Duty to Provide Independent Counsel In a Conflict of Interest

San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal. App. 3d 358 208 Cal. Rptr. 494, 50 A.L.R.4th 913 considered the situation of an insurer's reservation of rights to deny coverage upon resolution of liability litigation, and the conflict of interest such a reservation of rights posed not only for the insurer but also for defense counsel selected by it. The court concluded: "The Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage. If the insured does not give an informed consent to continued representation, counsel must cease to represent both. Moreover, in the absence of such consent, where there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured. . . ." (Id. at p. 375.) Section 2860 " 'clarifies and limits' " the rights and responsibilities set forth in Cumis, supra, 162 Cal. App. 3d 358. (Buss v. Superior Court (1997) 16 Cal. 4th 35, 59-60 65 Cal. Rptr. 2d 366, 939 P.2d 766 (Buss); 6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, 1139, p. 560.) The section reiterates the duty to provide independent counsel in certain circumstances of conflict of interest (subd. (a)), describes situations in which such a conflict may exist and on the other hand where one does not exist (subd. (b)), provides for disclosures by independent counsel to the insurer (subd. (d)), sets forth a recital by which the insured may waive its right to select independent counsel (subd. (e)), and provides for cooperation between insured-selected and insurer-selected counsel (subd. (f)). Section 2680(c) allows the insurer to require that independent counsel chosen by the insured possess certain minimum qualifications, including errors and omissions coverage and certain defense litigation experience. The statute then contains the provision at issue in this case, namely that the insurer's obligation to pay fees to independent counsel selected by the insured is limited to the rates the insurer actually pays to attorneys it retains in the ordinary course of business in the defense of similar actions in the community. Section 2860(c) concludes by providing it does not invalidate other or further policy provisions regarding attorney fees or methods to settle disputes about them, but that any dispute not resolved "by these methods" shall be resolved by final and binding arbitration by a single neutral arbitrator. These subdivisions of section 2860 provide as follows: "(a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel. An insurance contract may contain a provision which sets forth the method of selecting that counsel consistent with this section. (b) for purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, 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. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits. . . . (d) When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action. Any claim of privilege asserted is subject to in camera review in the appropriate law and motion department of the superior court. Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party. (e) the insured may waive its right to select independent counsel by signing the following statement: 'I have been advised and informed of my right to select independent counsel to represent me in this lawsuit. I have considered this matter fully and freely waive my right to select independent counsel at this time. I authorize my insurer to select a defense attorney to represent me in this lawsuit.' (f) Where the insured selects independent counsel pursuant to the provisions of this section, both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation. Counsel shall cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured. Nothing in this section shall relieve the insured of his or her duty to cooperate with the insurer under the terms of the insurance contract." Section 2860(c) provides in full as follows: "(c) When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have (1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and (2) errors and omissions coverage. The insurer's obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended. This subdivision does not invalidate other different or additional policy provisions pertaining to attorney's fees or providing for methods of settlement of disputes concerning those fees. Any dispute concerning attorney's fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute."