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Civil Litigation -
Reservation of Rights and Independent Counsel

Northern California Civil Litigation Information

If your insurance company has sent a "reservation of rights" letter to you, it may be legally obligated to pay for an attorney who is retained directly by you. Here, a little background may be helpful.

An insurance policy does not, and cannot, cover every conceivable type of liability. For example, in California, an insurer is prohibited from paying insurance benefits on your behalf for damages or injuries which you intentionally caused. Thus, to use a crude illustration, if you were sued after a car accident and the jury determined that you intentionally ran into the victim, your insurance company may have grounds to deny coverage for the plaintiff's damages in that case. (See California Insurance Code Section 533.)

If the lawsuit against you involves alleged damages which are potentially covered by your insurance policy, your insurance company has two fundamental duties: (1) a "duty to defend" you against all claims in the lawsuit, and (2) a duty to indemnify you for damages which are actually covered by your insurance policy. Thus, if none of the plaintiff's claims are even potentially covered under your policy, then the insurance company will most likely deny coverage for your claim and you will have to retain your own attorney to defend yourself in the lawsuit.

If any of the claims are potentially covered, then the insurance company must pay for an attorney to defend you against all of the claims. However, if you are found liable for damages which are not covered by your insurance policy, then your insurance company may not be obligated to indemnify you (pay money on your behalf) for those damages. If such damages are not actually covered, you would be personally responsible for paying those damages. The potential damage which is not covered by your policy is another form of "personal exposure."

In addition, a single claim for damages will either be ultimately covered under your insurance policy or not covered. After a trial, a final coverage determination can usually, but not always, be made. You are entitled to coverage if the liability is covered by your policy. Your insurance company is entitled to deny coverage if the liability is not covered by your policy and it has previously "reserved its right" to deny coverage.

So assume you are in a car accident. The other driver files a lawsuit alleging that you intentionally crashed into and injured him. You admit that you did collide with him, but deny it was intentional. You claim it was an accident. If the jury determined that you did crash into him intentionally, your liability would not be covered. If the jury concluded it was an accident, you would be covered. In this hypothetical, at the beginning of the lawsuit, you are potentially covered under your insurance policy, and your insurance company would have a duty to defend you. In fact, your defense might be that you were in another town at the time of the accident. If that were the case, the insurance company would still have a duty to defend you in the lawsuit because it has a duty to defend potentially covered claims, even those that are goundless, false or fraudulent.

The insurance company may be entitled to deny coverage if it has "reserved its right" to do so. Thus, in the above hypothetical, your insurance company could send you a letter telling you that it will provide a defense on your behalf (hire and pay for an attorney to defend you), but that it "reserves the right" to deny coverage in the event it is determined you intentionally crashed into the plaintiff.

Now, when the insurance company hires an attorney (sometimes referred to as "insurance defense counsel") to represent you in this hypothetical lawsuit, your attorney has an ethical dilemma. The dilemma stems from the fact that your attorney has two clients: (1) you, and (2) your insurance company. It is possible that the attorney's two clients have different objectives. Although you and your insurance company have the common objective to totally defeat the plaintiff's claims, you may not share the same interests if you are found liable for damages. If you are liable for damages, you would want the damages to be the result of an accident (and thus covered by your insurance policy). From a pure economic standpoint, your insurance company would prefer that the damages be due to your intentional conduct (and thus not covered by your insurance policy). This creates a "conflict of interest." Who's interest should your attorney serve: Your interests, or your insurance company's interests?

When a potential or actual "conflict of interest" exists between two clients of the same attorney, California State Bar rules prohibit the attorney from representing both clients unless the attorney has the "informed written consent" of each client. (See State Bar Rule 3-310(C)(1).) When there is a "conflict of interest" between you and your insurance company in the context of your defense in a lawsuit which is potentially covered under your insurance policy, there is a statute which particularly sets forth your rights; Civil Code Section 2860, is designed to solve the attorney's ethical dilemma and protect the insured.

Among other things, California Civil Code Section 2860 requires your insurance company, in certain situations, to offer to pay for "independent counsel." (In legal parlance, "independent counsel" is sometimes referred to as "Cumis counsel," after the 1986 appellate case of San Diego Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358, which eventually gave rise to the legislature's passage of Civil Code Section 2860.) You are entitled to independent counsel if your insurance company agrees to provide you with a defense subject to a reservation of rights which creates a "conflict of interest." In this regard, Civil Code §2860(b) states:

[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 rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the 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 insured is sued for an amount in excess of the insurance policy limits.

This statute has been the source of many disputes over when independent counsel is required, and there are many published appellate cases which address the issue. Some of the circumstances that may create a conflict of interest requiring the insurer to provide independent counsel include:

1. The insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by the insurer's retained counsel.
2. The insurer insures both the plaintiff and the defendant.
3. The insurer has filed a lawsuit suit against the insured, whether or not the law suit is related to the lawsuit the insurer is obligated to defend.
4. 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.
5. Any other situation where an attorney who represents the interests of both the insurer and the insured finds that his or her representation of the one is rendered less effective by reason of his representation of the other.

The first and fifth reasons listed above are key. Independent counsel is required when the way insurance defense counsel defends the action will affect an underlying coverage dispute between the insurer and the insured."

If your insurance company agrees that you are entitled to "independent counsel," there are other provisions in Civil Code §2860 which regulate further handling of the case. First of all, the insurance company is entitled to retain an attorney to defend you, even if you already have your own attorney who is "independent counsel." Thus, in your lawsuit you could end up with two attorneys who each represent you: (1) your "insurance defense counsel," and (2) your "independent counsel." If you are defended by both attorneys, they must both be "allowed to participate in all aspects of the litigation," and "cooperate fully in the exchange of information that is consistent with each counsel's ethical and legal obligation to the insured [you]." While your independent counsel is obligated to timely report to your insurance carrier concerning matters related to the lawsuit, he has no duty to disclose any "privileged materials relevant to coverage disputes."

Furthermore, the insurance company has the right to require that your "independent counsel" meet minimum qualifications including at least five years of civil litigation practice, substantial defense experience in the subject at issue in the litigation, and possession of errors and omissions (malpractice) insurance coverage.

Finally, although your insurance company would be paying for your independent counsel's fees, it is not obligated to pay any more than, "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 is being defended." Thus, if the independent counsel you have selected charges $300 per hour, and the attorney hired by the carrier charges $145 per hour, you would be responsible for paying your independent counsel the difference, i.e., $165 per hour.

You do not have to hire independent counsel, even if you are entitled to do so. However, if you decide not to retain independent counsel, then you must sign a written waiver to that effect.

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