Conflict-Of-Interest – Independent Counsel: California Federal Court Affirms Policyholder Right To Use Multiple Firms As Independent Counsel

A California Federal Court, applying California law, has held that policyholder Signal Products, Inc.’s (Signal) utilization of two law firms as independent counsel was not per se unreasonable.  Signal makes and sells Guess? products.  Signal became embroiled in an intellectual property lawsuit brought by Gucci.  Signal was represented in the underlying litigation by one firm, while another firm (Signal’s longtime outside general counsel) also assisted with Signal’s defense.

Signal filed a summary judgment motion against its insurer, claiming that Cal. Civil Code § 2860 does not preclude Signal from hiring a second law firm to act as independent counsel.  Section 2860 codified the common law doctrine that, where the policyholder and its insurer have a conflict of interest, the policyholder is entitled to independent counsel , i.e., Cumis counsel.   See San Diego Navy Federal Credit Union v. Cumis Ins. Society Inc., 162 Cal. App. 3d 358 (1984).  In relevant part, § 2860 states:  “[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.  In finding that multiple attorneys from different firms could act as Cumis counsel, the court 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, however, ultimately denied Signal’s summary judgment motion, holding that there were issues of fact regarding whether the retention of a second Cumis counsel was reasonable and necessary for the defense of the underlying action.   Signal Products, Inc. v. American Zurich Ins. Co., No. 2:13-cv-04581-CAS-AJW (C.D. Cal. August 4, 2014).

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