Insurance Company that Withdraws Cumis – Triggering Reservation of Rights Need Not Continue to Pay Cumis Counsel’s Fees

On September 23, 2013, in the case of Swanson v. State Farm General Ins. Co. (Case No.B240016; LASC Case No. EC055177) the California Court of Appeal (Second District, Division Seven) held that when an insurance company withdraws all reservations of rights and coverage defenses that give rise to the right to retain Cumis counsel (San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358); Civil Code section 2860), it has no duty to continue to pay the insured’s Cumis counsel’s fees and can appoint counsel of its choice to defend the insured in a third party action.

Because the duty to pay for independent counsel is based on the ethical duty of an attorney to avoid representing the conflicting interests of the insurer and insured, once that conflict no longer exists, there is no basis to require the insurance company to pay for independent counsel to represent the insured. The plaintiff argued that State Farm relinquished the right to stop paying for Cumis counsel by modifying the insurance policy and waiving the right to stop paying by failing to reserve that right.

The Court of Appeal disagreed. The plaintiff conceded there was no written modification of the insurance policy and there was no consideration for the alleged modification. Moreover, there is no authority holding that an insurer can waive its rights under Cumis and Civil Code section 2860 by failing to reserve them. (pp. 14-15)

In-house counsel and clients, as well as their independent Cumis counsel, should be prepared for the eventuality of their insurers’ withdrawal of their reservations of rights. If parties want counsel of their choosing to continue to represent them after the conflict of interest is eliminated, clients must expect (1) that they will be responsible for all fees for that attorney going forward, and (2) that they and their Cumis counsel must continue to cooperate with the insurer and the counsel the insurer will select and pay if it wants to be involved in the litigation.