On Behalf of | Sep 29, 2022 | Insurance Law

Under California Civil Code §2860 (hereafter, “§2860”), insureds have a right to obtain independent counsel at the insurer’s expense whenever there are competing interests that create an ethical conflict for the insurer-appointed counsel.  Since enactment, the California courts defined the boundaries of §2860.  As an example, the California courts have held that not every reservation of rights that is asserted by an insurance company entitles an insured to select cumis counsel.  Rather, independent counsel is required only when the outcome of any reserved coverage issue could be controlled by insurer-appointed defense counsel.  The California courts have also found that there is no entitlement to independent counsel where the coverage issue was independent of, or extrinsic to, the issues in the underlying action.  Stated differently, where the reservation of rights is based on coverage disputes which have nothing to do with the issues being litigated in the underlying action, no conflict of interest arises requiring appointment of independent counsel.  One of the key questions to be asked is whether any actual conflict of interest precludes the insurer-appointed defense counsel from presenting a quality defense for the insured.

In Nede Mgmt., Inc. v. Aspen American Insurance Co., 284 Cal.Rptr.3d 122, 38 Cal. App. 5th 1121 (Sept. 20, 2021), as modified (October 5, 2021), the California Court of Appeals considered the merits of various arguments asserted by an insured for why the insured believed §2860 required the appointment of independent counsel.  First, the insured argued that the insurer reserved its rights generally.  Upon review, the Court noted that the insurer’s reservation of rights focused on there being no coverage under the policy for punitive damages and that the damages being alleged by the claimants went beyond the limits of the policy.  In rejecting this argument, the Court noted that the insurer did not reserve any rights related to coverage beyond an excess-limits damage award and punitive damages, which did not create an ethical conflict for defense counsel.  The Court stated that the cumis rule in §2860 concerned with an attorney’s dual representation of the insurance company and insured when their interests were in conflict.  That a conflict of interest between jointly represented clients occurred when their common lawyer’s representation of the one is rendered less effective by reason of the lawyer’s representation of the other.  The type of coverage dispute regarding excess exposure and punitive damages did not create a situation where the insurance company and insured’s interests diverged, forcing defense counsel to represent one to the detriment of the other.  Rather, both the insurance company and the insured under those circumstances were aligned in defending the lawsuit to minimize or avoid liability.

Another ground for requiring the appointment of independent counsel was the insured’s allegation that defense counsel demonstrated “unremitting hostility” to the insured, which was exemplified by the belief that the insureds would be bad witnesses who could not be believed at trial.  The Nede court did not find defense counsel’s honest assessment as creating a conflict of interest.  The court noted that if defense counsel had entertained such a viewpoint, that viewpoint was part of the attorney’s honest assessment about the merits of the case.  That honest assessment would serve both the insurer and the insured.  From the insurer perspective, defense counsel’s honest evaluation would help inform any decision made by the insurance company to litigate or settle the case.  From the insured’s perspective, the honest assessment might avoid a much higher damages award if a jury disliked the insured’s testimony or found them not to be credible.  In assessing how the jury might react to testimony from the insureds, the insurer appointed defense counsel was serving his clients’ aligned interests in avoiding liability.

Another ground asserted by the insureds to support the appointment of independent counsel focused on a rejection of a policy limits settlement demand at the start of the lawsuit without the insureds being consulted.  The insureds argued that the rejection might have resulted in the insureds being exposed to damages exceeding policy limits or punitive damages.  The Nede court rejected this basis for the appointment of independent counsel.  The court noted that the insurance company was simply exercising its right to control the defense.  The policy gave the insurer discretion to investigate and settle claims as it deemed appropriate.  To further their argument, the insureds asserted that defense counsel told them that he believed the policy limits demand was “clearly premature.”  In responding to the demand, defense counsel had chronicled and detailed all of the outstanding issues.  A review of each of the chronicled items, according to the Nede court, found that they were all aimed at defending the insureds and the insurance company’s interests equally.

Finally, the insureds argued that insurer-appointed defense counsel advised the Nedes’ cumis counsel during later settlement discussions that the insureds needed independent counsel because the latest settlement demand exceeded policy limits.  The court found that insurer-appointed defense counsel’s guidance was sound.

Overall, the Nede court found no divergence between the insured’s and the insurance company’s interests.  Although the insureds did not like or agree with the insurer-appointed defense counsel’s litigation decisions, the insureds did not allege any circumstance upon review that prevented insurer-appointed defense counsel from serving both the insured’s interests as well as the insurance company’s interests.  Absent a coverage dispute or reservation of rights that created a risk that insurer-appointed defense counsel would serve the insurance company’s interests to the detriment of the insureds, independent counsel was not warranted.