United States: Controlling Cumis - California Court Confirms That Right To Independent Counsel Can Be Terminated By Withdrawing ROR

The Second District Court of Appeal has issued an important new opinion that adds to this year's series of California appellate decisions on when an insurer owes its policyholder a duty to pay for independent defense counsel, in Swanson v. State Farm General Ins. Co., ___ Cal. App.4th ___ (2013).  In Swanson, the Court of Appeal found that an insurer that had issued to its policyholder a reservation of the right to deny coverage that gave rise to the type of conflict that creates a right to independent counsel under California Civil Code section 2860 ("Cumis counsel") could end that duty by withdrawing that portion of the reservation of rights that created the right to have the insurer pay for such counsel.  After the insurer waived the coverage defenses giving rise to the conflict, the court found that the insurer could then retain its own choice of defense counsel and cease paying for the policyholder's independent counsel.

The Swanson decision's ruling was based on the statutory wording and precedent that establish the scope of when the policyholder is entitled to Cumis counsel.  Section 2860 establishes that right only when there is a reservation of the right to deny coverage on a specific issue that creates a conflict because "the outcome of that coverage issue can be controlled by counsel" chosen by the insurer.  California cases have established that the right to Cumis counsel only exists when the conflict is "significant, not merely theoretical, actual, not merely potential."  The Swanson court relied on simple logic to conclude that when the relevant conflict ceases to exists, the insurer can return to defending with its choice of counsel. 

The Swanson decision clarifies existing law in this respect, and it further clarifies existing law in its rejection of additional arguments the policyholder made as to why the insurer should be prevented by its actions from terminating payment for Cumis counsel.  Swanson distinguishes and limits Behnke v. State Farm General Ins. Co., 196 Cal.App.4th 1443 (2011), which had been argued by policyholders to hold that an insurer's consent to retain Cumis counsel subject to rate limitation and the right to arbitrate fee disputes waived the right to terminate Cumis counsel by withdrawing the coverage defenses that created the relevant conflict.  However, Swanson explains that Behnke's holding is limited to the situation where no separate counsel is provided after the withdrawal of coverage defenses; where the insurer offers a defense under the policy after eliminating the Cumis conflict, it does not have to continue to pay for Cumis counsel.  The Swanson court also rejected the argument that the right to withdraw from paying for Cumis needs to be specifically reserved or can only be made at the inception of the agreement to pay for such counsel.

The Second District Court of Appeal's decision in Swanson represents an important confirmation of an insurer's right to control the Cumis counsel situation that gets out of control.  The decision recognizes that the entitlement to Cumis counsel only exists when an insurer reserves certain rights, and the insurer can return to its right under the policy to control the defense of the policyholder by withdrawing the reservation that created the issue in the first place. 

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