Court Confirms that Potential Conflicts Do Not Trigger Right to Independent “Cumis” Counsel

In Centex Homes v. St. Paul Fire & Marine Ins. Co. (No. C081266, filed 1/22/18), a California appeals court confirmed that an insured’s speculation about possible or potential conflicts do not require appointment of independent “Cumis” counsel.

Centex was the developer of residential construction projects in Rocklin, California. Centex was sued for construction defects and tendered its defense to St. Paul, which insured one of the subcontractors. St. Paul agreed to defend Centex as an additional insured subject to a reservation of rights, including the right to deny coverage for claims not covered by St. Paul’s policy; for claims of damage to the subcontractor’s work; and for damage caused by the work of other subcontractors not insured by St. Paul. St. Paul also reserved its right to reimbursement for costs of defending uncovered claims. St. Paul then appointed counsel for Centex.

Centex cross-complained against its subcontractors, including St. Paul’s named insured, for breach of contract, indemnity and contribution. Centex also included a cause of action for declaratory relief against St. Paul, alleging a right to independent “Cumis” counsel under Civil Code section 2860.

The court granted summary adjudication for St. Paul on the Cumis issue, holding that its reservation of rights did not create a conflict of interest and did not affect coverage issues that could be controlled by St. Paul’s appointed defense counsel. St. Paul had presented evidence that the attorney was retained solely to represent Centex in defense of the homeowners’ lawsuit, and did not represent Centex, St. Paul or the subcontractor for the Centex cross-claims. Additionally, the attorney testified that St. Paul did not limit or dictate his representation of Centex, or ask him to settle Centex’s claims against the subcontractor. The court stated:

“St. Paul has also established that the other lawsuits and claims for reimbursement, subrogation, and contribution do not create a conflict of interest. St. Paul has retained separate counsel … to pursue its claims against Centex. [] Mr. Lee … does not represent St. Paul.” The court determined that under the circumstances Centex and the subcontractor had similar interests to limit liability and “St. Paul has successfully negated the existence of a conflict between Mr. Lee and Centex that would put ‘appointed counsel in the position of having to choose which master to serve.’” The court went on: “The evidence clearly shows a conflict between St. Paul and Centex. It does not extend, however, to include Mr. Lee so as to invoke a triable issue regarding the appointment of independent counsel.”

In affirming summary adjudication, the appeals court recited the propositions that not every reservation of rights requires independent counsel; the reservation of rights must assert factual or legal theories which undermine or are contrary to the positions to be asserted in the liability case; and there is no entitlement to independent counsel where the coverage issue is independent of, or extrinsic to, the issues in the underlying action.

Further, the Centex court rejected an argument that the controlling statute or case law support appointment of independent counsel when a reservation of rights poses a potential for conflicts. The court confirmed that a mere possibility of an unspecified conflict does not require independent counsel; the conflict must be significant, not merely theoretical, actual, not merely potential:

“To the extent Cumis, … suggests ‘potential’ conflicts or whenever the insurer has reserved its rights to deny coverage are sufficient to require appointment of independent counsel, we emphasize that section 2860 ‘clarifies and limits’ the Cumis decision.” The Centex court stated that “the reference in section 2860 to ‘possible conflict’ is part of the statute’s explanation that an insurer does not need to provide independent counsel after ‘a conflict of interest arises’ if ‘at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel.’” (Citing Civ. Code, § 2860(a).) The court explained that Centex was misreading the statute: “Thus, the statute specifies there is a right to independent counsel when a conflict arises but reflects that this conflict may be waived either at the time it arose or before, when it was merely a possible conflict. The fact that an insured can waive a conflict when it is merely potential is separate from the articulation of when the right to independent counsel arises. With respect to when independent counsel is required, the statute states there must be a ‘conflict’ and not ‘potential conflict.’”

The Centex court also rejected an argument that a Cumis conflict was established by virtue of Rules of Professional Conduct Rule 3-310(C)(1), which provides that an attorney shall not, without informed written consent: (1) Accept representation of more than one client in a matter when the interests of the clients potentially conflict; or (2) Accept or continue representation of clients whose interests actually conflict; or (3) Represent multiple clients where their interests in separate matters are adverse. While acknowledging that the Cumis decision found the Rules of Professional Conduct “correlative” of the insurer’s duties with respect to independent counsel, the Centex court said that “the insurer and the insured are not necessarily both clients ‘in a matter’ as contemplated by rule 3-310(C)(1).” Further “subparagraph (C)(3) is not intended to apply with respect to the relationship between an insurer and a member when, in each matter, the insurer’s interest is only as an indemnity provider and not as a direct party to the action.”

The Centex court found further support in State Bar Opinion 1995-139, addressing an attorney’s duties when he or she acts as insurance defense counsel and is hired by an insurer to represent the insured. In particular, the opinion stated that “while insurer is indeed a client in some respects—the ongoing relationship with the member, the payment of fees, etc.—it is a client whose rights under case law are clearly limited.”

Interestingly, the Centex court never reached the question whether the facts might actually establish a conflict, blaming Centex for a lack of evidence. While mentioning causation as a possible issue that might be subject to control by defense counsel, the court found that Centex failed to meet its burden in opposing summary adjudication by merely citing to its own briefs and arguments, which had been deemed inadmissible by the trial court.

Finally, the Centex court said that St. Paul did not control both sides of litigation, because it had only appointed counsel to defend Centex in the liability action and not for the cross-complaint.

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January 23, 2018