Most people with any knowledge of insurance coverage are familiar with the Cumis rule, first announced by a California appellate court in 1984. It allows an insured whose insurer has agreed to defend a claim but reserved its right to contest coverage, to defend the case through counsel of the insured’s (not the insurer’s) choice, and requires the insurer to pay for that counsel. The California legislature soon followed up with a framework for such “Cumis” defenses, under which among other things, the insurer needs to pay only at “panel counsel” rates (usually significantly lower than general market rates), and the insurer can compel arbitration of any fee disputes for the Cumis counsel.
Obviously, this is not necessarily a bed of roses for the insured, who may have to fight the insurer about the fees and may find arbitration not the most hospitable forum. However, a new case this week should help to cut down the more unreasonable demands of insurers in this area.
The Housing Group and others sued their insurers for breach of contract, bad faith, fraud and other wrongs, apparently because the insurers failed to provide and pay for a Cumis defense against certain third party actions. The insurers responded by demanding arbitration, claiming they had paid some of the Cumis fees and this was simply a dispute about whether the payments were sufficient. The trial court denied arbitration, and the court of appeal affirmed.
Plaintiffs’ contention was that the insurer could not compel arbitration because it had never agreed to defend the underlying cases and because it had made only very partial, untimely payments after the underlying case had been resolved, instead of currently. The trial court ruled for the plaintiffs, finding that the insurers either paid no fees or paid only partially and after the case had been completed.
In a brief opinion, McGuiness, P.J., ruled that without producing evidence that it had fully paid the defense costs currently, at least to the limits of the “panel counsel“ levels, the insurer had in effect refused to defend the underlying cases. That left it in the position of having breached its contract. Thus, it could not dispute the extent of its performance through arbitration.
Thus, if in a situation that requires Cumis counsel the insurer does not unequivocally and timely pay defense costs, at least at the alleged panel counsel rates, it is simply in breach of its contractual obligations and can be sued for breach of contract, possibly for bad faith as well. Housing Group v. PMA Capital Insurance Co., Cal. Ct of Appeal, 3/25/11.
Score one for fair play to policyholders!