Cumis Counsel: When California Insurers Pay Your Lawyer

When your insurer reserves rights, you may be entitled to your own defense lawyer

A reservation of rights letter can cost you your coverage through the defense your insurer is paying for. If the facts that decide your lawsuit also decide whether you are covered, the lawyer your insurer picked is working on both questions at once, and only one of them is yours.

California answered that problem in 1984, and the Legislature codified the answer in 1987 as Civil Code section 2860. You may select your own defense lawyer and send the bill to your insurer. That lawyer is known as Cumis counsel. Three questions decide whether the right is yours.

A reservation of rights can set your insurer’s interest in the underlying case against your own, and California resolves that conflict by giving you counsel of your own choosing.

The conflict is structural, not personal. Suppose the complaint alleges both negligence and intentional conduct, and your policy covers negligence alone. Every step of the defense that develops intentional conduct strengthens your insurer’s coverage position and weakens yours. The Court of Appeal confronted that arrangement in the 1984 Cumis decision, a wrongful termination case, and held that it asked one lawyer to serve two masters. Where the insurer’s reservation creates divergent interests, the insurer must pay the reasonable cost of independent counsel the insured selects, and it may not compel the insured to surrender control of the litigation.

Not every reservation of rights creates the right, because the conflict must be one your insurer’s lawyer could control through the way the underlying case is tried.

Section 2860(b) supplies the test. A conflict may exist when the insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel the insurer first retained. Courts read that language narrowly. The right arises only when the basis for the reservation causes the assertion of factual or legal theories that undermine or run contrary to the positions asserted in the liability case.

Four things do not create the right. A general reservation naming no particular exclusion is not enough. Neither is a reservation resting on punitive damages, because the insurer owes compensatory damages whatever the jury finds about malice. A suit seeking more than your policy limits does not by itself create a conflict. Nor does dissatisfaction with how appointed counsel is handling the case.

Your insurer pays independent counsel at the rates it pays its own defense firms, and it carries the burden of proving that a fee was unreasonable.

Section 2860(c) caps the rate at what the insurer actually pays lawyers it retains in the ordinary course of business to defend similar actions in the community where the claim arose or is being defended. The insurer may also require that the lawyer you choose carry errors and omissions coverage and have at least five years of civil litigation practice that includes substantial defense experience in the subject at issue. That cap applies only where a qualifying conflict exists.

The burden on fees runs the other way. The California Supreme Court asks whether the charges were objectively reasonable when incurred, under the circumstances then known to counsel, and puts on the insurer the burden of proving a fee unreasonable and unnecessary. Hartford Cas. Ins. Co. v. J.R. Mktg., L.L.C., 61 Cal. 4th 988, 1006-7 (2015).

Act on the letter, not on the case. An insurer that withdraws the reservations that created the conflict may stop paying your independent counsel and retake the defense, though that decision and its timing remain subject to its duty of good faith and fair dealing. Swanson v. State Farm Gen. Ins. Co., 219 Cal. App. 4th 1153, 1160-61, 1168 (2013). You can also sign the right away, because section 2860 honors a written waiver given after the insurer tells you a conflict may arise. So read the reservation letter for what it actually reserves. If the reserved issue is one your own defense will decide, demand independent counsel in writing and identify the overlap.

Send me the reservation of rights letter and the complaint, and I will tell you whether section 2860 applies to your case.