Duties owed by Cumis counsel to the insurer

It is understood that attorneys generally answer only to their clients for errors during the course of a representation. This principle, which helps attorneys manage risk, has been considered by many courts to be a matter of public policy, as attorneys arguably should not have to balance their duties to their clients with potential liability from third parties.

There can be uncertainty, however, where a third party pays the fees incurred by the attorney. Typically, an attorney owes no obligations to that third party if they are simply paying the bills. In the context of insurance defense, the issue can be more complicated.

In a situation in which an insurance company pays an attorney to represent its insured in connection with a claim covered or potentially covered under a policy, states differ as to whether the insurance company is considered a client of the law firm, in addition to the insured. Where there are no potential coverage issues, many states refer to the relationship between the insurer, insured and defense counsel as a "tripartite" relationship, although the primary duty owed by defense counsel is typically to the insured.

In situations where there is a conflict between the insurer and its insured regarding the scope of coverage, the insured may be entitled to independent counsel or, as it is known in California, "Cumis" counsel, based on the California Supreme Court's decision in San Diego Federal Credit Union v. Cumis Ins. Society Inc., 162 Cal. App. 3d 358 (1984).

When Cumis counsel is required, the insurer is typically responsible for paying the attorney selected by the insured at those "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." Cal. Civ. Code 2860(c). Although that attorney is "independent," California Civil Code Section 2860 (which codified the Cumis decision) nonetheless requires that the attorney disclose certain information with the insurer relating to the case.

However, defense counsel is not required to disclose to the insurer any "privileged materials relevant to coverage disputes." Cal. Civ. Code 2860(d). The reason for this restriction is that, if the attorney provides privileged information to the insurance company that affects the availability of coverage, it may harm the insured. Thus, Cumis counsel is generally considered to enjoy a traditional attorney-client relationship with the insured, although they are paid by the insurer and owe duties of disclosure to the insurer under Section 2860.

Clarity on the Duties Owed by Defense Counsel

Although the relationship between defense counsel and the insurer is well-defined by Section 2860, there remain some unanswered questions regarding the scope of defense counsel's obligations to the insurer.

A 2015 decision of the Supreme Court of California provided clarity on at least one aspect of the relationship between Cumis counsel and the insurer: the payment of bills. In Hartford Casualty Insurance Co. v. J.R. Marketing, 61 Cal. 4th 988 (2015), the insurer provided the insured with Cumis counsel after the parties disputed whether there was coverage for a third-party claim.

After the representation, the insurer alleged that the counsel selected by the insured overbilled and charged excessive, unreasonable and even fraudulent fees. As a result, the insurer sought to bring a direct action against the law firm selected by the insured. In response, the law firm argued that any rights of the insurer ran solely against its insured, who then might have a right of indemnity against the law firm.

The California Supreme Court disagreed and found that the insurer could directly sue and recover from Cumis counsel for improper billing. The court explained that such a right could maintained under a theory of unjust enrichment:

"If Cumis counsel, operating under a court order that expressly provided that the insurer would be able to recover payments of excessive fees, sought and received from the insurer payment for time and costs that were fraudulent, or were otherwise manifestly and objectively useless and wasteful when incurred, Cumis counsel have been unjustly enriched at the insurer's expense."

Thus, although Cumis counsel may not have a traditional attorney-client relationship with the insurer, J.R. Marketing suggests that the attorney retains an obligation to the insurer regarding the reasonable billing of fees. Attorneys and law firms that serve as Cumis counsel can therefore learn some valuable lessons from the decision.

Don't Get Greedy

In light of this decision, many Cumis counsel will take efforts to be conscientious and accurate in its billing to insurers for work performed for an insured. Indeed, insurers will likely apply further scrutiny to the bills submitted by Cumis counsel in light of the decision in J.R. Marketing and the recourse available to insurers for improper billing.

Further, even before the California Supreme Court's decision, insurers often required that Cumis counsel adhere to litigation billing guidelines used by other counsel retained by the insurer. Such billing guidelines have been routinely upheld as a way to ensure reasonable and efficient billing, particularly where the guidelines do not impact the counsel's strategy or otherwise limit the defense. Thus, if defense counsel has any questions regarding the insurer's billing guidelines, she or he would be best served to ask the insurer at the outset of the representation rather than risk having bills rejected.

Duties Owed by Cumis Counsel

The primary duties of Cumis counsel, such as the duty of loyalty, duty of candor, and duty of confidentiality, are usually owed to the insured. However, that does not mean that the attorney can completely cut off the insurer.

Although, as noted, Cumis counsel should be careful not to disclose information to the insurer that bears on coverage disputes and could be used against the insured, the insurer is generally entitled to information that would allow it to make reasonable and informed assessments regarding the case. This usually includes providing information that would bear on an insurer's decisions relating to potential exposure and likelihood of success. The failure to disclose such information could provide another avenue for a claim by the insurer against Cumis counsel, in addition to the billing issues addressed in J.R. Marketing.

However, by complying with its statutory obligations and acting reasonably in billing, an attorney serving as Cumis counsel can limit the risks of a claim by the insurer.