Source: http://dutytodefend.com/cumis-rule/
Timestamp: 2019-04-22 08:38:04+00:00

Document:
In San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 (Cumis) California joined eight other jurisdictions to rule that when a liability insurer reserves its rights to deny coverage to its policyholder in a plaintiff’s lawsuit, the insurer must discharge its promise to defend by adequately funding competent counsel of the policyholder’s choice to control the defense. The insurer’s reservation of rights is a challenge to coverage that creates conflicts of interest between the insurer and the policyholder. Lawyers selected and directed by the insurer always represent the interests of the insurer and represent the policyholder as a defendant. A California lawyer who represents the interests of joint clients with potential conflicts of interest must comply with Rules of Professional Conduct, Rule 3-310. The so-called tripartite relationship, that harmoniously permits dependent counsel to represent the insurer and policyholder when there are no conflicts of interest, is “torn and shredded” when conflicts of interest emerge.
California courts have elaborated on the scope of the Cumis Rule. Because the insurer is not licensed to practice law, it must hire counsel to conduct the defense. The insurer must defend immediately. The insurer must defend the entire action. The insurer must adequately fund the defense. “Potential” not “actual” conflicts require the lawyer to comply with Rule 3-310. “[A] distinction between ‘potential’ and ‘actual’ conflicts of interest which is invalid and unworkable.” Both dependent counsel and the insurer have an affirmative duty to initiate disclosure of potential conflicts. Dependent counsel’s conflicts analysis must be thorough.
The Cumis rule has two parts: 1) Lawyer ethics prohibits joint representation of dual clients whose interests potentially conflict; and 2) therefore, the insure must discharge its promise to defend by adequately funding independent counsel.
“[W]here multiple theories of recovery are alleged and some theories involve uncovered conduct under the policy, a conflict of interest exists. In actions in which the insurer and insured have conflicting interests, the insurer may not compel the insured to surrender control of the litigation. If the insurer must pay for the cost of defense and, when a conflict exists, the insured may have control of the defense if he wishes, it follows the insurer must pay for such defense conducted by independent counsel.
“We begin by briefly reviewing the reason for Cumis counsel. An insurer is obligated to provide its insured with a defense to a third party’s lawsuit when there exists a potential for liability under the policy. In this way, an insurer’s duty to defend is broader than its duty to indemnify. Under these circumstances, an insurer may provide a defense under a reservation of rights, agreeing to defend, but promising to indemnify only for conduct covered by the policy.
 “Among the cases from other jurisdictions which are generally supportive of the view we take are the following:” Alaska, Arizona, Illinois, Maryland, New York, Massachusetts, Rhode Island, and Texas. (Cumis, supra, 162 Cal.App.3d at 374, fn.9.) California’s requirement for independent counsel when an insurer and insured are in conflict is the majority rule. [fn. 9. See Federal Ins. Co. v. X-Rite, Inc., 748 F. Supp. 1223, 1228 (D. Mich. 1990) (stating ‘Cumis is representative of a growing body of case law which would give the insured an absolute right to choose counsel where a conflict exists’); Moeller v. Am. Guar. & Liab. Ins. Co., 707 So. 2d 1062, 1069 (Miss. 1996) (noting that ‘other jurisdictions have generally held that in such a situation [defending under a reservation of rights], not only must the insured be given the opportunity to select his own counsel to defend the claim, the carrier must also pay the legal fees reasonably incurred in the defense’); Union Ins. Co. v. Knife Co., 902 F. Supp. 877, 880 (W.D. Ark. 1995) (stating ‘[d]ue to this [coverage] conflict of interest . . . the insurer must give up control of the litigation and retain an independent counsel for the insured’); CHI of Alaska v. Employers Reins. Corp., 844 P.2d 1113, 1121 (Alaska 1993) (concluding that ‘the insured should have the right to select independent counsel’ subject to the ‘implied covenant of good faith and fair dealing’); Village of Lombard v. Intergovernmental Risk Mgmt. Agency, 681 N.E.2d 88, 94 (Ill. 1997) (holding that the insured can select independent counsel except where the insurer and insured contractually agree to limit scope of the defense and liability obligations); Brohawn v. Transamerica Ins. Co., 347 A.2d 842, 854 (Md. App. 1975) (requiring the insurer to inform the insured of the conflict and provide the insured with the option of accepting counsel selected by the insurer or selecting independent counsel whose reasonable expenses will be paid by the insurer).
 Hartford Cas. Ins. Co. v. J.R. Marketing (2015) 61 Cal.4th 988, 992, fn1.
 How Much Must an Insurer Pay Independent Counsel? and How Often Must an Insurer Pay Independent Counsel?
 Cumis, supra, 162 Cal.App.3d at 368 (citations, quotation marks, and ellipses omitted).
 Id. at 374-375 (citations, quotation marks, and ellipses omitted).

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