445 S. Figueroa Street, Suite 2350, Los Angeles, California 90071

Update: The Right to Cumis Counsel

A recurring issue in business litigation concerns when an insured may choose its own counsel in a dispute tendered to its insurer.  A recent California case clarifies the current criteria governing this issue.  St. Paul Mercury Insurance Company v. McMillin Homes Construction, Inc., 2016 WL 5464553, (S.D. Cal. Sept. 29, 2016).

Under standard general liability insurance policies, an insurer has the right to control its insured’s defense; courts have interpreted that right to include the selection of the insured’s counsel.  Because, however, this creates a situation where counsel serves two clients – the insured being defended and the insurer paying counsel’s bills — conflicts of interest can arise, including those in which the insurer reserves its right to deny coverage.  This problem was addressed in the seminal case of San Diego Navy Federal Credit Union, et al. v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984) (“Cumis”), which held that where a potential conflict of interest arises between an insurer and its insured, the insurer is obligated to pay for independent counsel.  Cumis, 162 Cal.App.3d 373-74.  This principle was later codified in section 2860 of the California Civil Code.

Several weeks ago, the United States District Court for the Southern District of California issued a decision that summarizes the current state of the law concerning Cumis counsel.  In McMillin, an insured tendered to its insurer a claim for coverage based on a construction defect lawsuit that had been filed against it, but the insurer took between one and two months to agree to defend the insured.  The insured proceeded to hire its own counsel and argued that the insurer’s delay created a conflict triggering the right to independent counsel.  The district court, after carefully looking at the facts relating to the tendered claim, disagreed:

[The obligation to fund independent counsel may arise] (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; (b); (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.

. . . [N]ot every conflict of interest entitles an insured to insurer-paid independent counsel.  Nor does every reservation of rights entitle an insured to select Cumis counsel.  There is no such entitlement, 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. 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.

McMillin, 2016 WL 5464553 at *4-*6 (citations and quotation marks omitted).

McMillin is a good summary of the current state of the law and reminds us of two things.  First, California courts continue to interpret the right to independent counsel somewhat restrictively, at least compared to other states.  Second, the factual record behind the loss, claim tender and insurer positions is critical to establishing the right to independent counsel.