A Cumis counsel is "an attorney employed by a defendant in a lawsuit when there is a liability insurance policy supposedly covering the claim, but there is a conflict of interest between the insurance company and the insured defendant."
The landmark 1984 Cumis decision
The title of this type of lawyer comes from the Cumis case from California, which was decided by the California Court of Appeal for the Fourth Appellate District on December 3, 1984. It is by far the most notorious case on this issue and is commonly mistaken to be the first appellate endorsement of the appointment of independent counsel for defense of insureds whose insurance company has a conflict of interest. The Supreme Court of California actually endorsed the concept of independent counsel in an earlier 1964 case, which in turn cited to and was based upon the 1925 Kentucky case that laid the foundation in the first place for the notion of independent counsel in the insurer-insured relationship. The only real innovations introduced by the Cumis court over existing precedent as of 1984 were its express holdings that the insurer was actually obligated to pay for the insured's independent counsel, and that the mere potential of a conflict of interest was enough to trigger the insured's right to independent counsel.
The most important paragraph from the Cumis decision is as follows:
- We conclude the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage. If the insured does not give an informed consent to continued representation, counsel must cease to represent both. Moreover, in the absence of such consent, where there are divergent interests of the insured and the insurer brought about by the insurer's reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured. The insurer may not compel the insured to surrender control of the litigation ... Disregarding the common interests of both insured and insurer in finding total nonliability in the third party action, the remaining interests of the two diverge to such an extent as to create an actual, ethical conflict of interest warranting payment for the insureds' independent counsel.
A common conflict is when the insurance company denies or refuses to defend all or part of a claim under a liability insurance policy, such as when an insurance company pays for the defense of a policyholder under a reservation of rights. A "reservation of rights" letter usually states that the insurance company reserves its rights to later deny the claim should facts surface that prevent coverage, such as facts that would preclude coverage under a policy term or exclusion.
A law firm can still have a conflict of interest, despite the appointment of a Cumis counsel. However, in some states, the appointment can cure a conflict. The appointment of Cumis counsel also raises unusual attorney–client privilege issues.
Cumis, before and after
After a number of pioneering insurance bad faith cases in the 1950s and 1960s, it became common for U.S. insurers to reflexively issue reservation of rights letters in response to practically every tender of a third party claim by an insured. Under those earlier cases, it was held that if an insurer withdrew a defense after failing to reserve their rights, they could be (and were actually often held to be) liable for all damages suffered by the insured, even in excess of the policy amounts. Therefore, insurers wanted to always reserve their right to withdraw if facts were later discovered precluding coverage (e.g., evidence that the insured was guilty of an intentional tort, which is uninsurable).
The Cumis decision changed that practice significantly. Now, in California and several other states, an insurer faced with a new tender has three options: (1) deny the tender completely and either risk an immediate bad faith lawsuit by the insured or having to sue the insured first to obtain a judicial declaration of no coverage (a "race to the courthouse"); (2) accept the tender without a reservation of rights and thereby commit to defending the insured to a final judgment (unless the policy is expressly designed so that defense costs "eat away" at policy limits); or (3) accept the tender but issue a reservation of rights letter, which will usually cause the insured to promptly exercise his or her right to Cumis counsel. In turn, the third option jacks up the insurer's costs because the insurer now has to pay for independent counsel and counsel of its own to monitor the case at arm's length (so that privileged information never reaches the insurer).
The advantage of the second option is that by assuming complete responsibility for the defense of its insured, the insurer has more control over defense costs. Most insurers operate so-called "captive" law firms (carefully designed to avoid the ban on the corporate practice of law) and also maintain "panels" of preferred defense law firms who agree to carefully negotiated rate structures. In contrast, because independent counsel is separate from the insurer, their billing rates will be somewhat higher since they merely must bill the "reasonable" rate for their defense services. But if the insurer accepts the defense without a reservation of rights, it must defend completely and loses the right to recover the cost of defense from the insured even if it later discovers that the entire claim was uninsurable to begin with.
Because of all these issues, reservation of rights letters are issued today by adjusters only after careful consideration and discussion with experienced insurance coverage counsel.
- Civil litigation
- Conflict of interest
- Contract attorney
- Insurance law
- Of counsel
- Risk management
- Tort law
- Definition from Law.com's Law Dictionary (based on the People's Law Dictionary)
- San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3d 358, 208 Cal. Rptr. 494 (1984).
- Jack S. Pierce; Harold Weston; Robert G. Levy; David J. McMahon (2014). Insurance Practices and Coverage in Liability Defense (2nd ed.). New York: Wolters Kluwer Law & Business. pp. 9-25—9-26 (section 9.05[C]). ISBN 9781454835301.
- Cumis, 162 Cal. App. 3d at 375.
- See California Civil Code section 2860.
- Definition at the Legal Explanations Web site.
- "Cumis Conundrum" from Duane Morris newsletter.
- Findlaw.com, citing Finley v. The Home Insurance Co., 1998 WL 905218 (Haw. 1998).
- See the State Bar of California ethics opinion on the issue of privileged records.
- Unauthorized Practice of Law Committee v. American Home Assurance Company, 261 S.W.3d 24 (Tex. 2008). In this decision, Texas joined the nine other states which as of that year had judicially endorsed this practice. The Court also noted that Florida promulgated ethical rules allowing it, and three other states have statutes allowing it. Only the supreme courts of Kentucky and North Carolina have endorsed ethics committee opinions that prohibit insurers from defending insureds directly with their own staff counsel and require them to hire local counsel at arm's length.
- Detailed discussion of Cumis case law: .