Cumis counsel
Encyclopedia
A Cumis counsel is "an attorney employed by a defendant
in a lawsuit when there is an insurance policy supposedly covering the claim, but there is a conflict of interest
between the insurance company and the insured defendant."
, which was decided by the California Court of Appeal for the Fourth Appellate District on December 3, 1984. This was the first appellate endorsement of the appointment of independent counsel for a tort
defense (legal)
when an insurance
company had a conflict of interest.
The most important paragraph from the Cumis decision is as follows:
The California State Legislature
subsequently enacted a statute governing the right of insured defendants to independent counsel.
A common conflict is when the insurance company denies or refuses to defend all or part of a claim under a liability insurance
policy, such as when an insurance company pays for the defense of a policyholder under a reservation of rights. A "reservation of rights" letter usually states that the insurance company reserves its rights to later deny the claim should facts surface that prevent coverage, such as facts that would preclude coverage under a policy term or exclusion.
A law firm can still have a conflict of interest
, despite the appointment of a Cumis counsel. However, in some states, the appointment can cure a conflict. The appointment of Cumis counsel also raises unusual attorney-client privilege
issues.
cases in the 1950s and 1960s, it became common for U.S. insurers to reflexively issue reservation of rights letters in response to practically every tender of a third party claim by an insured. Under those earlier cases, it was held that if an insurer withdrew a defense after failing to reserve their rights, they could be (and were actually often held to be) liable for all damages suffered by the insured, even in excess of the policy amounts. Therefore, insurers wanted to always reserve their right to withdraw if facts were later discovered precluding coverage (e.g., evidence that the insured was guilty of an intentional tort
, which is uninsurable).
The Cumis decision changed that practice significantly. Now, in California and several other states, an insurer faced with a new tender has three options: (1) deny the tender completely and either risk an immediate bad faith lawsuit by the insured or having to sue the insured first to obtain a judicial declaration of no coverage (a "race to the courthouse"); (2) accept the tender without a reservation of rights and thereby commit to defending the insured to a final judgment (unless the policy is expressly designed so that defense costs "eat away" at policy limits); or (3) accept the tender but issue a reservation of rights letter, which will usually cause the insured to promptly exercise his or her right to Cumis counsel. In turn, the third option jacks up the insurer's costs because the insurer now has to pay for independent counsel and counsel of its own to monitor the case at arm's length (so that privileged information never reaches the insurer).
The advantage of the second option is that by assuming complete responsibility for the defense of its insured, the insurer has more control over defense costs. Most insurers operate so-called "captive" law firms (carefully designed to avoid the ban on the corporate practice of law) and also maintain "panels" of preferred defense law firms who agree to carefully negotiated rate structures. In contrast, because independent counsel is separate from the insurer, their billing rates will be somewhat higher since they merely must bill the "reasonable" rate for their defense services. But if the insurer accepts the defense without a reservation of rights, it must defend completely and loses the right to recover the cost of defense from the insured even if it later discovers that the entire claim was uninsurable to begin with.
Because of all these issues, reservation of rights letters are issued today by adjusters only after careful consideration and discussion with experienced insurance coverage counsel.
Defendant
A defendant or defender is any party who is required to answer the complaint of a plaintiff or pursuer in a civil lawsuit before a court, or any party who has been formally charged or accused of violating a criminal statute...
in a lawsuit when there is an insurance policy supposedly covering the claim, but there is a conflict of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
between the insurance company and the insured defendant."
The landmark 1984 Cumis decision
The title of this type of lawyer comes from the Cumis case from CaliforniaCalifornia
California is a state located on the West Coast of the United States. It is by far the most populous U.S. state, and the third-largest by land area...
, which was decided by the California Court of Appeal for the Fourth Appellate District on December 3, 1984. This was the first appellate endorsement of the appointment of independent counsel for a tort
Tort
A tort, in common law jurisdictions, is a wrong that involves a breach of a civil duty owed to someone else. It is differentiated from a crime, which involves a breach of a duty owed to society in general...
defense (legal)
Defense (legal)
In civil proceedings and criminal prosecutions under the common law, a defendant may raise a defense in an attempt to avoid criminal or civil liability...
when an insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
company had a conflict of interest.
The most important paragraph from the Cumis decision is 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 ... 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.
The California State Legislature
California State Legislature
The California State Legislature is the state legislature of the U.S. state of California. It is a bicameral body consisting of the lower house, the California State Assembly, with 80 members, and the upper house, the California State Senate, with 40 members...
subsequently enacted a statute governing the right of insured defendants to independent counsel.
A common conflict is when the insurance company denies or refuses to defend all or part of a claim under a liability insurance
Liability insurance
Liability insurance is a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy...
policy, such as when an insurance company pays for the defense of a policyholder under a reservation of rights. A "reservation of rights" letter usually states that the insurance company reserves its rights to later deny the claim should facts surface that prevent coverage, such as facts that would preclude coverage under a policy term or exclusion.
A law firm can still have a conflict of interest
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
, despite the appointment of a Cumis counsel. However, in some states, the appointment can cure a conflict. The appointment of Cumis counsel also raises unusual attorney-client privilege
Attorney-client privilege
Attorney–client privilege is a legal concept that protects certain communications between a client and his or her attorney and keeps those communications confidential....
issues.
Cumis, before and after
After a number of pioneering insurance bad faithInsurance bad faith
Insurance bad faith is a legal term of art that describes a tort claim that an insured person may have against an insurance company for its bad acts. Under the law of most jurisdictions in the United States, insurance companies owe a duty of good faith and fair dealing to the persons they insure...
cases in the 1950s and 1960s, it became common for U.S. insurers to reflexively issue reservation of rights letters in response to practically every tender of a third party claim by an insured. Under those earlier cases, it was held that if an insurer withdrew a defense after failing to reserve their rights, they could be (and were actually often held to be) liable for all damages suffered by the insured, even in excess of the policy amounts. Therefore, insurers wanted to always reserve their right to withdraw if facts were later discovered precluding coverage (e.g., evidence that the insured was guilty of an intentional tort
Intentional tort
An intentional tort is a category of torts that describes a civil wrong resulting from an intentional act on the part of the tortfeasor. The term negligence, on the other hand, pertains to a tort that simply results from the failure of the tortfeasor to take sufficient care in fulfilling a duty...
, which is uninsurable).
The Cumis decision changed that practice significantly. Now, in California and several other states, an insurer faced with a new tender has three options: (1) deny the tender completely and either risk an immediate bad faith lawsuit by the insured or having to sue the insured first to obtain a judicial declaration of no coverage (a "race to the courthouse"); (2) accept the tender without a reservation of rights and thereby commit to defending the insured to a final judgment (unless the policy is expressly designed so that defense costs "eat away" at policy limits); or (3) accept the tender but issue a reservation of rights letter, which will usually cause the insured to promptly exercise his or her right to Cumis counsel. In turn, the third option jacks up the insurer's costs because the insurer now has to pay for independent counsel and counsel of its own to monitor the case at arm's length (so that privileged information never reaches the insurer).
The advantage of the second option is that by assuming complete responsibility for the defense of its insured, the insurer has more control over defense costs. Most insurers operate so-called "captive" law firms (carefully designed to avoid the ban on the corporate practice of law) and also maintain "panels" of preferred defense law firms who agree to carefully negotiated rate structures. In contrast, because independent counsel is separate from the insurer, their billing rates will be somewhat higher since they merely must bill the "reasonable" rate for their defense services. But if the insurer accepts the defense without a reservation of rights, it must defend completely and loses the right to recover the cost of defense from the insured even if it later discovers that the entire claim was uninsurable to begin with.
Because of all these issues, reservation of rights letters are issued today by adjusters only after careful consideration and discussion with experienced insurance coverage counsel.
See also
- Attorney-at-law
- Civil litigation
- Conflict of interestConflict of interestA conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
- Contract attorneyContract attorneyA contract attorney works on legal cases on a contract basis. Such work is generally of a temporary nature, often with no guaranteed employment term.A contract attorney is-Civil litigation:...
- CounselCounselA counsel or a counselor gives advice, more particularly in legal matters.-U.K. and Ireland:The legal system in England uses the term counsel as an approximate synonym for a barrister-at-law, and may apply it to mean either a single person who pleads a cause, or collectively, the body of barristers...
- Insurance lawInsurance lawInsurance law is the name given to practices of law surrounding insurance, including insurance policies and claims. It can be broadly broken into three categories - regulation of the business of insurance; regulation of the content of insurance policies, especially with regard to consumer...
- LawyerLawyerA lawyer, according to Black's Law Dictionary, is "a person learned in the law; as an attorney, counsel or solicitor; a person who is practicing law." Law is the system of rules of conduct established by the sovereign government of a society to correct wrongs, maintain the stability of political...
- Of counselOf counselOf counsel is often the title of an attorney who is employed by a law firm or an organization, but is not an associate or a partner. Some firms use titles like "counsel," "special counsel," and "senior counsel" for the same concept...
- Risk managementRisk managementRisk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
- Self interest
- Tort law
External links
- Detailed discussion of Cumis case law: http://www.lacba.org/showpage.cfm?pageid=432.