California: Right to Independent Counsel Evaporates After Insurer Withdraws Reservation of Rights

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A California appellate court recently held that insurers are not obligated to provide an insured with independent counsel after the insurer withdraws the reservation of rights which generated the right to independent counsel.  In a unanimous opinion, California’s Second Appellate District held that the withdrawal of a reservation of rights letter extinguished the conflict of interest requiring an insurer to provide independent counsel.  Swanson v. State Farm General Insurance Company¸ Cal.Ct.App.__________ (September 23, 2013).

California Civil Code section 2860 (the “Cumis” statute) requires the appointment of independent counsel when an insurer reserves its rights on a given issue, and defense counsel appointed by the insurer can determine the outcome of that coverage issue.  In Swanson, the insured was named as a cross-defendant in a matter involving premises liability and negligence.  The insurer reserved the right to disclaim coverage on several bases, including whether the insurer owed a duty to defend the cross-complaint.  The insured’s counsel sought an appointment as independent counsel based on the reservation of rights letter, and the insurer agreed.

The insurer subsequently withdrew the reservation of rights and appointed its own counsel. The insurer declined to continue paying independent counsel because the conflict of interest no longer existed.  The insured filed an action for breach of contract alleging that, after the insurer appointed independent counsel, it waived its right to stop paying Cumis counsel.  The trial court granted summary judgment for the insurer, and the Court of Appeal affirmed.

The court held that “the duty to provide and pay for Cumis counsel arises only where a disqualifying conflict of interest exists.”  When that conflict concludes, in this case by withdrawal of the reservation of rights, “the insurer has no duty to provide and pay for Cumis counsel.”  The insurer had not breached the contract by refusing to pay Cumis counsel fees after the reservation of rights was withdrawn.

The insured contended that the insurer had failed to reserve its right to resume control of the defense, which effectively constituted a waiver of the right to assume control of the defense after the reservation was withdrawn.  The court held that the insurer had not waived any of its rights by providing a defense, and Civil Code section 2860 did not obligate the insurer to expressly reserve the right to assume control of the defense after the conflict of interest ceased to exist.