Memorandum of law cumis rule the cumis



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THE RATIONALE FOR THE CUMIS RULE

The rationale for the Cumis Rule may be traced to the Bible. “No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other.”19

The Cumis rule has two parts: 1) Lawyer ethics prohibits joint representation of dual clients whose interests potentially conflict; and 2) therefore, the insure must discharge its promise to defend by adequately funding independent counsel.20

“[W]here multiple theories of recovery are alleged and some theories involve uncovered conduct under the policy, a conflict of interest exists. In actions in which the insurer and insured have conflicting interests, the insurer may not compel the insured to surrender control of the litigation. If the insurer must pay for the cost of defense and, when a conflict exists, the insured may have control of the defense if he wishes, it follows the insurer must pay for such defense conducted by independent counsel.21

“[O]nce the insurer decides to assert a coverage defense, the same attorney may not represent both the insured and the insurer. [W]hen coverage is disputed, the interests of the insured and the insurer are always divergent. The attorney should not be placed in the position of divided loyalties. Such an arrangement would be adverse to the best interests of the insured, the insurer, the attorney, and the profession. We conclude the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage. If the insured does not give an informed consent to continued representation, counsel must cease to represent both. Moreover, in the absence of such consent, where there are divergent interests of the insured and the insurer brought about by the insurer’s reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured. The insurer may not compel the insured to surrender control of the litigation.”22

“We begin by briefly reviewing the reason for Cumis counsel. An insurer is obligated to provide its insured with a defense to a third party’s lawsuit when there exists a potential for liability under the policy. In this way, an insurer’s duty to defend is broader than its duty to indemnify. Under these circumstances, an insurer may provide a defense under a reservation of rights, agreeing to defend, but promising to indemnify only for conduct covered by the policy.



An insurer usually provides a defense to its insured by hiring competent defense counsel, who represents the interests of both the insurer and the insured. In some cases, there is a conflict of interest or a potential conflict of interest between the insurer and the insured. Usually, these conflicts involve the insured trying to obtain coverage and the insurer trying to avoid it. When this happens, defense counsel may not be permitted to represent both the insurer and the insured. The insurer may be required to provide the insured, at the insurer’s expense, with independent counsel (i.e., Cumis counsel), who then controls the litigation.”23


1 “Among the cases from other jurisdictions which are generally supportive of the view we take are the following:” Alaska, Arizona, Illinois, Maryland, New York, Massachusetts, Rhode Island, and Texas. (Cumis, supra, 162 Cal.App.3d at 374, fn.9.)

2 “Under the policy [the insurer] assumed . . . duties in relation to the assured: . . . to employ competent counsel to represent the assured and to provide counsel with adequate funds to conduct the defense of the suit.” (Merritt v. Reserve Ins. Co. (1973) 34 Cal.App.3d 858, 882 (Merritt).)

3 “Where a question exists as to whether an occurrence is within coverage, independent counsel representing the insured’s interests is required.” (Cumis, supra, 162 Cal.App.3d at 374.)

4 See, Reservation of Rights - MoL

5 See, Dependent Counsel Always Represents the Insurer - MoL

6 See, Duty to Comply with Rule 3-310 - MoL

7 See, Three Way Relationship - Harmony or Dissonance - MoL

8 “The situation has changed. Partners have become adversaries. The closely knit fabric of confidentiality is torn and shredded.” (American Mut. Liab. Ins. Co. v. Superior Court (Nork) (1974) 38 Cal.App.3d 579, 593.)

9 Hartford Cas. Ins. Co. v. J.R. Marketing (2015) 61 Cal.4th 988, 992, fn1.

10 “By its very nature the duty assumed by [the insurer] to defend its assured against suits must necessarily be classified as a delegable duty, understood by all parties as such, for [the insurer] had no authority to perform that duty itself and, in fact, was prohibited from appearing in the California courts. (Bus. & Prof. Code § 6126.) Since a carrier is not authorized to practice law, it must rely on independent counsel for the conduct of the litigation.” (Merritt, supra, 34 Cal.App.3d at 880-81 (citations omitted).)

11 “Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf.” (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.) “Upon receiving proof of claim, every insurer . . . shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part.” (Cal. Code Regs. § 2695.7(b).)

12 “[T]he insurer has a duty to defend the action in its entirety.” (Buss v. Superior Court (1997) 16 Cal.4th 35, 48.)

13 “By definition, the duty [to defend] entails the rendering of a service, viz., the mounting and funding of a defense.” (Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 58.)

14 A lawyer “shall not, without the informed written consent of each client: (1) Accept representation of more than one client in a matter in which the interests of the clients potentially conflict” (Rule 3-310(C).)

15 Cumis, supra, 162 Cal.App.3d at 371, fn.7.) But see, Dynamic Concepts: So Right on the Fact; So Wrong on the Law! - Ed

16 Dependent counsel “owed a duty to [the policyholder] . . . to disclose potential conflicts of interest between California Indemnity and plaintiffs.” (Canton Poultry & Deli, Inc. v. Stockwell, Harris, Widom & Woolverton (2003) 109 Cal App 4th 1219, 1224.)

17 “[T]he insurer’s fiduciary obligations were consistent with those of the attorney retained to represent the insured, and as a result the insurer should have informed the insured of the conflict of interest and of the opportunity to have independent counsel. (Manzanita Park v. Insurance Co. of North America (9th Cir. 1988) 857 F.2d 549, 555.)” (State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 1235-1236.)

18 Dependent counsel’s perfunctory denial of the existence of a conflict “was simply wishful thinking.” (Industrial Indem. Co. v. Great American Ins. Co. (1977) 73 Cal. App. 3d 529, 535.)

19 Matthew 6:24. “The mandatory rule of disqualification in cases of dual representations [is] analogous to the biblical injunction against ‘serving two masters’ (Matthew 6:24) - is such a self-evident one that there are few published appellate decisions elaborating on it.” (Flatt v. Superior Court (1994) 9 Cal.4th 275, 286.)

20 See, How Much Must an Insurer Pay Independent Counsel? and How Often Must an Insurer Pay Independent Counsel? - MoL

21 Cumis, supra, 162 Cal.App.3d at 368 (citations, quotation marks, and ellipses omitted).

22 Id. at 374-375 (citations, quotation marks, and ellipses omitted).

23 Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 83-84 (citations, quotation marks, and ellipses omitted).)

Cumis Rule - rev. 2/16 - page - © DutytoDefend.com


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