What is "Cumis Counsel" and Do I Need One?

By: Kenneth W. Chung

A lawsuit is filed against Broker Bob and his seller alleging that they both were aware of a water leak under the slab but didn't disclose the problem to the buyer. The lawsuit alleges fraud and negligence against Broker Bob. Bob sends the lawsuit to his E&O insurance company. He then receives a "Reservation of Rights" letter from the insurance company stating that they have appointed one of their panel attorneys to represent him. The letter also states that the insurance company is reserving its rights to deny coverage and seek reimbursement of legal fees paid for the defense if a judgment is later obtained based on fraud since fraud is not covered by insurance.

Not quite understanding what this means and relieved that his insurance company is paying all the expenses, Broker Bob believes he is covered. After a year of litigation, and foregoing several settlement opportunities, Broker Bob's panel counsel guides the case to trial. At trial, a fraud judgment is issued against Broker Bob. To make matters worse, he then receives a letter from his insurance company stating that the insurer will not pay for his fraud judgment and that Broker Bob must also reimburse the insurer for all the legal expenses paid to panel counsel. Still in shock, Broker Bob ponders why his insurance company did not settle the case earlier so that the possibility of a fraud judgment could have been avoided.

Broker Bob should have had independent counsel (aka "Cumis Counsel") whose job is to look out for Broker Bob's personal interests over those of the insurer. California Civil Code Section 2860 states: " If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel..."

The tripartite relationship between Broker Bob, insurer, and panel counsel creates a situation where panel counsel has two clients - the insured and the insurer who pays panel counsel. Having multiple clients creates the possibility of a conflict of interest for panel counsel where the insurer reserves its right to deny coverage. When an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by panel counsel, a conflict of interest may exist. There are other situations where a conflict exists including where the insured is requested to contribute towards a settlement amount above policy limits, or where the insurance company insures the other party.

Under such circumstances, the insurer has an obligation to allow the insured to retain independent counsel (i.e. Cumis Counsel) and to pay for Cumis Counsel's legal fees. Cumis Counsel's duty is to safeguard the insured's sole interest. Cumis Cousel would oversee the defense in furtherance of preserving insurance coverage by making sure that proper legal arguments are being made, and that the insurer pursues all reasonable settlement opportunities so that the case can be resolved without going to trial.

In order to avoid the problems of Broker Bob, independent counsel should be promptly consulted upon receipt of a reservation of rights letter. Based on the contents of such letter and the circumstances of the case, independent counsel can evaluate whether Cumis Counsel is warranted, and if so, properly represent your interest in demanding the insurer to appoint and pay for Cumis Counsel to protect the insured's sole interests. The law firm of Kring & Chung, LLP regularly counsels insureds on such matters and can assist you in determining your right to Cumis Counsel.