National Insurance Law Forum : Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

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“Cumis” – California’s rule on the right to independent counsel (codified at Civil Code Section 2860) – continues to raise issues requiring courts to more clearly define, among other aspects:

• under what circumstances does the right to independent counsel arise?
• when is there is an actual “conflict” for defense counsel retained by the insurer?
• can the right to independent counsel arise due to the insurer’s failure to defend immediately (rather than any conflict in that defense)?
• what reporting is required from independent counsel?
• when should an insurer retain defense counsel in addition to paying for the insured’s independent counsel?
• what issues can be arbitrated under Section 2860 along with the dispute over “usual” rates?

In Intergulf Dev. v. Superior Ct., __ Cal.App.4th __ (2010), California’s appellate court for the Fourth Appellate District (San Diego County) held the parties had to first litigate issues of breach of contract and bad faith prior to arbitrating the issue of independent counsel’s rates. The insurer agreed to defend an Additional Insured under its policies in a lawsuit arising out of defects on a construction project. However, the insurer did not respond to the question of whether it would agree that the additional insured had a right to independent counsel. The insurer was sued for breach of contract and bad faith. In the course of that lawsuit, the insurer made payments toward defense costs but claimed independent counsel’s rates far in excess of the usual rates the insurer paid to defend similar actions. Five weeks before trial of the breach of contract/ bad faith case, the insurer filed a petition to compel arbitration. The trial court granted the petition, but the appellate court issued a writ of mandate vacating that order. The appellate court ruled that arbitration over the fees charged by independent counsel was premature. First, there had to be a determination of whether the insurer breached its contract in not defending “immediately” and “entirely.”  As that court explained, breach of those duties may “place the section 2860, subdivision (c) procedures out of [the insurer’s] reach.”