Cumis Counsel Beware – Insurance Carrier May Seek Reimbursement

Posted on August 16, 2017August 22, 2017 by kayseeb

Reimbursement directly from Cumis Counsel.

In August of 2015, the California Supreme Court issued its opinion in Hartford Casualty Insurance Company v. J.R. Marketing, LLC., 61 Cal.4th 988 (2015) in which our high court found that an insurance carrier that paid for Cumis counsel could seek recovery directly from counsel, and not the insured, where the independent counsel submitted bills that were unreasonable and unnecessary. As we have reviewed in prior posts, “Cumis counsel” is an independent attorney hired by the insured when a conflict of interest arises between the Carrier and the insured. (See prior post regarding explanation of Cumis Counsel)

In this case, the Hartford had issued a Commercial General Liability policy and thereafter refused to defend the insured as to a third-party claim. The Hartford then provided Cumis Counsel after a reservation of rights to dispute payment for liability. Oddly enough, the independent counsel arose as a result of a court order that required the Hartford to pay defense costs as there was a finding of a conflict of interest. That Court order recognized the reservation of rights and also expressly stated that the Carrier could challenge and recoup charges made by Cumis Counsel. Sure enough, the Hartford sought reimbursement and asserted that counsel had charges that were unnecessary to the litigation and were excessive under the circumstances.

The trial court found that reimbursement should come from the insureds and not from counsel. The Court of Appeals affirmed that judgment, again stating that reimbursement could not come directly from counsel but from the insureds. The Supreme Court then under a theory of unjust enrichment, and after review of various cases, reversed and held that “under the facts of the case at bar,” the insurer could seek reimbursement directly from Cumis counsel.

From review of the opinion, the court specifically stated that the holding was to be held strictly to the circumstances arising in that case. In that regard, perhaps the court would have come to a different conclusion if the court did not advise Hartford that it could seek reimbursement. It appears Hartford had already seen the bills before the issue arose and Hartford thereby requested such language in the order, or perhaps the court was extra-clairvoyant and knowing the bills would be excessive. Probably the former and not that latter, but it is uncertain if the court would order reimbursement from the insured if the order had not been in place. That notwithstanding, this case makes clear that Cumis counsel can be ordered to reimburse the carrier directly if its billing is not in order.

The Supreme court makes its ruling based on a theory of unjust enrichment and opines that Cumis counsel had unjustly benefited as a result of the payment of the unreasonable and unnecessary bills. It also appears that the Court must have been concerned with judicial economies. If reimbursement came from the insured then a another action would arise for the insured to recover from Cumis counsel who had issued the bills. The insured did not issue the bills and probably had no say in the matter.

The case also does not describe the type of charges that were considered to be fraudulent. That was not an issue on appeal and the charges were presumed to be unreasonable and unnecessary. So what the court’s perceive as unreasonable and unnecessary is left for another daym or perhaps defined in other case law. Of course, there would be no case at all if the bills were not fraught with unacceptable billing practices. As always, and with all practices of law, you can’t reap what you don’t sow, and it goes without saying, Cumis counsel must review their bills closely to insure they accurately reflect the work completed.

Author: Kevin Callon Boyle is a Coverage Attorney in Calabasas, California who has litigated all types of business matters with an emphasis on employment law. He also, is a licensed insurance producer and provides risk management services for his clients. The Law Offices of Kevin C. Boyle provides coverage opinions and counsel’s business clients and carriers as to coverage issues. Call for a free consultation at (818) 282-5799.

Cumis Counsel – When An Insurance Carrier has a Conflict of Interest

Posted on August 16, 2017August 21, 2017 by kayseeb

Who Pays Independent Counsel?

According to the dictionary at Legal.com, Cumis Counsel is “an attorney employed by a defendant in a lawsuit when there is a liability insurance policy supposedly covering the claim, but there is a conflict of interest between the insurance company and the insured defendant.” The name comes from the case San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3D 358 (4th Dist. 1984). which was decided by the Fourth Appellate District of the California Court of Appeal.

These situations arise where an insurance carrier receives a third party claim and finds that some of the action falls within coverage and some of it does not. In such instances the insurance carrier generally provides a defense, but will do so with a reservation of rights, which means that the insurance company may not pay liability. When the Carrier assigns such a case to an attorney there inherently is a conflict of interest as there could be a point in litigation where the interests of the clients (the insurance carrier and the insured) are different. Of course there is the common interest of both the carrier and the insured that the litigation will result in no liability, however the court in the Cumis case pointed out that the possibility of a conflict of interest is such that independent counsel must be provided and paid by the carrier and not the insured.

Cumis Counsel often arises where a third party complainant pleads punitive damages. Generally insurance policies do not cover intentional conduct or punitive damages. The Cumis case involved an employment matter, which also had contractual causes of action in addition to pleadings for punitive damages. The insurance policy did not cover the contractual matters nor did it cover punitive damages. The insured hired independent counsel when it issued a reservation of rights letter and did not acquiesce to multiple representation by the carrier and hired independent counsel to deal with the non-covered claims. The Cumis opinion describes all types of problems with this type of multiple representation and notes that a special verdict form itself creates a conflict as counsel may argue for or against such a form that specifically asks the jury to identify where liability arises.

The court concluded as follows:

“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 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. The insurer may not compel the insured to surrender control of the litigation (Tomerlin v. Canadian Indemnity Co., supra, 61 Cal.2d 638, 648; and see Nike, Inc. v. Atlantic Mut. Ins. Co. (N.D.Cal. 1983) 578 F.Supp. 948, 949). 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. “

So, where a reservation of rights letter is issued and a conflict of interest arises, the carrier who issued the reservation of rights must pay for the defense provided by the independent counsel that is hired by the insured. Somewhat of a precarious position for counsel and the insured, both of which must be vigilant for such instances as failure to abide by the holding in Cumis creates further litigation which is expensive and time consuming.

3 Reasons to Consider Unpublished Court Opinions for Insurance Coverage Research

Posted on July 23, 2017August 22, 2017 by kayseeb

Since the beginning of our legal careers we have been taught to only consider and research published opinions. However, in my experience that does not mean to ignore unpublished opinions. We are continuously researching insurance coverage matters and here are 3 reasons why unpublished court opinions should be reviewed as part of any research project or on a regular basis as unpublished decisions are issued all the time and in fact much more often than published opinions. Those reasons are:

Although the unpublished case itself cannot be cited in your papers, the court in those cases renders findings and gets to a conclusion using the most current accepted case law authority regarding the issues. All such authority includes published opinions, and such authority can certainly be cited. Even though the unpublished case does not include some new aspect of the law to make that case publishable, it still relies upon cases that are good law. Just don’t cite the unpublished case.
Unpublished opinions include the analysis of very bright legal minds. Often we can learn from such analysis and sometimes you can find factual situations that are closer to your case than the seminal case on the issue and a Court’s application of the law to those facts may be more helpful than the published opinions that deal with a different industry, business or set of facts. Again, just don’t cite the unpublished opinion but use the analysis, or logical reasoning as applied to your case.
The unpublished opinions will save you time getting to the analysis and case authority you are looking for. Clients want nothing more than an attorney who can save time and efficiently move through legal research. Ergo, don’t ignore those unpublished opinions that appear on point. We often use Versuslaw.com which will list all published and unpublished decisions as part of its search results, they are designated with a “[U]” and begin with text in bold letters advising that the case is unpublished, so you don’t mistakenly site the case.

In our office we are researching Insurance Coverage issues all the time, and we follow all opinions whether published or unpublished. We learn much from the courts application of established law in different circumstances. Clients never have the exact same fact pattern as found in published decisions. Every case is slightly different with a twist one way or the other. The review of all cases exposes us to Court decision that, although not identical. are much closer to the case on which we are working. We also get a feeling as to the judicial tendencies of the different districts and divisions. This also applies to Federal law as well as Federal courts are applying state law to decide matters. Insurance substantively law lies with the states and is not preempted by state law. Plus, we often end up in Federal Court.

So, we find unpublished opinions to be helpful. They help us build our library of points and authorities from which we write coverage opinions and counsel our clients.

Court Excludes General Liability Coverage With Broad Interpretation of Professional Serices

Posted on July 23, 2017August 22, 2017 by kayseeb

Intro

Recently on July 11, 2017, the California Court of Appeals, First District, Fourth Division, issued its ruling in the matter of Energy Insurance Mutual Limited (“EIM”), v. Ace American Insurance Company (“ACE”), Case No. A140656, in which the court found that general liability coverage was excluded from a claim of damage due to a massive gas explosion. In coming to that conclusion, the Court considered a broad interpretation of the term “professional services” in the exclusion of the General Liability Policy issued by ACE. Note, this is not a published opinion but we review the matter for its legal analysis and citation of cases in support, which are published opinions (See our post 3 Reasons to Review Unpublished Opinions). We also review the importance of carrying both professional liability and general liability in certain instances particularly in large construction projects.

Insurance Coverage Issue

Facts of the Underlying Case.

This case arises out of a tragic event resulting from a failure to identify and mark gas lines on a construction site. On November 9, 2004, an excavator operated by Mountain Cascade, Inc. (MCI), who working a project in Walnut Creek, California, punctured a high-pressured petroleum line owned by Kinder Morgan. Gasoline was released into the pipe trench and was ignited by the welding activities of Matamoros Pipelines, Inc., a subcontractor working for MCI. The resulting explosion and fire killed five employees and seriously injured four others. Extensive property damage also occurred. A Cal/OSHA investigation concluded that the failure to determine and mark the location of the utility line contributed to the accident.

The underlying lawsuits largely alleged that the pipeline rupture was caused by the negligence of the parties, including Kinder Morgan and Comforce who sought insurance coverage from its Excess carrier EIM and from ACE who carried a general liability and excess coverage. Ace defended under a reservation of rights and thereafter declined coverage. EIM commenced the instant action against ACE on March 16, 2011, seeking full reimbursement of the payments it made to Kinder Morgan under its excess policy, up to the full $25 million limit of Comforce’s umbrella policy with ACE. EIM further alleged that the defense costs and settlement payments disbursed in connection with the underlying lawsuits should have been paid by ACE. At issue on appeal, is whether the trial court properly determined that the tort claims asserted against Kinder Morgan arose from performance or non-performance of services of a professional nature.

It was determined that the pipeline was never properly identified and the contract called out an obligation to do so. The Court in this instance was persuaded that the failure to identify and mark gas lines was part of defendant’s “professional services.” The policy did not provide a definition for “professional services” so the court was at liberty to use the commonly known meaning of that term given that it is a term widely used in insurance. In doing so the court noted. “Courts have applied the professional services exclusion broadly to bar coverage for damages resulting from a wide range of professional services that extend “beyond those traditionally considered ‘professions, ‘ such as medicine, law, or engineering.” (Hollingsworth v. Commercial Union Ins. Co. (1989) 208 Cal.App.3d 800, 806-807 (Hollingsworth) [store employee negligently pierced customer’s ears]” Here, the court believed that the general contractor would be using special acquired skill in its oversight of the other contractors such that those activities fell within the broad rubric of professional services. Thus, Ace was relieved of responsibility as the General liability policy specifically excluded damage arising from such professional responsibility. The insured did not have an E&O policy with ACE.

Court’s Analysis

So, the lessons learned here are to make sure that the work involved in any project, which is either taken on and/or assumed by the insured, or directly required by contract, must be considered as potentially involving professional services. This is unusual in an industry like construction that is predominately covered by general liability for damages that flow from the negligence of those performing the construction work. Usually such work is covered by a CGL, but whenever there is oversight of other contractors, or others are taking action as a result of the opinion of another professional or management. Such activities should set of bells and whistles that an E&O policy should be procured in addition to the CGL policy.

One could argue that part of the excavation would include how to safely dig, which means the subcontractor must know and understand what they are digging in. That would seem to include identification of utility lines, which would inherently be part of excavation work itself and not require an extra special skill of knowledge. Those running a bull dozer would not need special skill to inquire about what they are digging into. It would seem that question would arise numerous times a day for those in the excavation business and if not, that would be negligent on the part of excavator in performing excavation services. However, the Court did not accept such an argument and pinned the responsibility on those who owned the gas line and managed the project.

As such, the court has put the onus on the general contractor to make such a determination and those activities are professional services as they are not necessarily doing the digging but rendering an opinion as to where to dig. This case also shows how the difference between professional liability and general liability is not a bright line. Given the vast authority provided in this case for a broad definition of professional services it would be prudent to purchase E&O out of an abundance of caution if the issue of prefessional services is even questioned.

Manuscripted Exclusion as a Precaution

It is noted, that one other safeguard would be to properly or narrowly define the term “professional services” in the general liability exclusion form. Certainly, the insured can define such terms and insist on a certain term through a manuscripted exclusion form. By defining the term, the court is not at liberty to apply the broad common law interpretation but must look to the language of the contract itself. However, don’t try this at home… get an attorney to draft such language, and beware that even through careful wording, there are so many types of activities taken on by many large projects that, it would be best to have E&O to cover that which would still fall within a narrowly worded exclusion.

Conclusion

As usual if the insured is going to the extent of obtaining coverage, it only makes reasonable sense to be fully insured and having both professional responsibility and general liability would be the prudent choice. Very few cases arise where the litigant is over insured. Err on the side of coverage. Don’t go cheap.

FAIR Plan Must Pay Repairs In Excess of Market Value

Posted on July 6, 2017August 22, 2017 by kayseeb

CALIFORNIA FAIR PLAN ASSOCIATION, Plaintiff and Respondent,

MARLENE GARNES, Defendant and Appellant.

A143190

California Court of Appeals, First District, Second Division

May 26, 2017

In a recent decision brought by the FAIR plain, the Appellate court ruled that where repair costs did not exceed policy limits in a Actual Cash Value fire policy, the recoverable damages would be the repairs even if they exceed the fair market value of the home.Continue reading→