Tim focuses his practice on complex commercial litigation, business law, and catastrophic injury and tort matters, including: Construction Environmental...
John Czuba has 28 years experience in the publishing industry. Since 1994 he has worked for the AM Best,...
Attorney Tim Agajanian from the law firm Ropers Majeski discusses the selection of cumis counsel attorneys and how their duties impact claims.
Special thanks to our sponsor, AM Best Company, Best’s Insurance Professional Resources, including Qualified Member attorneys, adjusters and expert service providers.
Best’s Insurance Law Podcast
Cumis Counsel Selection and Impact on Claims
Intro: This is the Best’s Insurance Law Podcast brought to you by the Best’s recommended insurance attorneys.
John Czuba: Welcome to “Best’s Insurance Law Podcast,” the broadcast about timely and important legal issues affecting the insurance industry. I’m John Czuba. Managing Editor of Best’s Recommended Insurance Attorneys. We’re pleased to have with us today Attorney Tim Agajanian.
Tim is a partner at national law firm Ropers, Majeski. He represents corporations and insurers nationwide in commercial litigation, catastrophic injury, real estate, and tort matters. Tim is also a frequent author and speaker and addresses updates to regulations in case law. Tim, thank you so much for joining us today.
Atty. Tim Agajanian: Thank you John very much for having me. I appreciate it.
John Czuba: Today’s podcast discussion is Cumis Counsel and how it impacts insurance claims. And Tim for our first question, “What are the circumstances that trigger an insurer’s obligation to provide independent counsel?” Often called Cumis Counsel.
Atty. Tim Agajanian: A very good question. So, under §2860 subpart b, as I’ll read, “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 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 defense of the 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 insurer is sued for an amount in excess of the insurance policy.1
So, the Cumis Counsel name came from a case that was decided in 1984 in California entitled, “San Diego Navy Federal Credit Union versus Cumis Insurance Society Inc.” And that decision which came down in the Court of Appeals in the Fourth District in 1984, created scenarios wherein in church you were defended by a counsel, by insurance companies could choose their own counsel and be paid for by the insurance companies. Since that time because of some abuses and interesting background issues, the California legislature really enacted a statute now called, The Cumis statute. It’s §2860 California Civil code §2860.
Here are the circumstances that require insurance companies to provide its insureds with independent counsel when they’re in a suit and providing defense: one, where there’s under §2860, subsection where the insurer reserves its right on an issue and the outcome of that coverage issue can be controlled by the insured’s retained counsel. That’s 98 percent of the time when that statute triggers independent counsel and that is the enabling legislation that came from the Cumis case.
Atty. Tim Agajanian: And very quickly, there are several other subparts that would institute or require independent counsel to be appointed. The second one is, where the insurer insures both the plaintiff and the defendant. A pretty obvious conflict of interest.
Subpart 3 of §2860 is, “Where the insurer has filed suit against the insured whether or not the suit is related to the lawsuit, the insurer is obligated to defend.” Clearly a violation of California Ethics Code, which we’ll talk about a little bit later in this presentation of the genesis of the Cumis rule and the independent counsel rule.
The fourth scenario under the code section is, “Where the insurer pursues settlement in excess of the policy limits without the insured’s consent and leaving the insured exposed to claims by third parties.” And I’m assuming that our audience is somewhat sophisticated as insurance folks and this is a pretty obvious example of when those interests would conflict and probably it doesn’t occur very often, but can occur.
Subsection5 of California Code §2060 is, “Any other situation where an attorney who represents the interests of both, the insurer and the insured finds that his or her representation of one is rendered less effective by reason of his or her representation of the other.” That seminal case which you can write down is, James 3 Corporation versus Truck Insurance Exchange that’s a 2001Cal app decision 91 Cal up fourth at 1093. So, I’ve given you some basic situations that would trigger the Cumis statute.
There are other states that have similar type of statutes or a common law that would trigger the right to independent counsel. The most common trigger of the obligation to provide independent counsel is in California. Is in insurers providing a defense subject to a reservation of rights.
And in the Cumis case, the counsel was derived from holding in that case which I cited earlier. And the Cumis decision inadvertently created a broad and nearly unbridled opportunity for insured’s personal counsel to demand and seek payment to serve as defense counsel for the insurer’s expense. And this apparent abuse created the need for the independent counsel statute.
And there are some examples of common examples of when the independent counsel is now triggered under the new code §: one is, when there’s an intentional act versus a negligent allegation and the insurance company reserves its rights in regards to not obviously going to cover any acts that were intentional. A simple example, a house burns down.
There’s a question as to whether the homeowner’s child started the fire with playing with matches or it was a natural cause or a negligent cause. Therefore, the defense counsel may be leaning towards showing that it was an intentional cause of the fire. A very, very, simple example and as we get further into this Q&A today, we can give you some more examples and there’s some exceptions and whatnot. It gets kind of complicated which we delve into more in a full hour and a half program we put on for this subject.
John Czuba: So, Tim the duty to provide Cumis Counsel is triggered by a conflict of
interest. Can you provide some examples of scenarios that would create this type of
Atty. Tim Agajanian: There are several examples of when it wouldn’t create a conflict of interest and any anytime that there is a general, factual allegation in the complaint and in the reservation of rights that deviates or puts the insured at odds with the insurance company regarding behavior, conduct, intentional type acts, then that would generally, and that the defense counsel can steer the case or control how the cases is defended in putting the case more in an uncovered situation.
Meaning, they would have more of a tendency to defend the case, wherein the insured, they would prove or there’d be jury instructions to prove that the insured acted intentionally to create the damage, that would trigger Cumis Counsel.
For instance, there’s an environmental case that we handled wherein, it was dry cleaners, and there were allegations that the dry cleaner, the insured on the environmental case intentionally dumped cleaning fluid into the ground and did not dispose of it properly as opposed to a negligent creation of a plume over a number of
years by just leakage or just negligence.
In that case, the reservation of rights triggered an independent counsel and there’s many other examples. But as an example, that doesn’t trigger Cumis, there are many examples where when the insurance company simply denies coverage for certain uncovered claims, it’s purely a coverage issue then, that would not trigger the right to independent counsel.
As a matter of law in the case where the damages may not be covered under the definition of the policy and the rights are reserved then, that does not trigger Cumis under §2860 as one of the examples.
There is an exception under construction defect cases under the Blanchard case which I can cite for you. Wherein, if it’s work product that’s being challenged, and you’re reserving your rights, the workmanship was not good, but it did not result in damages, that’s an exception where it does not trigger Cumis counsel.
So, most of your construction defect cases, even those and there’s a reservation of rights made on the workmanship or you just did not build the house or the detail correctly and, if there’s no resulting damage then, there’s no covered damages. That’s a good example under the Blanchard case. I can give you the site, 2 Cal App Fourth 345, which is kind of a carve out of a typical situation where there’s an allegation of intentional acts or acts of the insured that that will not trigger Cumis.
John Czuba: Tim can you tell us are there any other distinguishing conflicts that will
trigger Cumis Counsel and others that may not?
Atty. Tim Agajanian: So, there’s no simple test to determine when the right to independent counsel arises. Further, not every conflict of interest activates an obligation to provide the insured defendant with independent counsel at the insurer’s expenses.
Yeah. For example, in the James 3 case, the insurer owes no duty to provide independent counsel in these situations because the Cumis rule is not based on insurance law, but on ethical duty of an attorney to avoid representing conflicting interests.
So simply, in in that case, if you’re reserving rights on a claim that’s not covered by insurance that it’s an insurance coverage issue, that does not automatically trigger Cumis. And in fact, under that under that James 3 case, it stands for the premise that simply because there’s a reservation of rights on a claim that’s not covered, that does not trigger Cumis.
John Czuba: Tim how are Cumis attorneys selected and what are their duties?
Atty. Tim Agajanian: Under subpart C, here are the requirements under §2860 of selection of counsel: one, at least five years of civil litigation practice which includes a substantial defense experience in this subject at the issue in the litigation; two, errors and omissions coverage, and the insurer’s obligation to pay the fees to the independent counsel selected by the insured is limited 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 actions in the community where the claim arose or it is being defended. This is the codification of the rule: practical experience to answer your question. is that obviously, the insured has a right to select counsel.
Under the subsequent case law, the insured has a right to control the litigation, the insured has a right to select the expert witnesses, and some of these qualifications on fees, the amounts of fees paid, there is an ample exemplar of cases, where under this code section, if there’s a dispute in the hourly rate, and this becomes a real issue in a lot of these cases because independent counsel normally are charging much higher rates than what we call, agreed upon panel counsel rates. And this is where the dispute comes in.
So, the selection of counsels by the insured to answer question, we can get into some of the other issues at the other questions regarding the amount of fees and how those can be arbitrated.
John Czuba: Tim, how are attorney’s hourly fees established under the rules thatyou just mentioned? And if there is a dispute over Cumis counsel rates, how is it typically resolved?
Atty. Tim Agajanian: Right. So, under 2860C, on the last provision of that code section says, “Any dispute will be by binding arbitration and the arbitrator will have sole discretion to determine what the hourly fees would be.” And even though §2860 articulates a general requirement that you have to have five-year’s experience, and be experienced in this field of practice, there’s a lot of other factors here. And the rates at these panel counsel firms –
Well, let me give you an example. A case study we looked at is, the fabric washroom equipment case, wherein it works as traveler’s insurance company and that was a very good example which you can pull this up on west law and I think, it’s cited it at 2017WL10127812 Cal super arbitration award.
I think, that’s the reference. And in that case, there’s a couple of very important lessons here to answer your questions. Even though the insurance companies will try to say that, “Gee, we have panel counsel. They handle this typical type of cases and we charge 250 dollars an hour for example. That’s really not going to be the dictating factor in a case that goes to arbitration. It’s binding arbitration. Evidence can be presented. There are hearings, but ultimately, the arbitrator will make the ruling.
Atty. Tim Agajanian: Let me give you an example of some of the language that was articulated in this particular decision, which is informative to this audience. The rates of these panel counsel firms, this is quoted from the arbitrator, “were not determined by reference to the legal claims factual circumstances location, potential exposure, or complexity of these cases thus, these cases cannot reflect rates paid to attorneys travelers has retained in the ordinary course of business in the defense of similar actions in the community where the claims arose or is being defended. So, what that is informative of is that, the arbitrator will take in consideration the complexity of the of the cases, at the location, the potential exposure, whether or not the law firm has represented the client before in similar matters, the expertise of the attorney and not just a simple subject matter or the fact that, the insurance company has paid other law firms you know, much, much, lower fees.
So, that is informative and with more time, I can give you more examples in regards to the factors involved. I can’t say this too in the arbitration, which is an important pointer to carriers. If you get involved in a situation where you determine that Cumis Counsel or independent counsel is required, this is very important. You should agree to disagree on the hourly rate and indicate that you will work that out and continue to pay the fees at the rates that the carrier thinks is fair or is standard in the community of this type of case and agree to either arbitrate or negotiate the differential at some date in the
Future. If you don’t do that as a carrier, you may waive all your rights under §2860 to binding arbitration and be precluded from challenging the actual hourly rate the law firm wants to charge you. So, you don’t want to just not agree just pay something. That’s just an interesting practice pointer from the carrier’s perspective.
John Czuba: Tim, this is a very informative podcast. Thank you so much for joining us today, and thank you for providing the case law so our listeners could go back and review further if they need to.
Atty. Tim Agajanian: Thank you very much. I appreciate the opportunity and I hope it was informative and helpful.
John Czuba: That was Tim Agajanian from the national law firm, Ropers, Majeski.
And special thanks to today’s producer, Frank Vowinkel and thank you all for joining us for Best’s Insurance Law Podcast.
To subscribe to this audio program, go to our webpage, www.ambest.com/home/default.aspx. If you have any suggestions for a future topic regarding an insurance law case or issue, please email us at [email protected]. I’m John Czuba, and now this message.
Best’s Insurance Professional Resources features valuable insurance industry content including searchable profiles of client recommended insurance attorneys, adjusters, and expert service providers. Brought to you by AmBest known worldwide as a respected source of insurance industry news and information. Visit AmBest.com/claimsresource.
Best's Insurance Law Podcast features discussions with leading insurance attorneys about timely industry issues.
Attorney addresses circumstances that trigger an insurer's obligation to provide cumis counsel in cases.
Expert Service Provider discusses how insurance companies can best be prepared for reptile attacks in litigation.
Adjuster addresses changes to the Michigan no-fault insurance law and impact on claims and risk managers.
Adjuster discusses COVID-19 triggering fraudulent claims.
Senior Forensic Mechanical Engineer addresses how COVID-19 has changed claims handling now and for the future.
Attorney addresses COVID-19 return to work challenges.