Nearly 30 years ago, the California Court of Appeal announced its landmark decision in San Diego Federal Credit Union v. Cumis Insurance Society, Inc., 162 Cal. App. 3d 358 (1984), holding that if a conflict of interest exists between an insurer and its insured arising out of possible noncoverage under the insurer’s policy, the insurer is obligated to offer independent counsel to the insured, which is to be paid for by the insurer.  Shortly after the issuance of the Cumis case, the California Legislature passed Civil Code section 2860 to codify and clarify the rights and responsibilities of insureds and insurers when a claim of conflict of interest is asserted.

Since that time, a number of decisions have weighed in on the scope of the right to Cumis counsel and the meaning of section 2860, and the most recent decision is Federal Insurance Company v. MBL, Inc., decided August 26, 2013. Significantly, MBL confirms that not every reservation of rights entitles an insured to independent counsel.

Following the filing of an environmental remediation action against a dry cleaner for PCE contamination of soil and groundwater, the dry cleaner filed a third-party action against MBL, a supplier of dry cleaning products.  MBL retained defense counsel, who tendered MBL’s defense to multiple insurers and requested that the insurers provide MBL with Cumis counsel. 

While all of the insurers accepted the defense subject to various reservations of rights, only one, Great American Insurance Company, agreed to the retention of Cumis counsel. The rest of the insurers contended that their reservation of rights did not create a conflict of interest that required the appointment of independent Cumis counsel. 

In June 2008, all of the insurers except Great American filed an action for declaratory relief against MBL, seeking a declaration that they were not obligated to provide independent counsel based on their various reservations of rights, which they contended did not create any conflict of interest between them and MBL. Shortly thereafter, Great American filed a separate action against MBL for declaratory relief also seeking to establish that it did not need to provide Cumis counsel, and it further filed a claim for contribution against the other insurers seeking to have them share in the cost of such counsel. The actions were later consolidated.

The trial court granted summary judgment to the insurers, finding there was no actual conflict of interest and thus no right to Cumis counsel. The Court of Appeal affirmed.

After detailing the development of the of the right to independent/Cumis counsel under California law, the Court of Appeal emphasized that

not every conflict of interest entitles an insured to insurer-paid independent counsel. Nor does every reservation of rights entitle[] an insured to select Cumis counsel.

For example, the court advised that where the coverage issue is independent of, or extrinsic to, the issues in the underlying case, or where the damages are only partially covered by the policy, there is no right to Cumis counsel. Rather, it is only when there is a reservation of rights and the outcome of that coverage issue can be controlled by the defense counsel retained by the insurer is independent counsel required to be appointed.

MBL contended that there were conflicts of interest because the insurers reserved their rights as to the applicability of various pollution exclusions, the policy limits for each accident or occurrence, and that there was no coverage for any damages outside of the insurers’ policy periods. In the context of this case, however, the court found that none of these reservations created a conflict of interest triggering the right to Cumis counsel under section 2860.  The court also found no conflict on interest merely because some of the insurers were defending other insureds that had interests adverse to MBL.

MBL further argued that the insurers’ “general reservation of rights” provided the basis for a conflict of interest. To this, the Court of Appeal concluded,

To the extent MBL contends the Insurers’ general reservations of rights gave rise to a conflict of interest, we reject that argument.  General reservations are just that: general reservations.  At most, they create a theoretical, potential conflict of interest – nothing more.

Finally, as to Great American, which had paid MBL’s independent counsel, subject to a reservation of the right to seek reimbursement from MBL, the court concluded that since Great American was not obligated to pay those fees in the first place, it could only seek reimbursement from MBL itself, and not from the other insurers who had no obligation to provide Cumis counsel to MBL.