Tag Archives: Duty to Defend

Cumis Counsel Beware – Insurance Carrier May Seek Reimbursement

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Cumis counsel

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

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Cumis Counsel

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.