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. That is the problem Cumis counsel solves.

What is Cumis counsel?

Cumis counsel is an independent defense lawyer you choose and your insurer pays for when the insurer’s reservation of rights creates a conflict of interest. You select the lawyer and send the bill to your insurer.

The name comes from San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 (1984). The Legislature codified the right in 1987 as Civil Code section 2860, which calls this lawyer “independent counsel.”

Three questions decide whether the right is yours: whether your insurer’s reservation creates a real conflict, what the insurer has to pay, and whether the right can be taken back or given up.

Why a reservation of rights can create a conflict

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 Cumis, 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.

When does a reservation of rights give you the right to Cumis counsel?

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.

What does not create a right to Cumis counsel

None of these, by itself, is enough:

• A general reservation that names no particular exclusion.
• 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.
• An outright denial of coverage for some claims. The statute finds no conflict as to allegations the insurer denies rather than reserves.
• Dissatisfaction with how appointed counsel is handling the case.

Who pays Cumis counsel, and at what rate?

Your insurer pays, at the rates it pays its own defense firms. 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. In a dispute over Cumis counsel’s bills, the California Supreme Court agreed that the test is whether the charges were objectively reasonable when incurred, under the circumstances then known to counsel, and held that the burden of proving a fee unreasonable and unnecessary “falls entirely on the insurer.” Hartford Cas. Ins. Co. v. J.R. Mktg., L.L.C., 61 Cal. 4th 988, 1006-07 (2015).

Unless the policy sets another method, a dispute over the amount of fees goes to binding arbitration before a single neutral arbitrator. An insurer that breaches its duty to defend may lose these protections. In Hartford, the trial court barred the insurer from using section 2860’s rate cap for that reason.

Can your insurer end Cumis counsel, and can you waive it?

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. Section 2860 honors a written waiver given when the insurer tells you a conflict may arise or does exist. Don’t sign one before a lawyer has read the reservation letter.

What to do when you get a reservation of rights letter

Act on the letter, not on the case. 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.

This post is general information about California insurance law. It is not legal advice about your case.