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.