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September 2013

Insurer’s Withdrawal of Cumis-Triggering Reservation of Rights Eliminates Insured’s Right to Cumis Counsel

The California Court of Appeal affirmed a trial court’s summary judgment for an insurer holding the insurer could refuse to pay attorney’s fees to counsel the insured had selected pursuant to Civil Code section 2860 and San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 after the insurer withdrew its Cumis-triggering reservation of rights. 

In Swanson v. State Farm General Insurance Co., decided Sept. 23, the Court of Appeal held no Cumis-triggering conflict exists after an insurer withdraws all reservations of rights and coverage defenses that gave rise to the insured’s right to such counsel. 

State Farm General Insurance Co. issued Terry Ann Swanson a Homeowners Insurance Policy. It provided personal and general liability coverage for her real property in La Crescenta and stated that State Farm would “provide a defense at our expense by counsel of our choice” if a third party sued Swanson for damages for covered “bodily injury” or “property damage” caused by an “occurrence.” 

Swanson filed an action against her neighbors for personal injury and property damage caused by the failure of her neighbors’ retaining wall.  The neighbors filed a cross-complaint against Swanson for premises liability and negligence in connection with the incident.  Swanson’s counsel, Richard E. Blasco, tendered the claim to State Farm, which accepted the defense subject to a reservation of rights regarding certain policy defenses.  State Farm also accepted Swanson’s choice of Blasco as Cumis counsel.

State Farm subsequently amended its reservation of rights and withdrew the policy defenses it had asserted.  State Farm informed Swanson that it had retained separate counsel to assume the defense of the cross-complaint from Blasco, and that the removal of the Cumis-triggering conflict eliminated its obligation to pay Swanson as independent counsel.  Swanson agreed to add the separate attorney as co-counsel but did not remove Blasco.  Blasco continued to bill State Farm, but State Farm did not make further payments.

After the underlying action resolved, Swanson sued State Farm alleging, among other things, breach of insurance contract and breach of the implied covenant of good faith and fair dealing.  State Farm moved for summary judgment arguing that, once it withdrew its Cumis-triggering reservations of rights, Swanson was no longer entitled to Cumis counsel.  State Farm was then entitled to choose its own counsel to defend and was not obligated to pay Swanson’s personal counsel. The trial court agreed with State Farm and granted its motion.  Swanson appealed.  The Court of Appeal affirmed.

The Court of Appeal first stated that, because an insurer’s duty to defend is broader than its duty to indemnify, an insurer has an incentive to reserve a broad spectrum of coverage defenses to limit its obligation to indemnify to only covered claims.  When an insurer selects an attorney to defend the insured, the attorney represents the interests of the insurer and insured.  This dual representation can create the need for independent or Cumis counsel if an insurer’s reservation creates a conflict of interest between the insurer and insured. 

Civil Code section 2860 codified the Cumis rule by requiring a defending insurer to provide independent (also still known as Cumis) counsel for its insured if a disqualifying conflict of interest arises and the insured does not provide a written waiver of the right to such counsel.   However, the Court of Appeal agreed with State Farm and the trial court that an insurer’s duty to maintain Cumis counsel exists only while it maintains a Cumis-triggering reservation of rights. 

The Court of Appeal noted that it was undisputed that State Farm reserved coverage rights that created a disqualifying conflict of interest triggering its duty to pay for Cumis counsel for Swanson.  It also was undisputed that State Farm could waive its Cumis-triggering defenses and that State Farm did withdraw its broadest coverage reservations thereby eliminating the disqualifying conflict of interest.  The Court of Appeal held that once State Farm withdrew its Cumis-triggering reservation of rights, it no longer had an obligation to allow Swanson to control the litigation or an obligation to pay the attorney’s fees of Swanson’s Cumis counsel.

The Court of Appeal rejected Swanson’s contentions that State Farm relinquished its right to cease paying Cumis counsel by modifying the terms of the policy or failing to specifically reserve its right to stop paying Cumis counsel.  The Court of Appeal found that the correspondence from State Farm merely preserved State Farm’s rights to assert coverage defenses and implemented the provisions of Civil Code section 2860 requiring Cumis counsel to meet certain professional requirements and limiting the amount State Farm had to pay Cumis counsel.  Finally, the Court of Appeal found that there was no authority requiring an insurer to expressly reserve its rights under Cumis or risk waiver, and found that an insurer’s Cumis obligations are based on ethical obligations and not insurance law.

Since State Farm had no duty to continue to allow Swanson’s Cumis counsel to control the litigation or to pay for Swanson’s Cumis counsel, State Farm did not breach the insurance contract, and could not be liable for the breach of the implied covenant of good faith and fair dealing.  

Click here for the opinion.

This opinion is not final.  The Court of Appeal may modify it on rehearing or the California Supreme Court may order it depublished or grant review.  The latter two events would render the opinion unavailable as legal authority in California courts.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at


Aaron P. Rudin
Arthur Schwartz