DoesContractor’s Rights to Independent “Cumis” Defense Counsel At Insurance Carrier’s Expense (January 2013)

Posted March 3, 2014


Although insurance carriers may deny it, they have different interests than their insureds in defending claims. The insurer wants to minimize its costs. The insured wants to avoid defense costs altogether, or at least maximize someone else’s payment of them. While the insurer is obligated to provide defense counsel for any claim possibly covered by its insurance policy, it is excused from paying a settlement or judgment if, ultimately, the claim is determined not to be covered. Accordingly, an insurance company may have incentive to defend an insured in such a way as to show a claim is not covered.  For example, if a defense provided by an insurer results in a finding that a claim was caused by an uncovered occurrence—such as excluded mold—then the carrier might limit to defense costs the amount it has to pay—and it might even be entitled to reimbursement of such costs under Buss v. Superior Court (1997) 16 Cal.4th 35.

This issue is made more acute when an insured is, for instance, a general contractor that has demanded a defense as an additional insured under insurance provided by its subcontractor. There, for instance, the carrier may be defending both the general contractor and the subcontractor. If such a defense shows that one or the other’s work caused the damage that is the subject of the claim, this may, under the language of the policy, absolve the carrier from indemnifying the claim, potentially excusing it from paying to settle a case or paying a judgment arising out of it.

Right to Independent Counsel

This conflict of interest may give the insured contractor the right to hire independent counsel that is paid by the insurance carrier. Such counsel is known as Cumis counsel after the case, San Diego Federal Credit Union v. Cumis, Inc. (1984) 162 Cal. App.3d 388. The general law in this area is set forth in Cal. Civ. Code § 2860, which also provides some guidance regarding the payment by the carrier of such counsel.

The right to Cumis counsel usually arises after the insured has tendered a claim to a carrier and the carrier has responded with a reservation of rights letter. According to Dynamic Concepts, Inc.  v. Truck Ins. Exchange (1998) 61 Cal. App.4th 999, 1006, “An insurer’s reservation of rights may create a disqualifying conflict of interest requiring the insurer to pay the cost of Cumis counsel to represent the insured in the underlying action.”

Not every reservation of rights creates a conflict of interest that requires the appointment of Cumis counsel. There needs to be an actual conflict, not just speculation that a conflict might arise in the future. This essentially means that the facts underlying the claim must show that a case could be litigated/defended in such a way as to affect coverage. For instance, if there are two defenses, one of which might show coverage—i.e., resulting damage by an insured’s work—and another that avoids it—i.e., the damage arose out of an insured’s work—then the insured may have a right to independent Cumis counsel.

The rationale for hiring Cumis counsel arises out of the ethical obligations attorneys owe their clients, not out of insurance contract law. It turns on whether the insurance-retained attorney can provide an unbiased, quality defense for the insured. If there is evidence that such counsel may have conflicting loyalties so that the defense provided may be biased, then the insurance company is obligated to pay for independent counsel. It is a prophylactic measure to avoid conflicts from even occurring.  As several courts have noted:

[I]t is almost unavoidable that, in the course of investigating and preparing the insured’s defense to the third party’s action, the insured’s attorney will come across information relevant to a coverage or similar issue, it is quite difficult for an attorney beholden to the insurer to represent the insured where the insurer is reserving its rights regarding coverage (unless, of course, the insured consents).

Assurance Co. of America v. Haven  (1995) 32 Cal. App.4th 78, 87.  See also, Rockwell International Corp. v. Superior Court (1994) 26 Cal. App. 4th 1255, 1264.

Cumis Situations

Several situations exist in which courts have ruled that an insurer’s reservation of rights requires the insurer to pay for independent counsel. Some have been listed by the court in James 3 Corporation v. Truck Ins. Exch. (2001) 91 Cal. App.4th 1093, 1101. They are:

(1) where the insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by the insurer’s retained counsel;

(2) where the insurer insures both the plaintiff and the defendant;

(3) where the insurer has filed suit against the insured, whether or not the suit is related to the lawsuit the insurer is obligated to defend;

(4) where the insurer pursues settlement in excess of policy limits without the insured’s consent and leaving the insured exposed to claims by third parties; and

(5) other situations where an attorney who represents the interests of both the insurer and the insured finds that his or her representation of the one is rendered less effective by reason of his [or her] representation of the other.

Cumis and the Additional Insured

When a defense is provided to an additional insured, more Cumis problems result. Here, the insurance is obtained by a third party, usually the subcontractor for the benefit of the general contractor.  In such a situation the additional insured is effectively a stranger to the insurer. It did not pay premiums. It has no relationship with the insurer—other than the coverage agreement which is part of the insurer’s contract with its named insured, the subcontractor. The insurance carrier’s loyalty to the general contractor is minimal—or non-existent. Its real insured is the subcontractor.  It would thus be reasonable for the carrier to care more about exonerating the subcontractor and permitting liability to be imposed against the additional insured.

Moreover, in such situations, the carrier is paying for counsel for both the general contractor and the subcontractor. To minimize its costs, the insurer may try to provide the same counsel to both parties. Because these parties are almost always at least potentially adverse, an attorney’s professional responsibilities precludes dual representation, and separate counsel is required for both insureds—the named insured and the additional insured. But, this separation is often more illusory than actual. For instance, the same claim representative may handle these claims, thus permitting the intentional or unintentional sharing of confidential information, communications and strategy inside the insurance company. Even if different representatives supervise the different defenses, the “Ethical Wall” between these representatives may well be more of form than actual, allowing the sharing of information, potentially undermining the separateness of the defenses.

A carrier-appointed counsel has dual clients and duties, to the insurance carrier as well as to the insured. (Gafcon, Inc, v, Ponsor & Associates (2002) 98 Cal. App.4th 1388, 1406.) In contrast, Cumis counsel has limited duties to the carrier and is primarily responsible to his or her client, the insured. (Assurance Co. of America, supra, 32 Cal. App.4th at 91.) The appointment of Cumis counsel avoids the possibilities of sharing confidential information and strategy.  It insures that a full and complete defense is provided the insured—not one that is directed by an insurance company that has an interest in shifting responsibility away from a theory which maximizes its own coverage obligations.

Lastly, while Cumis counsel is primarily responsible to the insured, it is paid by the insurer.  However, the insurance company does not have to pay Cumis counsel such counsel’s usual rates. It is merely obligated to pay it the rates it pays other attorneys it retains “in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” Cal. Civil Code §2860(c). Insurance companies are notorious for paying discounted rates for counsel they retain—rates that are much lower than those commercial litigators usually charge. This means that an insured who wants to have an insurance company pay for its independent counsel will often need to persuade such counsel to accept a significant discount from its normal rate. Alternatively, the insured may need to make up the difference out of its own pocket.


The requirement of the Cumis case and Cal. Civil Code §2860 assures that insureds can obtain independent counsel to protect the insured’s interests, not the insurance carriers. It should be explored in any case that an insurance company provides defense counsel.