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By: David G. Molinari
The California Third District Court of Appeals has ruled that the right to Cumis counsel, independent counsel paid by the insurer (San Diego Federal Credit Union v. Cumis Insurance Soc’y, 162 Cal. App. 3d 358 (1984)) requires an actual as opposed to a potential conflict. In Centex Homes v. Saint Paul Fire & Marine Insurance Company, (Case C081266, January 22, 2018) the Court of Appeals concluded that Cumis counsel is not required absent a reasonable likelihood of an actual conflict when an additional insured carrier accepts a tender of a developer/general contractor’s defense subject to a reservation of rights and appoints defense counsel.
In Centex Homes the homeowners sued developer for construction defects. Developer tendered the defense to the insurer of a subcontractor involved in the project as an additional insured. The insurer provided an attorney to defend the developer under a reservation of rights against any claims not covered by the subcontractor’s policy. Developer hired their own attorney who filed a cross-complaint against the subcontractors, including the subcontractor under whose policy the developer was being defended. The developer argued that the case presented a “potential” conflict of interest that required the appointment of independent counsel under Cumis.
The Third District Court of Appeals ruled otherwise. The court concluded to the extent Cumis suggests a potential conflict arises wherever the insurer reserved its right to deny coverage being sufficient to require the appointment of independent counsel, the plain language of California Civil Code Section 2860 limits the Cumis right. Under Civil Code Section 2860 the conflict must be actual, not merely potential. The insurer-appointed counsel in Centex Homes was in no position to control the outcome in the case which focused on causation. On the issue of causation, the insurer and the developer had the same interests defending the underlying claim.
Further, the developer argued independent counsel was required because the insurer-appointed counsel had a conflict of interest under Rule 3-310 of the Rules of Professional Conduct: “Avoiding Representation of Adverse Interests.” Again, the Court of Appeals determined otherwise. The court concluded that while generally conceptualized, defense counsel represents the interests of both the insurer and the insured, they are not necessarily both clients in the matter as contemplated under the Rules of Professional Conduct for conflicts of interest. As the Court of Appeal viewed Rule 3-310 (C), the rule was not intended to apply to the relationship between an insurer and a member of the bar when the insurer’s interest is as an indemnity provider and not a direct party to the action. In Centex the court concluded there was no actual conflict of interest presented in the case.
Centex Homes may signal the limitation and narrowing of the right to independent counsel in construction litigation.
If you have any questions or would like more information, please contact David Molinari at [email protected].