Reservation of Rights Letter
Insurance Duty to Defend. An insurance carrier's duty to defend is much broader than their indemnity obligations. Depending on the claim, the carrier may readily agree to defend the association but may not agree to pay any judgment against the association. Once the association submits a claim, the insurance carrier will evaluate the claim to determine if the policy covers the claim. When that is done, the carrier will issue one of the following letters:
- Covered Claim. The claim is covered under the policy. The carrier then appoints a law firm to defend the association. If the claim ultimately goes to trial and a judgment is entered against the association, the carrier will pay the judgment (up to its policy limits).
- Denial of Coverage. The policy does not cover the claim. For example, the insurance policy covers claims for negligence, but the association is sued for breach of contract.
- Reservation of Rights. The carrier may agree to defend the association but may refuse to pay any judgments if the matter goes to trial and the association loses. This happens most often when coverage of the underlying claim is questionable.
Negative Letter. If the carrier issues a "denial of coverage" or a "reservation of rights" letter, the board of directors should have the association's legal counsel review the letter and the association's insurance policy to determine if he/she agrees with the carrier's position. If legal counsel disagrees, the board may want to dispute the carrier's position and make further demands for coverage. It may cause the insurance carrier to revise its position.
Cumis Counsel
"Cumis counsel" refers to an independent attorney appointed to represent the association or board members in cases of a conflict of interest with the association's insurance company. Instead of insurance-appointed counsel, the association or its directors could have counsel of their choosing as provided for in Civil Code § 2860(a). The term originated in the San Diego Federal Credit Union v. Cumis Insurance Society, Inc. case.
Conflict of Interest. A conflict of interest often arises when the insurance carrier agrees to defend under a "reservation of rights." When that happens, a conflict of interest exists between the insurer's and association's economic and litigation interests. If the conflict is significant, the traditional right of the insurer to select counsel and control the defense is lost. As a result, the association may choose independent counsel and control the defense, but the insurer must pay the defense costs. Section 2860 of California's Code of Civil Procedure provides:
(a) If 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 unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel. An insurance contract may contain a provision that sets forth the method of selecting that counsel consistent with this section.
(b) For purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.