of future work), may be forced to make numerous and varied decisions that could help one of his clients concerning insurance coverage and harm the other. [T]here has been recognition that, 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. Consequently, in order to eliminate the ethical dilemmas and temptations that arise along with conflict in joint representations, the insurer is required to provide its insured with independent counsel of the insured's choosing who represents the insured, not the insurer; and the insured may thereafter control the defense of the case. Thus, when the reservation of rights is based on coverage disputes that have nothing to do with the issues being litigated in the underlying action there is no conflict of interest, and no duty to appoint independent counsel. Conversely, when the facts on which resolution of the reserved coverage dispute depends are at issue in the underlying action, independent counsel must be appointed because counsel selected and controlled by the insurer could determine the outcome of those issues in the third party action. Both the insured and the insurer, of course, share a common interest in defeating the claims. But if liability is found, their interests diverge in establishing the basis for that liability. The insurer, however, may elect not to retain counsel to protect its own interest, and such election does not obviate the need to provide Cumis counsel if a conflict or potential conflict exists. The animating principle of the decision, is protecting the insured when a conflict of interest between insurer and insured arises in third party litigation and counsel beholden to the insurer, if retained, might be faced with divided, but unequal loyalties. [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. Quite simply, the duty exists when the potential conflict arises, whether or not the insurer has-or will-retain its own counsel."36

Compulink

"Where an insurer provides a defense under a reservation of rights, however, a conflict of interest may arise between the insurer and its insured. In such a case, the insurer has a duty to provide its insured with independent counsel of the insured's choosing."37

Seltzer

Cumis "concluded that an insurer is responsible to pay the reasonable cost for hiring independent counsel for the insured when the insured and insurer have divergent interests due to the insurer's reservation of its right to deny coverage.38

MBL

Cumis "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. [N]ot every conflict of interest entitles an insured to insurer-paid independent counsel. However, independent counsel is required where there is a reservation of rights and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim."39