The Current Status of the Cumis Doctrine in Colorado

• Jurisdiction: Colorado,United States
• Citation: Vol. 26 No. 7 Pg. 97
• Pages: 97
• Publication year: 1997

26 Colo.Law. 97 Colorado Lawyer 1997.

1997, July, Pg. 97. The Current Status of the Cumis Doctrine in Colorado

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97

Vol. 26, No. 7, Pg. 97

The Colorado Lawyer
July 1997
Vol. 26, No. 7 [Page 97]

Specialty Law Columns
Tort and Insurance Law Reporter
The Current Status of the Cumis Doctrine in Colorado
by Dino A. Ross, Richard L. Shearer
C 1997 Richard L. Shearer and Dino A. Ross

This article discusses whether the insured has the right to select defense counsel, at the insurer's expense, when an insurer issues a reservation of rights. This concept is commonly known as the "Cumis doctrine."

Colorado Law of Coverage And Defense

Colorado law requires insurers to provide a defense with respect to claims asserted against an insured.1 However, an insurer's duty to defend arises only when the complaint against the insured alleges facts that state a claim for which there is, or may be, coverage under the policy.2 If it is unclear whether a theory of recovery has been pled which would give rise to coverage, the insurer must accept defense of the claim.3

Generally speaking, every policy of insurance has two aspects: (1) providing defense of claims against the insured and (2) providing coverage in the form of indemnification of the insured for any liability arising from a covered claim up to the policy limits. The duty to defend is generally broader than the duty to provide coverage.4 The insurer's duty to defend is separate and independent from the insurer's duty to provide coverage. As a result, a conflict may arise between the insurer and its insured with respect to who should select (and pay for) defense counsel in situations where the insurer accepts the defense but issues a reservation of rights with respect to coverage

For example, insurers often issue a reservation of rights letter which denies, or which reserves the insurer's right to deny, coverage with respect to some, but not all, of the claims against an insured. Insurers often issue reservation of rights letters where the complaint sets forth alternative claims based on the same facts (such as the insured's conduct was negligent and/or reckless), and where the complaint requests alternative or cumulative forms of relief (such as compensatory damages, punitive damages, and injunctive relief).

Some insurance policies limit the amount the insurer will pay toward "injunctive claims." Some policies exclude coverage for non-economic claims, or certain types of claims, such as claims for reinstatement or back pay by former employees. If an insurer believes that one or more of the claims against the insured are outside the scope of coverage as a result of exclusions or limitations of coverage for non-economic losses or equitable relief, it may issue a reservation of rights letter.5

Regardless of the insurer's good faith in issuing the reservation of rights letter to the insured, once a reservation of rights letter is issued there is a clear conflict of interest between the insurer and the insured. At a minimum, there exists the risk that the insurer may be tempted to direct any liability of its insured from covered to noncovered claims, or to focus the defense or settlement of the claim in a way that favors the insurer. The appearance of, and potential for, a conflict of interest between the insured and the insurer is exacerbated where the defense attorney selected by the insurer is regularly or exclusively employed by the insurer to defend its insureds.

In addition to providing for defense of the insured for covered claims and claims that may be covered, most policies of insurance provide that the insurer will have the right to select defense counsel. The issue then becomes one of whether the conflict of interest created by an insurer's reservation of rights entitles the insured to select "independent" counsel to be paid by the insurer, notwithstanding a provision in the policy unequivocally giving the insurer the right to select counsel.

The Cumis Doctrine

The issue of whether an insured has the right to select independent defense counsel whose fees will be paid by the insurer, as a result of the insurer's issuance of a reservation of rights, was addressed in the landmark case of San Diego Federal Navy Credit Union v. Cumis Insurance Society, Inc.6 In Cumis, the insured, an employer, was sued by a separated employee for $750,000 compensatory and $6.5 million punitive damages for wrongful discharge, breach of the covenant of good...