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 could be ripened by the insurer's reservation of rights into an actual conflict of interest which in turn 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 may cause the insured to promptly exercise his or her right to Cumis counsel if a potential conflict of interest is already clear enough at that point in time under the known facts or allegations and the insurer's letter expressly reserves the right to withdraw from the insured's defense and deny indemnity for that reason. 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.
In California, a liability insurance company that reserves its rights to deny coverage must pay for independent counsel to control the policyholder’s defense unless “the coverage question is logically unrelated to the issues of consequence in the underlying case.” “A disqualifying conflict exists if [i]nsurance counsel had . . . incentive to attach liability to [the insured].” A disqualifying conflict of interest exists unless factual or legal disputes “have nothing to do with”, are “irrelevant” to, are “independent of, or extrinsic to”, or do not “overlap” issues in the third party liability action. A rationale for this rule is that a coverage dispute cannot be allowed to prejudice the policyholder’s defense. The insurer has a duty to accurately determine and communicate whether its reservation of rights creates a disqualifying conflict of interest that obligates it to pay for independent counsel. The insurer’s chosen lawyer shares this duty because “when coverage is disputed, the interests of the insured and the insurer are always divergent. [L]awyers hired by the insurer [have] an obligation to explain to the insured the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage.” There are a variety of ways that questions about an insurer’s duty to pay for independent counsel may be resolved.
The difference between independent Cumis counsel and insurer appointed defense counsel is that independent counsel represents only the interests of the policyholder while so-called dependent counsel represents the interests of both the insurer and the policyholder. “Cumis counsel is independent and represents only the insured.” “[T]here is no attorney-client relationship between Cumis counsel and the insurer.” “The Cumis rule requires complete independence of counsel when an insurance company interposes a reservation of rights, the basis of which creates a conflict of interest.” In contrast, “[a]n insurer usually provides a defense to its insured by hiring competent defense counsel, who represents the interests of both the insurer and the insured.” “[D]efense counsel and the insurer frequently have a longstanding, if not collegial, relationship.” “As a practical matter . . . in reality, the insurer’s attorneys may have closer ties with the insurer and a more compelling interest in protecting the insurer’s position, whether or not it coincides with what is best for the insured.” “Insurance companies hire relatively few lawyers and concentrate their business. A lawyer who does not look out for the Carrier’s best interest might soon find himself out of work.” “The signed defense guidelines, with the negotiated hourly rate, and subsequent correspondence, along with the subsequent dealings between [dependent counsel] and [the insurer], reflected an agreement between them and an attorney-client relationship as a matter of law.”
- Civil litigation
- Conflict of interest
- Contract attorney
- Duty to defend
- Duty to settle
- Insurance law
- Of counsel
- Reservation of rights
- 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.
- Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 302
- Gulf Ins. Co. v. Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone (2000) 79 Cal.App.4th 114, 131. 
- See, Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1470 : “[W]hen the reservation of rights is based on coverage disputes that have nothing to do with the issues being litigated in the underlying action . . . there is no conflict of interest.”
- See Montrose Chemical Corp. v. Superior Court (Canadian Universal Ins. Co.) (1994) 25 Cal.App.4th 902, 909 (Montrose II) “Accordingly, the question before us is whether the coverage questions are logically unrelated (that is, irrelevant) to the issues of consequence in the (third party litigation which might) prejudice [the insured] in the underlying actions”.
- See, Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1422  (No prejudice “where the coverage issue is ‘independent of, or extrinsic to, the issues in the underlying action’”.)
- See, United Enterprises, Inc. v. Superior Court (2010) 183 Cal. App. 4th 1004, 1010  (“[B]ecause factual issues to be resolved in the declaratory relief action overlap factual issues to be resolved in the underlying actions, the court was required to issue the stay.”)
- See, Montrose II, supra, 25 Cal.App.4th at 909 [“Accordingly, the question before us is whether the coverage questions are logically unrelated (that is, irrelevant) to the issues of consequence in the (third party litigation which might) prejudice [the insured] in the underlying actions”]; Haskel, Inc. v. Superior Court (1995) 33 Cal.App.4th 963, 980 (ellipses omitted) [“The trial court should determine: . . . (5) to what extent, if at all, will [the policyholder] suffer prejudice by evidence which tends to support or defeat its claim of coverage or the defenses raised by the insurers.”]
- “Every insurer shall disclose all benefits that may apply to the claim. When additional benefits might reasonably be payable under an insured’s policy, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer’s additional liability.” (Cal. Code Regs. § 2695.4 (ellipses omitted).) 
- “A [lawyer] shall not accept representation of a client without providing written disclosure [of the relevant circumstances and adverse consequences] to the client where [the lawyer] has a business, [or] financial relationship with another entity [such as an insurer that] would be affected substantially by resolution of the matter. A [lawyer] shall not, without the informed written consent of each client [a]ccept representation in a matter in which the interests of the clients potentially or actually conflict.” (Rule 3-310 (ellipses omitted).) 
- Cumis 162 Cal.App.3d at 375 (ellipses omitted). 
- Assurance Co. of America v. Haven 32 Cal.App.4th 78, 88 (1995).
- Cumis, 162 Cal.App.3d at 364; Haven 32 Cal.App.4th at 90.
- State Farm Fire & Casualty Co. v. Superior Court 216 Cal.App.3d 1222, 1226 (1989).
- Haven 32 Cal.App.4th at 83-84 (citations omitted).
- Berger, Kahn 79 Cal.App.4th at 131.
- Purdy v. Pacific Automobile Ins. Co. 157 Cal.App.3d 59, 76 (1984).
- Cumis, 162 Cal.App.3d at 364.
- Berger, Kahn 79 Cal.App.4th at 127.