This past week, the Nevada Supreme Court adopted the so-called “Cumis” Rule. See State Farm Mutl. Ins. Co. v. Hansen, No. 64484 (Nev., Sept. 24, 2015). That Rule derives from a California appellate court case decided over thirty years ago. San Diego Fed. Credit Union v. Cumis Ins. Society, Inc., 208 Cal. Rptr. 494, 506 (Cal. Ct. App. 1984). The Cumis Rule provides that when a conflict of interest develops between an insurer that is defending its insured against a third-party claim, the insurer must satisfy its contractual duty to defend by paying for independent defense counsel chosen by the insured.
Courts throughout the country are split on whether and when the Cumis Rule or some variant of that Rule applies. Thus, the right to independent counsel varies from state to state and policyholders must be proactive in understanding and securing their right to independent defense counsel.
Those courts that have refused to allow insureds to select independent counsel hold generally that no conflict arises because defense counsel represent and owe a duty of loyalty to to the insured only and not to the insurer. Conversely, those courts allowing insureds to select independent counsel hold that defense counsel engage in a dual representation by representing the interests of both insurers and insureds. When a conflict of interest develops in a case involving a dual representation, independent counsel selected by the insured and paid by the insurer is required.
Courts are likewise split on when an actual conflict of interest arises. Some courts hold that whenever an insurer reserves its right to deny coverage an actual conflict arises. Other courts have decided that an insurer’s reservation of the right to deny coverage does not create a per se conflict of interest. An actual conflict of interest requiring the retention of independent counsel arises in those jurisdictions only when the outcome of the coverage determination can be controlled by defense counsel. The Hansen Court opted for the latter approach, holding that “there is no conflict of interest if the reservation of rights is based on coverage issues that are only extrinsic or ancillary to the issues actually litigated in the underlying action.”
The Hansen decision underscores the reality that insurance coverage law and rights are ever developing state by state. Knowing which states acknowledge dual representation and when an actual conflict arises will make all the difference in securing independent defense counsel at the insurer’s expense.
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