Opportunities for insisting on independent counsel

Civil Code section 2860 authorizes the retention of independent counsel in the event a conflict of interest arises between the insurer and its insured. Under the statute a conflict of interest is deemed to arise “when an insurer reserves it rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim”. Section 2860(b).

But what happens if, in the absence of insurer appointed counsel, the insured selects counsel to defend the claim, with the insurer’s acquiescence? In that circumstance, is the insured entitled to reimbursement for the cost of that counsel? And if so, do the hourly rate limitations in the statute apply?

The court addressed those issues in Long v. Century Indemnity Co., 163 Cal. App. 4th 1460 (2008). In that case, attorney Long represented his client Harris, a recycling company, in an environmental lawsuit pending in federal court. Harris tendered the claim to INA, Harris’ CGL carrier. INA ultimately agreed to provide a defense subject to a reservation of rights.

Because Long had previously represented Harris in a related matter, INA asked Long to defend Harris in the federal suit. INA agreed to pay Harris’ fees but only at a capped hourly rate that INA deemed applicable, with Long reserving his right to seek payment at a higher rate.

After the underlying suit was settled, Long filed a lawsuit against INA in which he sought damages representing the difference between the amount he was paid by INA and the amount he would have been paid at the rate he sought. Although the court’s holding had to do with whether Long’s suit was subject to mandatory arbitration under subdivision (c) of the statute, the more interesting aspect of the decision had to do with the carrier’s duty to provide for independent counsel even where the carrier had not retained appointed counsel.

In this regard, the court held that the applicability of section 2860 does not depend on the insurer’s retention of counsel to represent its interests in the underlying action. The court rejected Long’s argument that the duty to provide independent counsel was contingent upon the insurer’s retention of its own counsel:

But the potential conflict described in subdivision (b) exists because the interests of the insurer and its insured diverge, thereby precluding the use of counsel (absent a waiver by the insured) who purports to jointly represent the interests of both insurer and insured. It is not the presence of the insurer-selected attorney that creates the conflict; rather, the existence of the conflict or potential conflict creates the need for “independent” or Cumis counsel — an attorney who owes his or her allegiance solely to the insured. Even if the insurer forgoes its right to its own representation under these circumstances, the insured retains its right to independent counsel who it selects and controls.

This language may also come into play where, for example, an insurer accepts the defense but only with regard to coverage that has a minimal sublimit. In that circumstance, with little risk to the carrier from the standpoint of indemnity, the carrier may lack an economic motive for a vigorous defense of the insured. See, e.g., Tomerlin v. Canadian Indem. Co., 61 Cal. 2d 638, 648 (1964) (where carrier lacks incentive to mount a vigorous defense of its insured, “the insurer may not compel the insured to surrender control of the litigation”). Therefore, for a conflict to arise, it is immaterial whether the carrier has in fact appointed its own counsel to defend the insured in the litigation:

Reservation of rights coupled with control of issue affecting coverage dispute: Cumis counsel may be required, however, “where an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.” [Civ. C. § 2860(b) (emphasis added); see Long v. Century Indem. Co., supra, 163 CA 4th at 1472, 78 CR3d at 492 – immaterial whether insurer has “first retained counsel” to defend action if conflict or potential conflict exists], Croskey et al., Cal. Practice Guide: Insurance Litigation ¶ 7:774 (The Rutter Group 2023) (emph. added).

Finally, the Court in Long held that because section 2860 applied to Long’s fee dispute with INA, the statute’s mandatory arbitration provisions applied. As the court noted, “it has decided that within the California courts these Cumis fee issues are to be decided in an arbitration forum, not the state’s judicial forum.”