C "-//W3C//DTD XHTML 1.0 Transitional//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-transitional.dtd"> Cumis, and Some Refinements on the Insurer's Duty to Defend : California Insurance Law Observer

Cumis, and Some Refinements on the Insurer's Duty to Defend

California has been the leader in recognizing an insured’s right to control the defense of its case where the insurer reserves its coverage rights and the outcome of the case could determine whether the coverage applies.  This is called the Cumis rule, after a 1984 case, and has since been codified as Civil Code section 2860.  That section was the result of heavy lobbying by the insurance industry and contains various provisions that inhibit the policyholder’s untrammeled selection of Cumis counsel, such as allowing the insurer to demand that such counsel “possess certain minimum qualifications” that “may include” specific elements stated in the law.  Cumis counsel must ‘cooperate fully” in providing information to the insurer except where coverage issues pertain; etc.

Perhaps the most inhibiting part of section 2860  limits an insurer’s duty to reimburse the insured for attorneys fees to “the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar claims” in the same community.”  Those fees are almost always lower than the standard fees charged to the insured by its non-insurance panel attorneys, and the client then has to swallow the difference.  And if there is a dispute about the reimbursements or their rate, the statute requires such issues to be arbitrated.

Insurers have nibbled at the edges of the Cumis rule and have tried to limit the insured’s rights to its chosen counsel in various ways.  Two recent cases have protected policyholders against that type of abuse.

Last year, in Intergulf Development Corporation v. Superior Court (2010) 183 Cal. App. 4th 16, the insurer had initially agreed to defend a construction defect case through it s own panel counsel but reserved its rights, and ultimately never accepted the case for defense and indemnity.  The insured rejected a defense by panel counsel and retained its own counsel.  the insurer made two payments of attorneys’ fees, apparently not in the full amounts of the billings and nine months apart.  After Intergulf sued it for bad faith, the insurer then sought to compel arbitration of what it called a fee dispute, claiming that Cumis counsel were charging fees in excess of the insurer’s standard rates as defined in section 2860.

The court of appeal reversed a trial court order compelling arbitration, ruling that Intergulf had begun a suit for breach of the insurer’s contractual duty to defend and for bad faith, which was notice to the insurer that the insured did not accept the insurer’s conduct as compliant with its duties under the policy and the law.  Since Intergulf claimed that the insurer had breached its duty, that issue had to be decided by the court and could not be divided by having the issue of the rates of charge determined first in an arbitration.

More recently, building on Intergulf, another court of appeal carried the same point farther.  In The Housing Group v. PMA Capital Insurance Company (2011) 193 Cal. App. 4th 1150, the underlying case had been defended by the policyholder’s chosen counsel while (it alleged) the insurer had not accepted the suit for defense.  After that case settled, the insurer stepped forward to draft the settlement agreement, paid the settlement amount, and paid only then what the insured called a “minor payment” toward the insured’s attorneys’ fees.  The insured had sued the insurer for breach of contract and bad faith; but after these events the insurer moved to compel arbitration, claiming that everything about this dispute had been resolved except the amount of attorneys’ fees it must reimburse to its insured.

The court didn’t buy that argument.  It held very clearly that “payment of defense fees at the end of the litigation [was] the equivalent of a defense denial,” and allowed the suit to proceed for breach of contract and bad faith, noting along the way that failure to pay the insured’s lawyers along the way left them “in the same position as if [the carrier] had failed to defend” entirely.

What lessons can we draw from these cases?  I think that they stand clearly for the proposition that in order to trigger its rights under the Cumis statute, section 2860, an insurer must do both of the following:

  • clearly commit to defend the claim
  • pay defense counsel the amounts billed, although at Cumis rates, promptly upon being billed.

In a case of mine, a Superior Court judge once ordered the insurer to pay all of the insured’s Cumis bills in a long-running, complex and costly litigation monthly upon presentation and without dispute, subject to a right to argue about their propriety later.  Unfortunately it was my opponents in that case, not my client, who got the benefit of that strong ruling. 

Policyholders should insist on getting a clear commitment from their insurers in Cumis situations, that the carriers will meet the two conditions I stated above.  Anything less is a breach of the insurer’s duties under the policy and can then be resolved in court, where there should be no arguments about reduced “similar defense counsel rates” or about late or partial payments being compliance with the insurer’s duties under the law.

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