Insurer’s General Reservation of Rights Does Not Entitle Insured to Cumis Counsel

In a recent ruling, the California Court of Appeal held that an insurer’s general reservation of rights to deny coverage of damages outside its policy does not create a conflict of interest with the insured, such that the insured in entitled to Cumis counsel.  The decision in Federal Insurance Co. v. MBL, Inc. __ Cal. App. 4th __,  2013 Cal. App. LEXIS 679, 2013 WL 4506149 (August 26, 2013) follows California precedent denying insureds the right to select independent counsel at the insurer’s expense absent an actual conflict of interest.

The case arose out of United States v. Lyon, an action by the Federal government against Halford’s Cleaners, for soil and groundwater contamination.  Halford’s, a dry cleaning facility, filed third party actions against the suppliers of dry-cleaning products, including defendant MBL, Inc. (“MBL”).  MBL’s insurers retained counsel for MBL, but asserted a general reservation of rights to deny coverage for damages occurring beyond the policy period and in excess of the policy amount.  However, the reservation of rights did not address any specific policy exclusions.  MBL alleged that their insurers’ reservation of rights created a conflict of interest such that MBL was entitled to choose an independent counsel (known as Cumis counsel) at the expense of the insurer.  The trial court granted summary judgment in favor of the insurers, finding there was no actual conflict of interest.  On appeal, MBL contended the trial court erred in finding the insurers were entitled to declaratory relief.

The Court of Appeals affirmed, analyzing and rejecting each of MBL’s arguments that a conflict of interest existed requiring Cumis counsel.  The Court explained that:

Without an express reservation of a right under the policy, there can be no conflict of interest based on the application of that exclusion or policy term during the pendency of the action.  (Emphasis added.)

First, the court rejected MBL’s contention that a general reservation of rights creates a conflict of interest, stating at most, they create a theoretical, potential conflict of interest, which is not sufficient to trigger the right to Cumis counsel.  Next, MBL argued the policy exclusions create a conflict because the appointed counsel would have an interest in establishing policy exclusions, such as when the damages occurred.  The Court rejected this argument, holding that MBL and the insurers’ interests were aligned because it is in the interest of both parties’ interest to avoiding liability, and defense counsel could not control the issue of when such damages occurred.  Furthermore, no conflict exists because insurer’s retained counsel has no control over whether exclusions apply.

Finally, that Court found that, although MBL and select third party plaintiffs in Lyons shared the same insurance company, there was no per se conflict of interest because the insurer’s interest ultimately remained in indemnifying their insureds against judgment.  The court noted the insurers retained different law firms for these plaintiffs, assigned different claims adjusters and ensured the adjusters did not have access to each other’s files.

The trial court granted declaratory relief for the insurers stating that absent a conflict, insurers were not obligated to provide independent counsel.  Furthermore, MBL’s refusal to accept appointed counsel relieved the insurers of their contractual obligation to defend MBL.

Ultimately, the California Court of Appeal agreed that MBL failed to establish a significant and actual conflict of interest, and their insurers’ were therefore not obligated to retain independent counsel.  A general reservation of rights is not enough to create a conflict of interest; instead, the parties’ interests must be analyzed to determine whether the interests can be reconciled.  The ruling therefore affirms the San Gabriel Valley Water Co., 82 Cal. App. 4th 1230 (2000) decision that insured parties are not entitled to Cumis counsel absent a showing of an actual conflict of interest with the insurer.

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