Nevada recently became the latest jurisdiction to protect the interests of policyholders by adopting the so-called Cumis counsel rule. In State Farm Mut. Auto. Ins. Co. v. Hansen (Sept. 24, 2015), the Nevada Supreme Court held that insurers are required to pay for independent counsel for insureds facing liability claims when there is a conflict of interest between the insured and insurer. In so holding, Nevada joined the list of states to ensure that policyholders have the benefit of being represented by counsel that has only the policyholders’ interests in mind—and not those of the insurer.
When an insurer agrees to defend its insured against a liability claim, it creates what is often referred to as the “tripartite relationship” between the insured, insurer, and retained defense counsel. By design, this relationship is intended to benefit everyone involved because the insured, insurer, and defense counsel all have the common objective to limit liability. Significant problems arise, however, when those interests are not aligned. For example, there is frequently a conflict of interest when the insurer defends the insured under a reservation of rights—that is, the insurer provides a defense for the insured, but reserves its right to later assert coverage defenses to avoid indemnifying the insured for liability arising from the litigation.
As recognized by the Hansen court, the textbook example of this conflict occurs when there is a question of whether the conduct giving rise to the liability was intentional or merely negligent. The insurer, in an effort to protect its interest and avoid paying the claim, will assert that the conduct was intentional and, therefore, not covered. Conversely, the insured will assert that the conduct was negligent, which will trigger the insurer’s duty to indemnify. In those situations, the retained defense attorney has the conflicting interests of protecting the insured (by offering proof that will trigger coverage) or the insurer (by offering proof that will implicate an exclusion). The policyholder’s predicament is exacerbated by the fact that, in most cases, the defense counsel is frequently retained by the insurer and, thus, has a monetary incentive to protect the insurer’s interests before the insured’s.
California developed an innovative solution to this problem in San Diego Navy Fed. Credit Union v. Cumus Ins. Society, Inc., 162 Cal.App.3d 358 (1984). The Cumis rule provides that, in order to avoid the conflict of interest resulting when an insurer reserves its rights to determine coverage, an insurer must satisfy its contractual duty to provide counsel by paying for counsel of the insured’s choosing. California later codified the rule by statute. See Cal. Civil Code § 2860. Since the Cumis decision, other states have adopted similar rules.
The Hansen case came to the Nevada Supreme Court as a certified question from the Nevada federal district court. In the underlying case, an individual that was injured by the policyholder was assigned the insured’s rights to recover from State Farm. The assignee asserted that State Farm breached its obligations to the policyholder by failing to provide independent counsel for the insured after it reserved its right to deny coverage based on policy exclusions for intentional acts and punitive damages. The federal district court agreed with the assignee, but agreed to certify the question upon State Farm’s request for reconsideration.
The Nevada high court responded that an insurer is required to provide independent Cumis counsel when there is a conflict of interest. It based the ruling on the fact that Nevada is a “dual representation” state, meaning that retained defense counsel represents both the insurer and insured. Given the inherent risk of conflicts, the court concluded that insurers must pay for independent counsel. The court weakened the protection for policyholders, however, when it concluded that an insurer’s reservation of rights alone does not per se trigger a right to Cumis counsel. Instead, policyholders must show there is an actual conflict of interest.
The Hansen decision certainly constitutes a step forward for policyholders in Nevada by eliminating the possibility that appointed defense counsel’s loyalty may lie with the insurer that’s paying the bills. The question of entitlement to independent counsel remains open in a number of other “dual representation” jurisdictions, such as Oregon. Perhaps the Nevada Supreme Court’s adoption of the Cumis counsel rule will spur those jurisdictions to address the issue head on—either though caselaw or legislation—and guarantee policyholders the right to select counsel that will have only their interests in mind.
Opinion reprinted from WestlawNext with permission of Thomson Reuters. If you wish to check the currency of this case by using KeyCite on WestlawNext, please visit www.next.westlaw.com.