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INSURANCE NOTES

Court Of Appeal Clarifies Right To Cumis Counsel

06.25.2008
Although the seminal case of San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 385 (1984), was issued 24 years ago and codified in Civil Code §2860 in 1987, the courts continue to struggle with a core Cumis question: which reservations of rights trigger a right to Cumis or independent defense counsel for liability cases?

It has always been clear that not all reservations trigger a right to independent defense counsel. For example, Blanchard v. State Farm Fire & Cas. Co., 2 Cal.App.4th 345 (1991), generally supports the proposition that a reservation as to covered and non-covered damages does not create a right to independent counsel. In contrast, reservations as to covered and non-covered causes of action may well create the right to independent counsel. The key is whether the reservation involves an issue that defense counsel can control, shape or influence through their defense strategy.

A remaining issue, however, concerns the so-called general or “catch-all” reservation. This involves a statement, typically at the conclusion of the reservation of rights letter, that the insurer reserves the right to deny coverage based on any of the terms, conditions, exclusions and limitations in the policy. Does such a blanket reservation trigger a right to independent counsel?

Last month, Musick Peeler obtained a ruling on this issue in Royal Indemnity Company v. Hartford Ins. Co. of the Midwest, 2008 WL 20009747 (2d Dist. 2008) (unpublished). That case involved an equitable indemnity claim between co-insurers with a duty to defend the insured against a trademark infringement action. Hartford initially offered to assign panel counsel to defend the insured, but the insured insisted on the right to appoint its own counsel. Royal paid for independent counsel and sued Hartford for contribution toward the defense costs. Hartford had reserved its rights on certain coverage limitations, but did not expressly list any intentional act exclusion. Hartford’s reservation letter did, however, include a general reservation as to all of the policy conditions and exclusions. Hartford argued that such a precautionary reservation did not create an actual conflict sufficient to trigger a right to independent counsel. Hartford claimed the insured breached its duty to cooperate by rejecting the offer of panel counsel and that Hartford had no obligation to contribute to the defense costs.

The Court of Appeal affirmed a judgment for Royal on the contribution claim and ruled that Hartford’s reservations did create a right to independent counsel. The Court held that “given Hartford’s position on coverage, it left the insured vulnerable on all claims. It demands that the insured cede control over its entire defense to an insurer who asserted that only one of numerous claims against the insured potentially qualifies for coverage and indemnity.”

The Court’s ruling in the Royal v. Hartford case calls into question the practice of issuing a general reservation as to all potentially applicable coverage defenses. Such a reservation may have the unintended effect of creating a right to independent counsel. Moreover, such a reservation may simply be unnecessary and not accomplish anything for the insurer.

The general purpose of a reservation of rights letter, of course, is to prevent an argument that the insurer has waived any coverage defenses or should be estopped from raising such defenses. The key here is that if the insurer has investigated the claim and is unaware of a particular coverage defense, the insurer should not face a risk of waiver or estoppel. Waiver is the relinquishment of a known right, and estoppel involves some conduct that misleads the insured about a coverage defense. Waller v. Truck Ins. Exchange, Inc., 11 Cal.4th 1 (1995). What would be the purpose, then, of reserving rights as to unknown coverage defenses that may become available in the future?

The better practice would seem to be to limit the reservation letter to issues of which the insurer (again, after a reasonable investigation) is actually on notice. As the claim develops, the insurer can issue a supplemental reservation letter if it obtains additional information about new coverage defenses. This approach would allow the insurer to preserve its position without creating a right to independent counsel that otherwise would not exist. A boilerplate reservation as to anything that may apply may simply do more harm than good. Meanwhile, it appears the courts will continue to be called upon to resolve disputes about the circumstances that create a right to independent counsel.
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