Source: http://dutytodefend.com/disqualifying-conflicts-of-interest/
Timestamp: 2019-04-22 08:33:36+00:00

Document:
Conflicts of interest between the policyholder and the insurer creates closely related attorney-client conflicts of interest for dependent counsel, who represents both the insurer and the policyholder. However, these two sets of conflicts are governed by separate, but symbiotic bodies of law.
While a reservation of rights always creates some conflict of interest, “not every reservation of rights entitles an insured to select Cumis counsel.” Instead, a disqualifying conflict of interest that compels the insurer to pay for independent counsel arises whenever a disputed issue of fact or law being litigated in the plaintiff’s lawsuit is related to any coverage issue.
Liability insurance policies usually include an express promise to defend, but even absent such an express promise, an “indemnity against . . . liability . . . embraces the costs of defense against such . . . liability.” However, ironically the insurer cannot itself lawfully discharge its duty to defend because the insurer is not licensed to practice law. Thus, the insurer cannot directly defend the policyholder in a lawsuit. Instead, it must delegate its promise to defend to a attorney who is licensed to appear in court on behalf of the policyholder-client. As a result, conflicts of interest between the insurer and the policyholder become inextricably intertwined with conflicts of interest between dependent counsel and the policyholder/client. Since an attorney cannot represent dual clients whose interests potentially conflict, an insurer must provide independent counsel if dependent counsel has unresolved ethically conflicts representing both the insurer and the policyholder.
Insurer-policyholder conflicts of interest are rooted in the policy contract while attorney-client conflicts are derived from the Rules of Professional Conduct. A leading case eloquently enunciates its two part, if-then, holding. If dependent counsel has any ethical conflict of interest, then the insurer must provide independent counsel.
The Cumis rule is based on attorney ethics governing an attorney’s joint representation of clients with potential conflicts of interest. The applicable ethical standard is stated in Rule 3-310 which requires an attorney to analyze potential conflicts, make written disclosure to and obtain the informed written consent of both the insurer and the policyholder before the lawyer may accept or continue representation of dual clients with potentially conflicting interests.
The conflict issue can be posed in the following terms: Is the insurance defense counsel in a position where he or she can shepherd the case in a way that favors the interests of the insurer over those of the policyholder? If the answer is “yes”, then the insurance defense counsel has a conflict of interest that obligates him or her to obtain the informed written consent of each affected client before accepting or continuing the representation.
The distinction between reservations of rights which do and do not create disqualifying conflicts of interest is whether any ground upon which the insurer reserves the right to disclaim coverage is related to any disputed issue of fact or law in the third party litigation. While judicial expressions of the concept of a disqualifying conflict of interest are consistent, the nomenclature used is not. Thus, the courts have stated that a disqualifying conflict of interest exists unless factual or legal disputes are unrelated to, have nothing to do with, are irrelevant to, extrinsic to, independent of, or do not overlap issues in the third party litigation. A rationale for this rule is that a coverage dispute cannot be allowed to prejudice the policyholder’s defense.
Civil Code § 2860 states: “[W]hen an 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.” The statute does not diminish dependent counsel’s ethical duties to a client. Instead, the statute expressly affirms that dependent counsel must comply with ethical obligations. Civil Code § 2860 codified the Cumis decision. The statute enunciates a compatible legal standard, again with different verbiage: “when an 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.” However, the statute “does not clearly state when the right to an independent counsel vests.” Additionally, the code does not apply absent a conclusive determination that the insurer has a duty to defend and that a disqualifying conflict of interest exists.
There are at least ten procedural options by which a policyholder may resolve a dispute whether an insurer’s reservation of rights creates a disqualifying conflict of interest: 1) Acquiesce to the insurer; 2) Negotiate while developing evidence of conflicts; 3) Withhold consent and authorization for dependent counsel to represent the policyholder; 4) Resist dependent counsel’s motion to withdraw; 5) file a motion in the liability action to disqualify dependent counsel; 6) Sue the insurer for declaratory relief; 7) File a motion to stay a declaratory relief action; 8) File a motion for summary adjudication in a declaratory relief action; 9) Sue the insurer for damages; and 10) Sue dependent counsel for breach of fiduciary duty.
 Spindle v. Chubb/Pacific Indemnity Group (1979) 89 Cal.App.3d 706, 713.
 See, Reservation of Rights at DutytoDefend.com.
See, Chinese Gong at DutytoDefend.com.
 See, Conflicts of Interest Among Liability Insurers, Policyholders, and Dependent Counsel at DutytoDefend.com.
 Dynamic Concepts, supra, 61 Cal.App.4th at 1006.
 Conflicts of Interest Among Liability Insurers, Policyholders, and Dependent Counsel at DutytoDefend.com.
 Cumis, supra, 162 Cal.App.3d at 375.
 See, Cumis Rule at DutytoDefend.com.
 See, Duty to Analyze Conflicts at DutytoDefend.com.
 See, Rule 3-310 – Summary at DutytoDefend.com.
 Canton Poultry & Deli, Inc. v. Stockwell, Harris, Widom & Woolverton (2003) 109 Cal App 4th 1219, 1224.
 Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1470 (Long) (citation and ellipsis omitted).
 See, e.g., Long, supra, 163 Cal.App.4th at 1470-71; Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1421-23.
 See, Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 306 (Montrose I) No conflict exists if “coverage hinges on factual issues that are unrelated to the issues in the third party liability action”.
 See Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co.) (1994) 25 Cal.App.4th 902, 909 (Montrose II) “Accordingly, the question before us is whether the coverage questions are logically unrelated (that is, irrelevant) to the issues of consequence in the (third party litigation which might) prejudice [the insured] in the underlying actions”.
 See, Gafcon,supra, 98 Cal.App.4th at 1422. No prejudice “where the coverage issue is ‘independent of, or extrinsic to, the issues in the underlying action’”.
 See, Dependent Counsel is Not Exempt from Rule 3-310 at DutytoDefend.com.
 Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131 (Berger, Kahn).
 Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1395.
 State Farm Fire & Cas. Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 1226, fn 3 (emphasis added).
 Dynamic Concepts, supra, 61 Cal.App.4th at 1007.
 Berger, Kahn, supra 79 Cal.App.4th at 131.
 The statute declares that neither exposure in excess of policy limits nor a claim of punitive damages is deemed to create conflicts of interest between the insurer and the policyholder. No California reported opinion exonerates dependent counsel from ethical arising from a punitive damage claim or exposure in excess of policy limits. See. Conflicts of Interest Arising from a Punitive Damage Claim.
 Seltzer v. Barnes (2010) 182 Cal.App.4th 953, 966 (“Civil Code, section 2860 codifies (with clarifications and limitations) the holding in [Cumis], which 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”); James 3, supra, 91 Cal.App.4th at 1100; Long, supra, 163 Cal.App.4th at 1470.
 See, Top Ten Procedural Options to Resolve Conflicts of Interest at DutytoDefend.com.
 Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 980.

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