Is Insurance Company Required to Pay for Independent Counsel In California ?
San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 is the starting point in the analysis of any case presenting the issue of an insurer's duty to pay for independent counsel.
Cumis presented the issue of "whether an insurer is required to pay for independent counsel for an insured when the insurer provides its own counsel but reserves its right to assert noncoverage at a later date." (Id. at p. 361.)
In concluding "under these circumstances there is a conflict of interest between the insurer and the insured, and therefore the insured has a right to independent counsel paid for by the insurer" (ibid.), the court staled:
"In the usual tripartite relationship existing between insurer, insured and counsel, there is a single, common interest shared among them.
Dual representation by counsel is beneficial since the shared goal of minimizing or eliminating liability to a third party is the same.
A different situation is presented, however, when some or all of the allegations in the complaint do not fall within the scope of coverage under the policy.
In such a case, the standard practice of an insurer is to defend under a reservation of rights where the insurer promises to defend but states it may not indemnify the insured if liability is found. In this situation, there may be little commonality of interest.
Opposing poles of interest are represented on the one hand in the insurer's desire to establish in the third party suit the insured's 'liability rested on intentional conduct' , and thus no coverage under the policy, and on the other hand in the insured's desire to 'obtain a ruling . . . such liability emanated from the nonintentional conduct within his insurance coverage' (ibid) . . . . Although issues of coverage under the policy are not actually litigated in the third party suit, this does not detract from the force of these opposing interests as they operate on the attorney selected by the insurer, who has a dual agency status.
"Here, it is uncontested the basis for liability, if any, might rest on conduct excluded by the terms of the insurance policy.
Goebel & Monaghan will have to make certain decisions at the trial of the Eisenmann action which may either benefit or harm the insureds.
For example, it will have to seek or oppose special verdicts, the answers to which may benefit the insureds by finding nonexcluded conduct and harm either Cumis' position on coverage or the insureds by finding excluded conduct. These decisions are numerous and varied.
Each time one of them must be made, the lawyer is placed in the dilemma of helping one of his clients concerning insurance coverage and harming the other." (San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d at pp. 364-365.)
The court continued:
"On the advisability of settlement, Goebel & Monaghan represented clients with conflicting interests [citation]. No matter how honest the intentions, counsel cannot discharge inconsistent duties." (Id. at p. 366.)
"We conclude 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 insurers 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.
The insurer may not compel the insured to surrender control of the litigation. Disregarding the common interests of both insured and insurer in finding total nonliability in the third party action, the remaining interests of the two diverge to such an extent as to create an actual, ethical conflict of interest warranting payment for the insureds' independent counsel." (San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d at p. 375.)
Other examples of cases finding conflicts when the same attorney represented both the insured and the insurer were discussed in Cumis.
See Industrial Indem. Co. v. Great American Ins. Co. (J977) 73 Cal.App.3d 529 (conflict existed because the insured and insurer had different interests with respect to the outcome of the issue of vicarious liability); Previews, Inc. v. California Union Ins. Co. (9th Cir. 1981) 640 F.2d 1026 (insured best served by a finding of no willful conduct on the part of the insured. Insured best served by a contrary finding); Executive Aviation, Inc. v. National Ins. Underwriters (1971) 16 Cal.App.3d 799 (conflict existed because if plane that crashed was involved in "common carriage" there would be no coverage under the policy; contrary result would follow if no "common carriage" found).
Following Cumis the Legislature, in 1987, enacted Civil Code section 2860. This section provides in pertinent part:
"(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. . . .
"(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. . . ." (Civ. Code, 2860.)
Cases decided subsequent to the enactment of Civil Code section 2860 have relied upon Cumis, (Rockwell Internal Corp. v. Superior Court (1994) 26 Cal.App.4th 1255; Mosier v. Southern Cal Physicians Ins. Exchange (1998) 63 Cal.App.4th 1022.)