Why it matters

Under California law, policyholders are entitled to independent counsel, often referred to as Cumis counsel, when a conflict of interests exists between an insurer and its insured. In a case of first impression, a California federal district court held that in appropriate circumstances an insured’s Cumis rights entitle it to hire attorneys from more than one law firm. So long as the policyholder demonstrates that the counsel fees were “reasonable and necessary,” the insurer must pay.

Detailed Discussion

As a licensee of Guess Inc., Signal Products was named as a defendant in a trademark dispute with Gucci America. Gucci alleged that Signal, as well as other licensees, infringed the trade dress of certain handbags and luggage.

Upon receiving Signal’s tender of the underlying action, its primary and umbrella carriers (collectively, “Zurich”) agreed to defend Signal under a reservation of rights. Zurich conceded that its reservation of rights created a conflict of interest and provided Signal a right to independent counsel.

Signal informed Zurich that it had appointed two law firms – O’Melveny & Myers and Steptoe & Johnson – to defend it in the underlying action. Zurich took the position that it had no knowledge of Steptoe & Johnson’s involvement until after the conclusion of the underlying action.

When Zurich refused to reimburse Signal for the fees incurred by Steptoe & Johnson, Signal filed suit claiming that Cal. Civil Code § 2860 does not preclude Signal from hiring a second law firm to act as independent counsel. In relevant part, Section 2860 states that “[i]f the provisions of a policy of insurance impose a duty to defend upon an insurer and a conflict of interest arises which creates a duty on the part of the insurer to provide independent counsel to the insured, the insurer shall provide independent counsel to represent the insured.”

The court first determined that multiple attorneys from the same firm could act as Cumis counsel under § 2860. The court then held: “Having accepted that multiple attorneys may serve as Cumis counsel, there does not appear to be any principled grounds for requiring as a matter of law that all of those attorneys need to be employed at the same law firm. . . . Certainly § 2860 does not impose such a requirement. . . .” The court found that it was a question of fact whether the retention of a second Cumis counsel was reasonable and necessary in the circumstances.

To read the decision in Signal Products Inc. v. American Zurich Insurance Co., click here.