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Keywords

contractlawsuitdamagesattorneytrialpunitive damages
settlementappealtrialwill

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San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358, 208 Cal.Rptr. 494, 50 A.L.R.4th 913

Facts

The insureds were sued by Magdaline S. Eisenmann for wrongful discharge and other claims, seeking substantial damages. Cumis Insurance Society, Inc. accepted the defense but reserved its right to deny coverage for punitive damages. The insureds retained independent counsel to protect their interests, leading to a dispute over whether Cumis was obligated to pay for this independent representation. The trial court ruled in favor of the insureds, stating that a conflict of interest existed due to Cumis's reservation of rights.

Cumis associate counsel Willis E. McAllister reviewed the complaint in the Eisenmann action and concluded Cumis had a duty to provide a defense to the insureds. McAllister selected and retained, at Cumis' expense, the San Diego law firm of Goebel & Monaghan to represent the interests of the insureds in the Eisenmann action.

Issue

Whether an insurer is required to pay for independent counsel for an insured when the insurer provides its own counsel but reserves its right to assert noncoverage at a later date.

The issue presented to this court by the appeal is whether an insurer is required to pay for independent counsel for an insured when the insurer provides its own counsel but reserves its right to assert noncoverage at a later date.

Rule

When an insurer retains counsel to defend a lawsuit but reserves the right to deny coverage, a conflict of interest arises, entitling the insured to independent counsel at the insurer's expense.

We conclude under these circumstances there is a conflict of interest between the insurer and the insured, and therefore the insured has a right to independent counsel paid for by the insurer.

Analysis

The court analyzed the situation by recognizing that the insurer's interests diverged from those of the insured due to the potential for noncoverage, particularly regarding punitive damages. This conflict necessitated the hiring of independent counsel to ensure that the insured's interests were adequately represented without the risk of divided loyalties. The court emphasized that the ethical obligations of the attorney and the contractual duties of the insurer required that the insured be allowed to select independent counsel, with the insurer bearing the costs.

The conflict may appear before trial. Goebel & Monaghan represented the insureds in the Eisenmann action settlement conference and the case did not settle although a demand was made within policy limits.

Conclusion

The court concluded that Cumis Insurance Society, Inc. was required to pay for the insureds' independent counsel due to the conflict of interest created by its reservation of rights. The judgment was affirmed.

The court concluded: 'We hold, therefore, that in a conflict of interest situation, the insurer's desire to exclusively control the defense must yield to its obligation to defend its policy holder.'

Who won?

The insureds prevailed in the case because the court found that a conflict of interest existed, which entitled them to independent counsel at the insurer's expense.

The trial court ruled Cumis is required to pay for the insureds' hiring of independent counsel, rejecting Cumis' argument the court was bound by Gray v. Zurich Insurance Co. (1966) 65 Cal.2d 263, 54 Cal.Rptr. 104, 419 P.2d 168.

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