Part 1: The Tripartite Construct of Legal Representation in Cumis Cases
Introduction
Scope of Article
This article describes a process for assisting settlement negotiations in a narrow category of tort litigation; specifically, those cases in which the defendant is insured under a liability insurance contract which obligates the insurer to defend in the tort action. The article discusses, as a specific class of cases within this general field of tort and insurance contract litigation, those cases in which a conflict of interest arises between the defendant and his liability insurer such that the defendant is entitled to legal representation by independent counsel provided by the insurer.
As a preface to Part 2 of this article, "Progressive Negotiations", which is really the major concern of the article, Part 1 provides an overview of the law governing the principal relationships which are involved in these cases. First discussed is the insurance contract, with an emphasis on (1) the parties to the contract, (2) the insurer's two basic promises, (3) the insurer’s right to control the defense, (4) the insurer’s right to control settlement, and (5) the implied covenant of good faith and fair dealing. The purpose of this discussion is to delineate relevant lines of case authority and statutory law governing insurance contracts, particularly in reference to settlement of liability cases.
Since the inquiry is concerned primarily with settlement negotiations in the context of a Cumis case as defined below, Part 1 also addresses the distinct roles of Cumis counsel, insurer-retained counsel, and coverage counsel.
Part 2 examines some of the important process features which follow from this combination of trilemma and tripartite construct of legal representation. The discussion assumes that the negotiations occur in the context of a mediation process. The second part suggests a general conceptual and procedural framework within which the mediator can work with counsel and the parties to increase the effectiveness and productivity of settlement negotiations in Cumis cases.
Glossary of Terms
In keeping with accepted usage, independent counsel in the context of this narrow sub-field of tort law will be referred to as Cumis counsel, a reference to San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494, 50A.L.R.4th 913. This three part legal representation construct is symbolized by the mnemonic device the Cumis triangle. To complete the glossary of terms, a case which combines all these characteristic features -- the three cases described and the accompanying construct of separate representation -- may for convenience be called a Cumis case.
The "Trilemma"
Cumis cases present particular challenges in efforts to reach a negotiated resolution, whether through mediation or otherwise. First, what may be characterized in the litigation in a singular manner -- e.g., a personal injury case, a products liability case, a construction defect case, a professional liability case, and so on -- actually encompasses at least two inter-related yet distinct cases: (1) the tort action in which the principal parties are the plaintiff and the defendant-insured and (2) the liability insurance contract case involving the insurer, the insured, and ultimately the plaintiff. As to the former case, the legal analysis for the most part concentrates on the evidence and law pertinent to the principal issues of liability, damages, and defenses. For purposes of the insurance contract case, the tort case discussion is usually referred to as the liability case or the underlying case.
As to the latter case, the issues tend to be framed by of the non-coverage claim or policy defense asserted by the insurer. Other issues bearing on the litigation of the underlying case may arise, such as those over investigation, case evaluation, litigation strategy, pleading practice, motion practice, discovery, pretrial preparation, trial matters, and settlement evaluation and negotiation strategy. This second case may be described as the coverage case or the contract case.
A third factor often present in tort litigation is the set of conflicts between the insured and the insurer regarding the manner in which the insurer has performed its contractual obligations in handling the liability case. When this set of conflicts is present, then a third case is conjoined with the underlying case and the insurance contract case. This third case arises from the insured’s claim that the insurer has breached the implied covenant of good faith and fair dealing. For convenience, this case, which is predicated on the insurer’s tort liability arising from how it performed its contractual duties, will be described as the bad faith case.
These three cases -- the liability case, the insurance contract case, and the bad faith case -- comprise the main determinants of the "trilemma" which is the subject of settlement negotiations in this sub-species of tort litigation. But one factor further complicating this complex of conflict is its association with a three-part construct of legal representation.
The Construct of Legal Representation
Both common law and statute recognize that the insurer has a duty to provide independent counsel for the insured when an actual conflict of interests exists between the insurer and the insured. Generally speaking, that conflict exists because the insurer disputes its contractual obligation to indemnify the insured, in whole or in part, with respect to the liability claims asserted in the underlying action. The mechanism by which the conflict of interest is to be resolved is application of the rule that those with conflicting interests must have separate and independent legal representation.
The tension between the insured’s right to control the defense in a Cumis type situation and the insurer’s right to control settlement is a further aggravating factor which can have its most emphatic expression during settlement negotiations. By reason of the conflict, the traditional tripartite relationship of "insurer-insured-insurance defense counsel" is supplanted by a new construct of legal representation: Cumis counsel, insurer-retained counsel and coverage counsel.
The Insurance Contract
The parties
The parties to the liability insurance contract are the insurer and the insured. However, other individuals and entities may be implicated in the contract, depending on the circumstances encompassed by the underlying case or the contract case.
In the formation of the contract, agents, brokers, underwriters and others are key participants in the process by which the contract is applied for, underwritten and issued. The insurance contract may name more than one "named insured." The "omnibus" provisions of the contract’s definition of "persons insured" extends the protection of the contract to individuals not specifically named in the contract. The contract may contain an endorsement listing other persons or entities as "additional insureds."
Once the underlying claim or litigation is reported to the insurer, claims personnel will become involved in the case. Such personnel may include outside adjusters and investigators, claim representatives, supervisors, claim committees, managers, regional directors, and on certain large exposure cases, general counsel or a senior corporate officer.
Moreover, the "direct action" statute [Ins. Code §11580(b)(2)] makes the plaintiff in the underlying case a third party beneficiary of the insurance contract. See, Shapiro v. Republic Indem. Co. (1959) 52 Cal.2d 437, 341 P.2d 289. However, the plaintiff’s rights as recognized under that statute are contingent upon the requirement that the plaintiff secure a judgment whereby the liability of the insured is legally established. See, Zahn v. Canadian Indem. Co. (1976) 57 Cal.App.3d 509, 129 Cal.Rptr. 286; Johnson v. Holmes Tuttle Lincoln-Mercury (1958) 160 Cal.App.2d 290, 325 P.2d 193.
Additional complicating facts may be present. Plaintiff's action may name defendants other than the insured, or the insured may have cross-complaints against others arising out of the accident or transaction which is the subject of the underlying action. There may be more than one insurance contract which is potentially applicable to the underlying case: one or more primary, excess, or umbrella policies, to suggest a few possibilities.
This discussion suggests some of the factors affecting the number of persons actually involved in this type of case. For convenience, the discussion that follows assumes an underlying case with a single plaintiff and a single defendant.
The insurer's two basic promises
The relationship between the insured and the insurer is defined by the insurance contract. The liability insurance contract is founded on the two principal promises which the insurer makes to the insured: the promise to defend and the promise to indemnify. These are not absolute promises to provide the promised protection in every case. Both promises are conditional promises, qualified by both the coverage limitations stated in the contract’s insuring clause and coverage exclusions.
A fundamental distinction exists between the promise to defend and the promise to indemnify. The insurer’s obligation to defend must be performed before the adjudication of the insured’s liability in the underlying case. Both the insurer’s initial decision to defend -- as well as its actions taken in performance of that obligation once undertaken -- necessarily must occur prior to the determination whether the liability claim is one for which it must indemnify the insured. Accordingly, the legal test for the duty to defend is whether the action against the insured alleges a claim which is potentially within the coverage of the insurance contract. See, Buss v. Superior Court (1997) 16 Cal.4th 35, 46, 65 Cal.Rptr.2d 366, 939 P.2d 766; Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295, 24 Cal.Rptr.2d 467, 861 P.2d 263, 276-277; Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 176-277, 54 Cal.Rptr. 104, 419 P.2d 168
By contrast, the insurer’s duty to indemnify is premised on a claim which is actually, not merely potentially, covered by the policy and arises only after the insured’s liability has been established by proven or undisputed facts. See, Montrose Chemical Corp. v Admiral Ins. Co. (1995) 10 Cal.4th 645, 659, fn. 9, 42 Cal.Rptr. 324, 913 P.2d. 878; Stonewall Ins. Co. v. City of Palos Verdes Estates, (1996) 46 Cal.App.4th 1810, 54 Cal.Rptr.2d 176; City of Laguna Beach v. Mead Reinsurance Corp. (1990) 226 Cal.App.3d 822, 830, 276 Cal.Rptr. 438; but see, Aerojet-General Co. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 60-61 and 61 fn. 13, 70 Cal.Rptr.2d 118, 948 P.2d 909 (despite jury verdict finding no coverage, site investigation expenses for CERCLA cleanup are recoverable as defense costs). Consequently, the insurer may have to defend the insured in a case in which it has no duty to indemnify, either because the insured is not liable or because the insured is liable for damages not covered by the insurance contract. In this sense, the duty to defend is broader than the duty to indemnify. See, Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 108117 Cal.Rptr.2d 210, 846 P.2d 792. The duty to defend is broader in other respects, but that subject is beyond the scope of this article.
The insurer's right to control the defense
Liability insurance contracts, generally speaking, grant the insurer the right to defend the liability action against the insured. Accordingly, in the absence of a conflict of interest, the insurance contract entitles the insurer to control the defense. The insurer has the right to select the attorney who will represent the insured and ordinarily will retain an attorney from a designated panel of law firms. Counsel retained by the insurer in this fashion to represent the insured is commonly known as insurance defense counsel.
The attorney retained in this capacity represents two clients: the insured and the insurer. See, Glacier Gen. Assurance Co. v. Superior Court (1979) 95 Cal.App.3d 836, 839-842, 157 Cal.Rptr. 435; American Mut. Liability Ins. Co. v. Superior Court (1974) 38 Cal.App.3d 579, 590-593, 113 Cal.Rptr. 561; see also, Unigard Ins. Group v. Flaherty & Belgum (1995) 38 Cal.App.4th 1229, 1236, 45 Cal.Rptr.2d 565 (insurer may bring legal malpractice action against insurance defense counsel for negligence in representing insured); but see, American Casualty Co. of Reading v. O’Flaherty (1997)57 Cal. App.4th 1070, 67 Cal.Rptr.2d 539 (insurer cannot bring legal malpractice action against insurance defense counsel whom it did not retain). If during the course of this joint representation, a divergence of interest between the two clients occurs, insurance defense counsel’s primary duty of loyalty is to the insured. See, Lysick v. Walcom (1968) 258 Cal.App.2d 136, 148-149, 65 Cal.Rptr. 406, 28 A.L.R.3d 368. The manner in which the insurance defense attorney discharges that duty is determined by ethical considerations and rules of professional conduct. See, Bus. & Prof. Code Sec. 6068; Rule 3-310 (avoiding representing adverse interests).
The insurer's right to control settlement
Although the insurer's duty to indemnify is conditioned upon a judgment awarding damages that are actually covered by the policy, liability insurance contracts invariably provide that the insurer may make any settlement that it deems expedient. Pursuant to such provisions, the insurer, as a general rule, has the right under the contract to control settlement negotiations without the consent -- and even over the objection -- of the insured. See, Commercial Union Assurance Companies v. Safeway Stores, Inc. (1980) 26 Cal.3d 912, 919, 164 Cal.Rptr. 709, 610 P.2d 1038; Ivy v. Pacific Automobile Ins. Co. 91958) 156 Cal.App.2d 652, 660, 320 P.2d 140; Brown v. Guarantee Ins. Co. (1957) 155 Cal.App.2d 679, 684-685, 319 P.2d 69, 66 A.L.R. 1202.
With the notable exception of professional liability policies, most liability insurance contracts do not require that the insurer obtain the insured’s consent in order to effectuate settlement. Consequently, absent some conduct constituting bad faith, the insurer acts within its contractual rights when it refuses to voluntarily settle a liability claim against its insured and instead insists on an adjudication of the liability case on its merits. See, Clark v. Bellefonte Ins. Co. (1980) 113 Cal.App.3d 326, 169 Cal.Rptr. 832.
While the insurer has right to settle, it also has a duty to the insured to accept a reasonable settlement under certain circumstances. That duty restricts the insurer’s discretionary right of settlement by requiring that the insurer not favor its own interests over the interests of the insured. The insurer must give at least equal consideration to the interests of the insured. This duty is recognized in common law as implicit in the implied covenant of good faith and fair dealing.
The implied covenant of good faith and fair dealing
The common law recognizes significant limitations on the insurer's discretionary claim settlement power under the contract in order to protect the insured’s interests. An insurance contract, like all other contracts, is subject to an implied covenant of good faith and fair dealing. This duty is implied to ensure that neither party will do anything to injure the right of the other to receive the benefits of their agreement. Broadly stated, in the liability insurance contract, the implied covenant of good faith and fair dealing requires that in certain circumstances the insurer must accept a reasonable settlement offer on behalf of its insured even though the express terms of the policy do not impose such a duty.
Where it is likely that a judgment against the insured in excess of the policy limits will result unless the insurer accepts a reasonable settlement demand within policy limits, compliance with the implied covenant requires the insurer to settle the claim. Comunale v. Traders & General Ins. Co. (1958) 50 Cal.2d 654, 659, 328 P.2d 198, 68 A.L.R. 2d 883; accord, Isaacson v. California Ins. Guarantee Association (1988) 44 Cal.3d 775, 791, 244 Cal.Rptr. 655, 750 P.2d 297; Samson v. Transamerica Ins. Co. (1981) 30 Cal.3d 220, 237, 242-243, 178 Cal.Rptr. 343, 636 P.2d 32; Johansen v. California State Auto. Assn. Inter-Ins. Bureau (1975) 15 Cal.3d 9, 16, 123 Cal.Rptr. 288, 538 P.2d 744; Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 432, 58 Cal.Rptr. 13, 426 P.2d 173. But see, Camelot by the Bay Condominium Owners' Assn. v. Scottsdale Ins. Co. (1994) 27 Cal.App.4th 33, 38-39, 53, 32 Cal.Rptr.2d 354 (insurer did not breach implied covenant by refusing to settle underlying action for construction defects where some of the allege defects were thereafter found not to be covered and the insured was never exposed to a potential excess verdict over its policy limits.)
Conversely, an insurer's refusal to settle does not constitute a breach of the implied covenant of good faith and fair dealing when the evidence establishes that in the underlying action, the insured was not actually exposed to the potential of an excess verdict. See, Dalrymple v. United Services Auto, Assn. (1995) 40 Cal.App.4th 497, 46 Cal.Rptr.2d 845.
Faced with the potential of an excess verdict against its insured, an insurer which believes that the liability claim is not covered may enter into an agreement with the insured to reserve its right to assert a defense of non-coverage even if it accepts a settlement offer. If the insurer subsequently establishes that the claim is not covered, it may obtain reimbursement of the settlement payment from its insured. See, Johansen, supra, 15 Cal.3d 9, 19; Maryland Casualty Co. v. Imperial Contracting Co. (1989) 212 Cal.App.3d 712, 720-722, 260 Cal.Rptr. 797. The judicial policy underlying the Johansen rule is to promote settlement of tort litigation by encouraging insurers to fund the settlement in the first instance and seek reimbursement afterwards.
However, the insurer's right of reimbursement is not absolute since certain cases have established threshold requirements on which the insurer’s right of recovery is conditioned. The insurer is not permitted to seek reimbursement for a settlement unless it can prove that (1) the insured agreed -- expressly or implicitly -- that the insurer could commit the insured’s own funds to effectuate a reasonable settlement and the insurer secured specific authorization from the insured for the particular settlement at issue or (2) the insured was given an opportunity to assume the defense if it did not believe the settlement to be reasonable. See, Val’s Painting & Drywall, Inc. v. Allstate Ins. Co. (1975) 53 Cal.App.3d 576, 588, 126 Cal.Rptr. 267; compare Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 25 Cal.Rptr.2d 242 (insurer not entitled to reimbursement where it accepted defense without reserving its rights and prior to settling failed to afford insured a reasonable opportunity to assume its own defense) with Maryland Casualty Co. v. Imperial Contracting Co. (1989) 212 Cal.App.3d 712, 720-722, 260 Cal.Rptr. 797 (trial court’s order authorizing insurer’s participation in settlement without insured contractor’s consent and under a reservation of rights sufficient to preserve insurer's reimbursement claim).
Other limitations on the insurer’s discretion regarding settlement exist. An insurer may breach the implied covenant of good faith and fair dealing if it withholds permission from attorneys retained to defend the insured to negotiate or evaluate a settlement of a third party claim on behalf of the insured. See, Travelers Ins. Co. v. Lesher (1986) 187Cal.App.3d 169, 188, 231 Cal.Rptr. 791 (disapproved on other grounds by Buss v. Superior Court.
The insurer’s right to control settlement does not include the right to compromise the insured's claim for affirmative relief against a third party. See, Security Officers Service, Inc. v. State Compensation Ins. Fund (1993) 17 Cal.App.4th 887, 21 Cal.Rptr. 653 (holding workers compensation insurer had duty to act in good faith in setting claim reserves and settling claims when such activities influenced insured’s premiums and potential dividends); Barney v. Aetna Casualty & Surety Co. (1986) 185 Cal.App.3d 966, 974-975, 230 Cal.Rptr. 215 (permitting cause of action based on allegations that insurer settled complaint arising from automobile accident in manner that precluded insured’s personal injury claim); Rothtrock v. Ohio Farmers Ins. Co. (1965) 233 Cal.App.2d 616, 623, 43 Cal.Rptr. 716.
The Independent Counsel Requirement
Conflicts of interests
Notwithstanding the insurer’s right to control the defense, it must relinquish that control whenever it accepts the insured’s defense under a reservation of rights which creates a conflict of interest in which the issues in the liability case bear some relation to the insurer’s non-coverage claim or policy defense. See, Civil Code sec. 2860; San Diego Federal Credit Union v. Cumis Society, Inc. (1984) 162 Cal.App.3d 358, 364, 208 Cal.Rptr. 494, 50 A.L.R.4th 913; Executive Aviation, Inc. v. National Ins. Underwriter (1971) 16 Cal.App.3d 799, 810, 94 Cal.Rptr. 347. In such cases, the insured is entitled to select independent counsel to represent his or her interests alone. Civil Code sec. 2860, subd. (c). In these circumstances, the insurer must still pay for the defense, including the attorneys’ fees of independent counsel, subject to certain limitations. Civil Code sec. 2860, subd. (c).
Ordinarily, the conflict of interest which triggers the independent counsel requirement arises by virtue of the insurer’s reservation of rights letter. Such a letter most often is issued by the insurer in response to the insured’s tender of defense which, usually but not always, occurs early in the underlying litigation. Thus, generally speaking, the issues regarding designation of the attorney who will represent the insured are typically resolved at the outset of the litigation. As a practical matter, determination of such representation is imperative in order for the litigation to proceed. However, a conflict between the insured and the insurer may arise at some subsequent stage of the litigation.
Consequently, even where the insurer does not reserve its rights at the inception of the underlying case and thereby maintains control of the defense, including its right to retain counsel of its choice, its duty to provide independent counsel may thereafter arise. For example, the insurer has a duty to provide independent counsel if a conflict arises in the course of settlement negotiations. See, Golden Eagle Ins. Co. v. Foremost Ins. Co. (1993) 20 Cal.App.4th 1372, 1394-1395, 25 Cal.Rptr.2d 342; Bogard v. Employers Casualty Co. (1985) 164 Cal.App.3d 602, 609, 210 Cal.Rptr. 578.
Civil Code section 2860 is not the exclusive authority for the independent counsel requirement. Section 2860 does not preclude judicial determination of conflict of interest and the insurer’s duty to provide independent counsel. See, United States Fidelity & Guaranty Co. v. Superior Court (1988) 204 Cal.App.3d 1513, 1525, 252 Cal.Rptr. 320. The basis for that requirement is not a duty expressed in the insurance contract but the ethical duty of insurance defense counsel to avoid representing conflicting interests. See, San Diego Federal Credit Union v. Cumis Society, Inc. (1984) 162 Cal.App.3d 358, 364, 208 Cal.Rptr. 494, 50 A.L.R.4th 913. The ethical propriety of insurance defense counsel’s continued representation is governed by a more comprehensive rule: a conflict of interest between the insured and the insurer occurs whenever their common lawyer's representation of the one is rendered less effective by reason of his or her representation of the other. See, Spindle v. Chubb/Pacific Indemnity Group (1979) 89 Cal.App.3d 706, 713, 152 Cal.Rptr. 776.
One observation bears emphasis. As indicated above, a conflict may arise at any stage of the proceedings in the underlying action. The insurer’s retention of insurance defense counsel the inception of the litigation does not mean that the insurer has fully discharged that duty. The means by which that duty must be fulfilled may change with changed circumstances.
The attorney-client relationship
An attorney provided by the insurer to represent the insured as Cumis counsel has but one client: the insured. See, J.C. Penney Casualty Ins. Co. v. M.K. (1991) 52 Cal.3d 1009, 1018, 278 Cal.Rptr. 64, 804 P.2d 689, cert. den. (1991) 502 U.S. 902, 112 S.Ct. 280, 116 L.Ed.2d 232 (noting that the purpose of requiring Cumis counsel is to protect the insured’s interests.); State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 1226, 265 Cal.Rptr. 372 (noting that the Cumis rule requires complete independence of counsel when the insurer interposes a reservation of rights that creates a conflict of interest.); Accordingly, no attorney-client relationship exists between Cumis counsel and the insurer; Cumis counsel represents only the insured with regard to the defense of the underlying action. See, Employers Ins. Co. of Wausau v. Albert D. Seeno Construction Co. (N.D. Cal. 1988) 692 F.Supp. 1150, 1157.
Consequently, Cumis counsel has no duty to the insurer regarding the manner in which the defense of the insured is conducted, and conversely, the insurer has no right of action against Cumis counsel for negligence in handling the defense of the insured. See, Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 81, 90, 38 Cal.Rptr. 25 (Cumis counsel is not liable to insurer for negligence in failing to assert statute of limitations defense to action against the insured).
Nevertheless, Cumis counsel owes certain statutory duties to the insurer. However, these duties imposed on Cumis counsel by Section 2860, subd. (d) and (f) do not establish an attorney-client relationship between Cumis counsel and the insurer. See, Haven, supra, 32 Cal.App.4th at 90; Seeno, supra, 692 F.Supp. at 1157-11158.
Furthermore, there is no ethical requirement that prevents Cumis counsel from representing the insured in insurance coverage litigation adverse to the insurer. See, Seeno, supra, 692 F.Supp. at 1157-1158. Therefore, Cumis counsel can serve the insured as trial counsel in litigation arising out of the coverage dispute, as well as trial counsel in the liability action against the insured.
The duties of independent counsel
The duties which Cumis counsel owes to the insurer are prescribed by Civil Code section 2860. Cumis counsel is obligated "to disclose to the insurer all information concerning the action except privileged materials relevant to the coverage dispute." Civil Code sec. 2860, subd. (d). Cumis counsel also has a duty "timely to inform and consult with the insurer on all matters relating to the action." Civil Code sec. 2860, subd. (d).
Another duty is triggered whenever the insurer has exercised its right to provide -- in addition to Cumis counsel -- separate counsel for the insured regarding the underlying action. In this situation, Cumis counsel has a duty to "co-operate fully in the exchange of information that is consistent with each counsel’s ethical and legal obligation to the insured." Civil Code sec. 2860, subd. (f).
To summarize, Cumis counsel has statutory duties (1) to inform and consult with the insurer in a timely manner, (2) to disclose to the insurer all non-privileged information, and (3) to co-operate in exchanging information with insurer-retained counsel.
The insurer has a right of action against Cumis counsel for negligent breach of these statutory duties to disclose, inform, consult and co-operate. But, thus far at least, the breach is actionable only when it concerns non-privileged information known to Cumis counsel and precludes the insurer from asserting a complete defense to the entire action, or to a cause of action, against the insured. See, Haven, supra, 32 Cal.App.4th 78, 81, 90.
Scope of retention
Although Cumis counsel is not ethically precluded from representing the insured regarding the disputed coverage issues and in related coverage litigation, the insurer is not responsible for attorney’s fees and costs incurred in connection with Cumis counsel’s work in such litigation. See, Seeno, supra, 692 F.Supp. at 1157, fn. 10. By the same reasoning, the insurer, generally speaking, should not be responsible for Cumis counsel’s fees solely related to the disputed coverage matters which precede the coverage litigation or which are incurred when no such litigation ensues.
However, there may be circumstances where Cumis counsel's activities regarding other coverage matters bear a reasonable relation to the defense of the liability action, relieves the insurer of work that would otherwise be necessary in the course of the insurer’s investigation, or in some other way inures to the mutual benefit of both insurer and insured. In such cases, it is not unreasonable to require the insurer to bear the burden of such fees and costs in discharging its duty to defend. Cf., Buss v. Superior Court (1997) 16 Cal.4th 35, 53, 65 Cal.Rptr.2d 366, 939 P.2d 766 (insurer obligated to pay defense costs allocable jointly to claims that are at least potentially covered and those that are not).
Control of defense : Control of settlement
Since the purpose of Cumis counsel is to place the defense of the liability action under the control of counsel retained by the insured, a crucial question over the extent of that control arises when the underlying action reaches the settlement phase of the case.
When the insurer is required to provide Cumis counsel for the insured, Civil Code section 2860 subd. (f) requires that such counsel be allowed "to participate in all aspects of the litigation." Such participation necessarily would extend to the settlement phase of the liability case. How is the right of Cumis counsel "to participate in all aspects of the litigation" affected by the insurer's right to control settlement? Conversely, what effect does the relinquishment of control over the defense have on the insurer's contractual right to control settlement?
As a general rule, Cumis counsel's right to control the defense of the action does not extend to preventing the insurer from exercising its contractual right to settle the claim as it sees fit. See, Western Polymer Technology, Inc. v. Reliance Ins. Co. (1995) 32 Cal.App.4th 14, 22-23, 38 Cal.Rptr.2d 78 (insurer did not violate §2860(f) by negotiating a settlement within policy limits over insured's objection that settlement was excessive and injured its business reputation). The fact that the insured is entitled to Cumis counsel does not, by itself, abrogate the insurer's right to control settlement.
Further, an insurer is exonerated from liability for settlement if the insured's personal counsel, having failed to respond to the insurer's reasonable requests that he identify the nature of the actual conflict entitling the insured to independent counsel, thereafter excludes insurer-appointed counsel from settlement negotiations. See, Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 71 Cal.Rptr.2d 882.
Nevertheless, as indicated above, under certain circumstances, the insurer's discretion regarding settlement is circumscribed by reason of the implied covenant of good faith and fair dealing.
Insurer-retained Counsel
In addition to Cumis counsel, the insurer may provide other counsel for the insured to participate in the third party action. See, Civil Code sec. 2860, subd. (f). Such counsel shall have an "ethical and legal obligation to the insured." Ibid. Such liability defense counsel cannot, absent informed consent of the insured, be the same counsel representing the insurer because otherwise they are subject to the ethical dilemma that mandates the provision of Cumis counsel in the first place. See, Seeno, supra, 692 F.Supp.1150, 1160, fn. 14 (Such counsel are "essentially just a second Cumis counsel."). Consequently, this second attorney, although retained by the insurer, represents the insured only and so is not retained in the capacity of traditional insurance defense counsel, who is deemed to represent both the insurer and the insured.
Insurer's Coverage Counsel
Nature of the retention
Insurer may retain coverage counsel for any of a number of reasons. At the inception of the underlying case, the insurer may request counsel provide a coverage opinion regarding its obligations in response to the insured's tender. The insurer may request advice or an opinion whether the insurer is obligated to provide independent counsel. Coverage counsel's retention may also include some investigatory duties regarding coverage issues or the obligations of other insurers or parties.
Once the insurer assumes the defense, counsel may be asked to monitor Cumis counsel's activities in the underlying case or even to assist in some limited aspects of liability case evaluation or pretrial preparation in the underlying action. The insurer may request a review of Cumis counsel's billing statements and practices to ensure they comply with the insurer's guidelines and reflect work that falls within the scope of the insurer's obligations.
When the underlying case moves into the settlement phase, the insurer may look to coverage counsel for advice and assistance regarding its obligations with respect to settlement. It may also seek assistance and advice regarding contribution, subrogation or indemnity claims. Finally, the insurer may retain coverage counsel to initiate a declaratory relief action or to respond to one brought by the insured, a third party or another insurer. In any event, the insurer will usually be represented by coverage counsel in connection with the settlement negotiations of any case involving significant coverage issues.
Attorney-client relationship
Even though an insurer has retained independent counsel to represent the insured, it still has the right to retain separate counsel to represent its own interests. See, Bogard v. Employers Casualty Ins. Co. (1985) 164 Cal.App.3d 602, 614, 210 Cal.Rptr. 578; Executive Aviation, Inc. v. National Ins. Underwriters (1971) 16 Cal.App.3d 799, 809, 94 Cal.Rptr. 347; Lysick v. Walcom (1968) 258 Cal.App.2d 136, 149-150, 65 Cal.Rptr. 406, 28 A.L.R.3d 368. Counsel retained by the insurer to represent its interests with respect to the third party claim against the insured represents the insurer only. The fact that such an attorney may have a role in assisting in the handling of liability disputes does not establish an attorney-client relationship with the insured, nor does the insurer's counsel owe any ethical duties to the insured. See, Employers Ins. Co. of Wausau v. Albert D. Seeno Construction Co. (N.D. Cal.1989) 692 F.Supp. 1150, 1160-1161.
An insurer's communications with its own counsel -- i.e., one not retained to defend the insured -- are privileged notwithstanding Evidence Code section 962, the joint-client exception to the attorney-client privilege. See, Houston General Ins. Co. v. Superior Court (1980) 108 Cal.App.3d 958, 966-967, 166 Cal.Rptr. 904; accord, State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 265 Cal.Rptr. 372; Native Sun Investment Group v. Ticor Title Ins. Co. (1987) 189 Cal.App.3d 1265, 1276-1277, fn. 2, 235 Cal.Rptr. 34 (memorandum prepared by counsel retained by title insurer to represent its interests after meeting with counsel retained by insurer for insured is not subject to Evidence Code §962).
Since counsel engaged for the insurer represents the insurer only, such counsel may represent the insurer in a coverage dispute adverse to the insured without being subject to disqualification for improper concurrent representation of adverse interests. See, Seeno, supra, 692 F.Supp.1150, 1158-1161.
Claim file administration
The requirement of separate and independent legal representation for the insured in conflict of interest situations raises a question regarding the insurer's claims handling practices and procedures. Both Cumis counsel and insurer-retained counsel must communicate with the insurer in order to fulfill their respective obligations, but are they permitted to report to the same individual in the insurer's claims department? Arguably, the insurer's employee who is responsible for the liability claim file should not be privy to the communications from the insurer's coverage counsel. The premise for this limitation is that the liability claim supervisor should not be influenced by whether the insurer's coverage counsel believes that there are grounds for disclaiming coverage for the liability claim. Such a prophylactic measure has thus far been rejected.
The fact that the same claim representative of the insurer who communicated with Cumis counsel also communicated with coverage counsel for the insurer does not operate as a waiver of the attorney-client privilege between the insurer and its coverage counsel. State Farm Fire & Casualty Co. v. Superior Court (1989) 216 Cal.App.3d 1222, 265 Cal.Rptr. 372 (holding no requirement that insurer segregate liability case from coverage case with separate adjusters for each); accord, Employers Ins. of Wausau v. Albert D. Seeno Construction Co. (9th Cir. 1991) 945 F.2d 284 (denying injunction to require segregation of claims file for liability and coverage cases).
Insurance Counsel for the Insured
Cumis counsel
As a practical matter, Cumis counsel will often be required, at least to some extent, to advise the insured regarding coverage issues in dispute before any coverage litigation actually commences. As noted above, Cumis counsel is not ethically precluded from representing the insured in coverage litigation arising out of the liability action in which he or she acted as trial counsel for the insured. When Cumis counsel acts in such a dual capacity, he or she may or may not be assisted by another attorney acting as insurance counsel for the insured.
However, the insured is under no obligation to retain Cumis counsel in this additional capacity, and Cumis counsel may, for various reasons, decline to undertake such representation. Consequently, it is not uncommon for yet another attorney to become involved in representing the insured. This attorney may be described most accurately as insurance counsel, or coverage counsel, for the insured.
Nature of retention
The representation provided by insurance counsel for the insured is closely analogous to that provided by his or her counterpart: coverage counsel for the insurer. The retention of insurance counsel creates an attorney-client relationship between that counsel and the insured, who is the sole client. Insurance counsel for the insured has no attorney-client relationship with the insurer and has no ethical duties to the insurer.
If a declaratory relief action is concurrently pending with the liability action, insurance counsel may be retained to act as trial counsel in the coverage action. Alternatively, insurance counsel may be retained to advise and assist the insured, and Cumis counsel, regarding the coverage issues in dispute and responding to the insurer's non-coverage claims or policy defenses. In this latter respect, insurance counsel may prepare one or more opinion letters to be sent to the insurer. Such letters may serve various purposes: to refute the insurer's interpretation and application of the policy provisions in dispute, to challenge the insurer's statement of California law governing its obligations, to provide information not previously known to the insurer, or to point out other errors or omissions in the insurer's coverage investigation or analysis.
As the liability case moves into the settlement phase, insurance counsel will analyze the insurer's settlement obligations and communicate to the insurer how those obligations must be fulfilled to protect the insured's interests and will also respond to letters from the insurer or its coverage counsel regarding such matters. Ordinarily, insurance counsel will be present at the mediation as both adviser and advocate regarding the disputed coverage issues and may assist in other ways on behalf of the insured in the resolution of the case. Insurance counsel may also have a role in dealing with issues between Cumis counsel and the insurer arising under section 2860 such as fees, costs, and billing practices.
Part 2: Progressive Negotiations
This article concerns itself with settlement negotiations of a certain type of tort case that has been called a Cumis case. Such a case is not a single case but is really three separate but inter-related cases: the liability case, the insurance contract case and the bad faith case. These three cases comprise the trilemma to which the title alludes. In addition, a Cumis case involves a three-part construct of legal representation due to the need for separate representation of conflicting interests on the defense side. This distinguishing feature is represented in the reference to the Cumis triangle.
As a necessary preface to what follows, the first part of this article examined the law governing certain aspects of the relationships which are involved in Cumis cases. The next part of the discussion describes, in the context of a mediation, some of the more important process features that distinguish the settlement negotiations in these cases and suggests a conceptual framework within which the mediator can work with trial counsel to advance the negotiations toward an agreed resolution.
The Mediation within the Mediation
Patterns of Conflict
In the type of case under consideration, the problematic, traditional tripartite relationship between insurer, insured, and insurance defense counsel is supplanted by a complex construct of legal representation: a troika consisting of independent counsel, insurer-retained counsel, and coverage counsel. The interactions within this troika are another factor influencing the patterns of conflict which crystallize as the underlying case proceeds to the settlement phase. Ultimate success in negotiations and satisfaction with the process depends in large part upon an identification of and appreciation for the varied interests which each attorney represents.
Developing an effective approach to this unique array of counsel is one of the primary challenges in progressing toward meaningful negotiations. As a preliminary matter, this task generally involves consideration of the priority of issues on the defense agenda and may even require a re-ordering of those priorities. Ordinarily, the mediator will already have some idea of the facts, issues and positions from written statements submitted in advance by the parties and sometimes also through preliminary telephone conferences. Such information may also emerge in the course of the discussions which take place in the initial joint session, where all counsel, clients, and any other participants in the process are present. Usually, however, as with the information previously provided, the principal subject for discussion will be the underlying case.
For obvious strategic reasons, the defense will not consider the joint session to be an appropriate forum to discuss the coverage issues or any other matters that are the source of disagreement amongst themselves. Regardless of the nature, extent and volatility of those conflicting interests, the troika of counsel invariably do agree on the advantage of maintaining a united front for purposes of the liability case, at least at this juncture.
As previously discussed, generally speaking, two primary conflicts subsist in any case in which the insurer is obligated to provide independent counsel. Perhaps most fundamentally, there is the conflict which triggered the independent counsel requirement. Generally, but not always, this conflict first arises in connection with the reservation of rights letter issued by the insurer at the time it accepted the tender of defense. The precise nature of each conflict will depend on the particular facts of the individual case, but two general categories of conflict may be suggested: one concerning the existence or scope of the insurer's indemnity obligation; the other concerning the existence or scope of the duty to defend. In either event, to the insured and his counsel the conflict arises because the insurer refuses to provide the full measure of protection promised by the policy.
Even in cases where there is no dispute over the duty to defend, a separate set of problems may arise over the conduct of the defense by Cumis counsel. Such disputes inhere in the tension between the insured's right to control the defense and the insurer's right to control settlement of the underlying case. This tension may be further aggravated by the subjective reactions of the insurer's claims personnel to the obligation to pay for a defense they do not control. By way of illustration, typical disputes include those over the necessity of and funding for investigation or discovery, pleading and motion practice, claims against other parties or insurers, case evaluation, and settlement negotiation strategy. Without exhausting the possible catalogue of such disputes, they could also include disagreements between the insurer and Cumis counsel over permissible hourly rates, billing practices, and compliance with statutory duties under section 2860.
The chief consequence of these conflicts is to threaten a deadlock in the critical threshold negotiations which must occur before the matters bearing on resolution of the underlying case can be addressed. This deadlock effectively precludes the defense from formulating a unified response to that claim, which is far different from simply maintaining the appearance of a united front. A stalemate between the insurer and the insured over the coverage issues in the contract case prevents the parties from reaching any serious discussion, much less agreement, regarding the underlying case, as to which they share a common purpose: "to avoid or at least minimize liability." See, Buss v. Superior Court (1997) 16 Cal.4th 35, 46, 65 Cal.Rptr.2d 366, 939 P.2d 766.
For these and other reasons, the first caucus usually provides the first opportunity for any substantive exploration of the conflicts of interests which exist solely on the defense side of the case.
The First Caucus
As should appear from the preceding discussion of the conflicting interests which necessitate the troika of counsel in the first place, the mediator's first caucus with the defense side may most sensibly be viewed as a "mediation within a mediation."
At this juncture, one approach is to begin in a joint session with all counsel and parties present. One advantage of such an approach is to provide an opportunity for the defense to concentrate on the issues, problems, interests, positions and concerns that pertain to the underlying case. This approach may be helpful in meeting other needs of the defense, such as identifying additional information that is needed from the plaintiff; revealing strategic information that the defense preferred to share in private with the mediator; clarifying certain points at the mediator's request; providing the mediator with a response to specific points made in the joint session by the plaintiff.
In this initial phase, as a general proposition, it is usually better for the parties to refrain from expressing opinions regarding settlement value or verdict value of the plaintiff's case. At this stage, unless there have been extensive negotiations prior to the mediation, any discussion of what should be paid and how it should be paid may be premature and prove counterproductive. Subject to this cautionary note, the further advantage of this approach is that it can help identify any disagreements on the defense side regarding an assessment of the plaintiff's case. If there is unanimity among counsel regarding that assessment, then a set of issues may have been eliminated, allowing the defense to proceed to the divisive contract issues on a more positive foundation. Sometimes, the process of achieving an agreement regarding the underlying case can help to open channels of communication between parties and counsel. This approach will not always obtain such favorable results. For any of a number of reasons, counsel may be unwilling meet in joint session or they may prefer that the mediator caucus separately with each party before meeting in joint session. In any event, the greater challenges arise over issues bearing on how a settlement offer to the plaintiff will be funded.
The difficulties posed by this initial caucus, for all participants, should not be underestimated. Almost without exception, the requisite patience and helpful communication tools will be in short supply. A combination of factors frequently have operated to deplete these personal resources and capabilities before the mediation has even begun. The patterns of conflict discussed above yield a harvest of bitter fruit: a history of mutual distrust throughout the litigation; anger on all sides over wrongs--real and imagined; highly aggressive bargaining positions taken by parties and counsel; subjective reactions arising from the human disposition to personalize the conflicts; concerns about the prospect of real and dire consequences should the case not be resolved on acceptable terms; and a host of other factors too numerous to list here.
Funding settlement proposals
The discussion of how to fund the settlement payment may begin in either a joint session or private caucus. Although the mediator will usually have a process preference, the choice will ordinarily be determined by the preferences of the parties. On occasion, the insurer will have informed the insured about what it is willing to offer the plaintiff even before the mediation. Other times, the insured does not know until the mediation. In any event, if the insured has not been so informed, Cumis counsel will usually demand not only that the insurer settle the case but that it disclose to the insured what it is willing to offer.
If the insurer and insured are able to reach agreement on the issue of apportionment, the negotiations concerning the underlying case can begin. In the ordinary case, though, a prompt resolution on this issue is rare, and as a practical matter, will occur only if the insured has sufficient assets to fund that portion of the settlement which the insurer refuses to pay. At the stage of the process where the insurer and insured are focused on the issue of apportionment, the mediation within the mediation will take the form of a series of caucuses in which the attention of the mediator is devoted primarily on the contract case. In this phase, the active discussions now involve coverage counsel for the insurer and the insured and much less Cumis counsel and insurer-retained counsel. These discussions usually proceed in joint session but may occur in private caucus or in both.
Progressive Negotiation Structure
Prioritizing Issues and Interests
Implicit in this discussion is the view that an effective approach to resolving these overlapping cases is one that includes some form of a progressive negotiation structure. In each case the particular contours of that structure will vary depending on a number of circumstances. Among those various factors are the choices and decisions regarding the order in which the three cases, and the underlying interests of the parties which they implicate, are addressed. Once sufficient attention to the underlying case has been given to reach a consensus amongst the defense reflecting an agreed evaluation and general strategy, experience suggests the following order of prioritization.
First, the insurance contract case must be discussed in such a way as to allow a complete understanding of the respective interests and concerns of the insurer and insured. This is best accomplished in that phase of the process which was been described as "the mediation within the mediation." The logic of the process derives in part from the inter-relationship between the underlying case and the contract case. Bilateral negotiations between the plaintiff and defendant cannot take place until and unless the conflicts between the insurer and the insured have been fully identified, explored and discussed. One objective will be to explore feasible avenues by which the contract case may be resolved in a mutually satisfactory manner. But where this is not possible, other options may be available. In some circumstances, the interests of the principals may be served by agreeing to disagree and to suspend for the moment the contract dispute. This may be useful in situations where shifting the focus to the underlying case may satisfy their common interest in eliminating or restricting the underlying claim. On other occasions, the insurer and the insured may be able to agree on an interim funding agreement to settle the underlying case and defer resolution of the contract issues for another mediation session or subsequent litigation, arbitration, or some other process.
Second, if the contract issues have been resolved or at least deferred in such a way as to allow a response to plaintiff's settlement demand, attention can be directed to the underlying action against the insured. This shift of focus serves the common interest shared by the insurer and the insured in securing a "cap" on the potential liability exposure, thereby limiting the potential risks faced by both in that case and also the "stakes" involved in the contract dispute. In some cases, the collaboration which is necessary in the steps toward resolution of the underlying case may also mitigate the impetus driving any potential bad faith claim. Once the underlying case is resolved, generally sufficient groundwork has been established to prepare the way for a third set of issues to be addressed, those previously deferred in connection with the contract case and others arising in connection with any claim of bad faith asserted by the insured. This set of negotiations may also address any countervailing ancillary claims which the resolution of the underlying case now permits the insurer to place on the table. Such claims may include reimbursement claims against the insured for some or all of the defense costs, contribution claims against other insurers, and indemnity or subrogation claims against other parties.
Building Consensus and Ratifying Settlement Terms
The approach outlined here, consisting of a series of separate, progressive negotiations, is effective for a number of reasons. First, the problems which inhere in the conflicts of interests between insured and insurer are best approached seriatim to enable counsel and their respective clients to gradually work through what initially appears to be an impenetrable morass. A progressive negotiation structure is best suited for accommodating the complex of conflicting interests which necessitates the tripartite construct of legal representation in the first place. The "mediation within the mediation" provides the opportunity for those interests to be addressed and affords a process compatible with the requirements of the negotiation process as affected by the inter-relationship between the underlying case and the insurance contract case.
Second, as a practical matter, the legal and factual complexities presented by such cases alone are of sufficient magnitude to inhibit attempts to resolve them in a single marathon session. Rather, to promote efficient and informed decision-making, the process must allow adequate time for deliberation regarding the options available to the principals. A vital component of this aspect of the process is to allow time for the advice and consent of counsel and clients concerning the legal and pragmatic implications of their decisions.
Finally, stakeholders and constituencies whose participation is necessary in the decision-making process are often too numerous for inclusion in a single mediation session. This is especially so for insurers due to multiple levels of settlement authority inherent in their hierarchical decision-making structure. The claim adjuster, usually the insurer's representative at the start of the mediation, will often discover that the settlement authority which he brought to the session is insufficient in light of information which has emerged in the course of the mediation. For negotiations to progress, he or she will invariably need to report these developments to a supervisor, a claim committee, a claim manager or some other superior at a higher level of decision-making authority. Such communications will normally increase the time required to commit to the negotiation. Where the insurer's claim department is located in another part of the country or where it is essential for such more senior claims personnel to become directly involved in the negotiations, additional time will be needed. Once the key terms of settlement have been "agreed to" by the negotiators at the table, a similar process ensues as the approval of those not present in the mediation may be required in order to ratify settlement terms. Consequently, more time is necessary than if all "final decisions-makers" were present at the outset of negotiations.
Phasing Sequential Settlements
The approach generally outlined here increases the chances for resolution in these challenging cases. In the individual case, the scope of the resolution will depend on a number of factors which operate independently of the experience, subject matter expertise, skill, talent, resourcefulness and patience of the mediator.
A global settlement, in which settlement of the underlying case is accompanied by a contemporaneous, collateral resolution of the contract and bad faith cases as well, may sometimes be achieved, at least where the parties and counsel are still willing and able to negotiate with the insurer.
Even when the underlying case is resolved without a simultaneous settlement of the contract or bad faith cases, further negotiations between the insurer and the insured may follow. When such negotiations are feasible and desired, a consideration of when to begin this phase of the negotiations deserves careful consideration. For example, when the negotiation of the underlying case has been particularly difficult, it may be helpful to delay negotiations on the remaining issues and allow a "cooling-off" period for both the parties and their counsel. During this period, the mediator can follow-up with counsel and often effectuate considerable progress so that when participants return to the negotiating table, circumstances will be more auspicious for settlement, both in terms of parties' confidence in the mediation process and in their progress toward reconciling their substantive positions with one another.
However, there are many instances where the attempt to settle the underlying case ends in stalemate. Usually, the impasse occurs because due to certain coverage issues, the insurer refuses to pay all or part of the proposed settlement. Almost invariably, it is this impasse over the insurer's indemnity obligation that thwarts a resolution of the underlying case in mediation.
The insurer's decision not to settle
An insurer's refusal to fund a settlement predicated on its denial of coverage for the liability claim or damages has important consequences for the insured, the negotiations, and the process. Foremost, such a position leaves the insured with an uninsured liability exposure potentially threatening his or her personal and financial well-being.
Second, the tenor of the negotiations undergoes a qualitative change. The conflict between the insurer and the insured now reaches its zenith, and the antagonisms among counsel comprising the troika are most intensely expressed. Counsel for the insured will assert, sometimes with justification, other times without, that the insurer is in bad faith for refusing to fund the settlement.
More pragmatically, in the context of the attempt to reach a negotiated settlement, the insurer's decision not to contribute or to limit its contribution presents the challenge of how to fund the settlement of the underlying claim. In the resulting impasse, the options for resolution, especially from the standpoint of the insured, diminish markedly, but certain courses of action remain which can be explored through the concluding stages of the progressive negotiation approach.
Under California law, when the insurer's decision not to fund the settlement is based on a denial of coverage, the insurer relinquishes its right to control settlement of the underlying case. Since the insurer will not furnish the insurance proceeds to fund the settlement, it has no right to decide the matter with the insured's own money and no longer has a financial interest in the outcome of the underlying case.
In this scenario, the critical decisions essential to any potential resolution of the underlying case now rest with the insured. Accordingly, this phase of the progressive negotiation may involve one or more caucuses with the insured, Cumis counsel and coverage counsel to discuss how to proceed in light of the insurer's decision. Again, the course chosen will depend on a variety of considerations, including Cumis counsel's evaluation of the cases, the insured's willingness to negotiate directly with the plaintiff, and, most important, the financial resources available to the insured to use in funding a settlement offer.
Where such resources are sufficient, the insured may decide to fund the settlement offer either entirely or in combination with whatever contribution the insurer has agreed to make. On occasion, even where the financial resources are limited, the insured may be able to offer plaintiff some other form of compensation such as dismissal of a cross-complaint for affirmative relief, waiver of another claim, release or reduction of some collateral obligation owed by plaintiff, assumption of risk or responsibility on behalf of the plaintiff, or even some form of non-monetary compensation. Whenever the insurer makes a contribution to settlement of the underlying case, that contribution will be part of an agreement which includes mutual reservation of rights to litigate the contract and bad faith claims against the insurer. In such an action, the insured will seek to recover the amounts paid in settlement and other consequential damages.
The more problematic cases are those in which the insured lacks the financial resources to fund a settlement as to which the insurer refuses to participate or limits its participation. One course of action available to the insured is an agreement with the plaintiff whose principle terms are the insured's assignment of the rights to the plaintiff and the plaintiff's covenant not to execute. The underlying case is not settled but proceeds to judgment after trial. Recent judicial decisions have significantly curtailed the availability of stipulated judgments as the means of establishing the insured's liability and consequential damages on which the insurer's indemnity obligation is predicated.
The assignment and covenant not to execute serves the insured's interest in avoiding personal liability for the underlying claim and being relieved of the necessity of involvement in a second round of litigation. Nevertheless, an action against the insurer of the contract and bad faith claims survives, to be brought by the plaintiff as assignee or judgment creditor. Moreover, the insured may join that action to recover damages which are not assignable.
Improving Communication
Since the authors are mediators as well as lawyers, this discussion would be incomplete if before concluding, it failed to offer some observations under the general heading of communication -- or, to be more precise, improving communication.
It is a truism that effective communication is an important element of any process whose objective is progress toward a satisfactory resolution of the case. What is important to emphasize is that there are different approaches to communication and that the very existence of those differences signifies a range of choices which in turn increase or diminish the prospects for a satisfactory resolution.
Naturally enough, in the context of litigation, most prevalent is what may be called an advocacy approach to communication. Advocacy animates the myriad tasks and skills of the lawyer's art: to take, articulate and defend a position; to support a client's claim or assert a client's defense; and countless other actions taken on behalf of the client. In its most positive light, the purpose of such communication is to influence and persuade.
By education, experience, and temperament, most trial attorneys rely principally on this method of communicating. Indeed, within the framework of our system of adjudication, the inherent nature of the profession of trial advocacy demands it.
The progressive negotiation structure outlined here respects the advocacy approach to communication and recognizes its essential importance in the adjudicatory process. Yet it is also true that advocacy alone is rarely sufficient to bring the parties to a negotiated resolution. In addition, the talents and contributions of the lawyer as adviser and counselor are required. These include communication skills beyond those encompassed in advocacy.
From this perspective, the preferred approach to communication is a composite of conversation, dialogue and deliberation, which by encouraging responsibility and participation seeks the common ground on which agreement can rest. Further elaboration is beyond the scope of this discussion, but two articles of faith which underlie this approach can be stated. When people can be brought together in such a way that they are really communicating, newly perceived options can arise out of that dialogue. Second, when a certain quality of connection is established between people joined in a negotiation, the quality of the conflict itself will change.
Conclusion
This discussion of the progressive negotiation strategy is hardly exhaustive. Drawing on the authors' experience in Cumis cases, it seeks to describe an approach compatible with the some of the particular challenges which they represent. The aim here is to make an informed beginning toward a more comprehensive framework defining the structures and processes through which settlement negotiations may bear fruit. Although the discussion has been limited to Cumis cases, the approach suggested here has relevance in other contexts where similar --or greater-- complications exist.