Confronting Issues in Insurance Coverage: The obligation to provide independent counsel

The obligation to provide independent counsel

An insurer must provide independent counsel to defend its insured where a conflict of interest exists between the insurer and insured. Civil Code ' 2860 codified (and was intended to clarify) the rules set forth in San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358 ("Cumis"), in which the court made clear that an insured has a right to be provided independent counsel, paid for by the carrier, in a conflict of interest situation.

Section 2860 provides, in part:

(a) If the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide such counsel to represent the insured unless . . . the insured expressly waives in writing, the right to such counsel . . . .

(b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of a claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits . . ."

Under ' 2860, a conflict of interest exists where the insurer's reservation of rights is based upon an issue that can be controlled by counsel retained by the insurer. The concern is that counsel selected by the insurer owes an allegiance to the insurer, and such counsel might be inclined to manipulate the facts of the case in a way that would enable the insurer to deny coverage. In most cases today, if an insurer agrees to provide defense, it does so under a reservation of rights which creates such a conflict of interest. For instance, in the context of underlying environmental claims, insurers rely upon exclusions for "expected or intended" injury, and contend that the underlying damage was "expected or intended" by the insured. Counsel selected by the insurer, if allowed to control the insured's defense, can manipulate the outcome of the underlying litigation towards a finding of intentional injury. This is the classic conflict of interest situation, but countless others exist.

• Introduction
• Insurers improperly use Section 2860 to limit their defense obligations
• Policyholders must challenge the use of Section 2860 by insurers to limit their coverage obligations