When your real estate broker license and reputation are being attacked with a civil lawsuit, and insurance carrier issues a “reservation or rights” letter, you might need to request “Cumis Counsel” to protect your interests. California Civil Code Section 2860.
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It is the rare broker that goes through their entire real estate career without being sued in a state or federal lawsuit for this or that, and also somewhat rare for a California real estate licensee (salesperson or broker) NOT to have errors and omissions insurance to help indemnify the broker in case the lawsuit results in a monetary loss due to “errors” and/or “omissions.” In other words, most policies cover brokers for general negligence actions that occur during the course of residential and commercial real estate transactions, property management transactions, and mortgage brokering of loans.
But some many claims made against real estate brokers go beyond alleging merely ONE CAUSE OF ACTION FOR NEGLIGENCE. What often happens in Plaintiff’s counsel asserts MANY different causes of action when filing a civil complaint in either State or Federal Court. The old saying is “throw everything at the wall and see what sticks” might come to mind. At any rate, when these “other claims” (ex. non-negligence claims) are asserted against the real estate broker or business client, the insurer may issue a “reservation of rights letter” which means they will “pickup your defense” but if one of the other causes of action come to fruition, then they reserve the right to deny coverage and deny your defense.
This blog discusses this somewhat complicated legal issue.
Typical Broker E & O Policy
There are many different types of insurance companies that provide E&O insurance coverage for real estate brokers. For Example Lloyds of London, CRES insurance services, etc. These companies will typically issue a real estate broker general liability policy, for example with coverage up to 1 million dollars. The policy will also usually have a deductible (ex $2,500 deductible), and will cover certain types of acts, errors, and omissions. As mentioned above, perhaps the policy will only cover you for claims of general negligence. But what happens if a Plaintiff in a real estate transaction decides to sue you for everything and names every cause of action thinkable in filing their state or federal lawsuit. See cause of action list below for common legal grounds real estate brokers are sued.
Common types of legal claims made against real estate brokers
The following are the types of causes of action (or Counts as they are sometimes called) that can be made against you in a real estate case in California or Arizona where we practice real estate law for nearly a decade now.
2. Negligence / professional negligence
3. Intentional misrepresentation
4. Negligent misrepresentation
5. Conversion or comingling of broker trust funds (ex. property manager)
7. Breach of fiduciary duty (ex. self dealing, breaching the duty of loyalty)
Obviously, there are many other types of claims that can be brought in a lawsuit.
What is a “reservation of rights” letter?
A reservation or rights letter is issued by the insurance carrier who is insuring the insured. The letter basically says “hi we have to pick up your legal defense for the negligence claim alleged against you per the terms of the insurance policy we agreed to, however, we reserve our rights to come back after you if one of the other causes of action the Plaintiff alleges proves to be true (ex. breach of fiduciary duty or fraud), and we reserve our rights to come back at you for and to deny a coverage obligation on our end. By the way, we selected a lawyer to defend you.
If you are astute, you might be scratching your head just hearing this, but in the world of real estate E & O (and in other arrangements where licensed people have million dollar insurance policies (or policies for more or less than that), this is pretty much how the ROR letters work.
Who gets to select the defense attorney to represent the broker-defendant?
The insurance company gets to “control the defense” which is interesting in and of itself. I guess the theory being it is their money to lose if they lose the case. But they get to appoint the insurance defense law firm that will represent the broker (while also representing the insurer’s best interests and following their instructions). This creates an inherent conflict of interest. The insurance company would rather not pay the claim so they want to find items that are not covered so that they do not have to pick up the coverage (yes, that’s being cynical, but I think most of us understand “its all about the money”). Yet the Client, wants the case to be all about general E & O so that he/she is not stuck with the bill if the insurance carrier decides they will not be defending you any more. Its a dog eat dog world. So the insured, where there is a “reservation of rights” needs to be a little suspicious and play watchdog with their insurance carrier. I have witnessed this first-hand at my law firm.
When must the attorney for the Insurance company have to recuse their law firm from representing the parties?
The insurance company appoints the defense counsel to represent the real estate broker. IF the situation becomes such that an irreconciable conflict exists with the client (the broker) and the insurance company and the insurance defense counsel (i.e. their claims and interests are not aligned following a reservation of rights letter) then the Attorney may not be able to stay on to defend the insurance company without creating risks to their bar cards.
An attorney may have to withdraw from a case if there is a “conflict of interest”. In some cases, the conflicts can be waived with full disclosure to all parties and signed written consent. However, some conflicts go to the core of attorney-client representation and in these cases, the conflict cannot be waived (ex. an inherently unwaivable conflict of interest). In these circumstances, where the attorney or insurance law firm cannot adequately represent the client (i.e. where their desire to represent the interests of the insurance company – need to get future business from them – over rides their duty to zelously advocate for their clients, the law firm must recuse themselves from the case so that the broker client can get a fair shot at defending themselves, their reputation, and in some cases protect their real estate licenses from further discipline from the California Bureau of Real Estate (“BRE”).
Does a real estate broker in California have a legal right to have Cumis counsel appointed at the cost of the insurer?
When the broker has tendered the defense to the carrier, and the insurance carrier picks up the defense, and appoints defense counsel, once the case is investigated the broker may receive a “reservation of rights letter (“ROR”). This is basically the carriers way of signaling to all parties that a divergent conflict exists (for example, if in an real estate broker case alleging negligence – which IS covered, and Breach of Fiduciary duty (for broker engaging in self dealing), the Carrier may feel it is obligated to defend on the general negligence claim, but may defend the other claims with a “RESERVATION OF RIGHTS” which means if you lose on one of the non-covered claims, you may be liable to your insurance carrier for their costs of defense and you could be denied their defense and duty to pay out and indemnify you for any losses. It’s a tricky situation.
In United Enterprises, Inc. v. Superior Court, 183 Cal. App. 4th 1004, 1010-11, 108 Cal. Rptr. 3d 25, 30 (2010) the Court discussed this issue:
“California courts have addressed the real and potential conflicts that arise between the insurer and insured in the layers litigation involving coverage and defense of third party common law claims for personal injury, property damage, and, more recently, statutory claims for environmental cleanup. See San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 208 Cal.Rptr. 494 (Cumis ), superseded by Civ.Code, § 2860. The courts in each case considered the divergent interests of the insured and insurer with the aim that each would receive a fair trial of coverage and liability issues at the appropriate time. Here, the court ruled that the interests of the insurer and insured were best served by sealing the summary judgment record and allowing the declaratory relief action to proceed. The difficulty with that resolution is that the court lacked discretion to fashion the alternative remedy in the circumstances of this case.”
TIP: Some California Courts may require an ACTUAL CONFLICT OF INTEREST as opposed to a potential Conflict of Interest. See Fed. Ins. Co. v. MBL, Inc., 219 Cal. App. 4th 29, 35, 160 Cal. Rptr. 3d 910, 915 (2013), review denied (Nov. 26, 2013) which discussed:
“MBL retained defense counsel, who tendered the defense of the Lyon action to the Insurers, requesting they appoint Cumis counsel. The Insurers accepted the tender of defense subject to various reservations of rights, detailed below, and appointed counsel to defend MBL. MBL refused to allow the Insurers’ appointed counsel to associate as defense counsel, asserting it was entitled to independent counsel of its own choosing pursuant to Civil Code section 2860. The Insurers advised MBL it was only entitled to Cumis counsel if their reservations of rights created a conflict of interest and, with the exception of Great American, refused to pay the defense costs incurred by MBL’s counsel.”
“The problem with MBL’s claim is that neither Federal nor Utica reserved their rights to decline coverage under the qualified pollution exclusions set forth in their policies. Where the insurer has not expressly reserved its right to deny coverage under a particular exclusion in its policy, there can be no actual conflict based on the application of that exclusion during the pendency of the action. (Dynamic Concepts, supra, 61 Cal.App.4th at p. 1010, fn. 10, 71 Cal.Rptr.2d 882.) MBL’s argument that Federal and Utica, by way of including a general reservation of rights in their letters, somehow incorporated specific reservations of rights on their respective qualified pollution exclusions is unavailing. A general reservation of rights does not give rise to a conflict of interest or create a duty to provide independent counsel.
California Cumis Counsel Law
(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.
(c) When the insured has selected independent counsel to represent him or her, the insurer may exercise its right to require that the counsel selected by the insured possess certain minimum qualifications which may include that the selected counsel have:(1) at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation, and;(2) errors and omissions coverage.
(d) When independent counsel has been selected by the insured, it shall be the duty of that counsel and the insured to disclose to the insurer all information concerning the action except privileged materials relevant to coverage disputes, and timely to inform and consult with the insurer on all matters relating to the action. Any claim of privilege asserted is subject to in camera review in the appropriate law and motion department of the superior court. Any information disclosed by the insured or by independent counsel is not a waiver of the privilege as to any other party.
(e) The insured may waive its right to select independent counsel by signing the following statement: “I have been advised and informed of my right to select independent counsel to represent me in this lawsuit. I have considered this matter fully and freely waive my right to select independent counsel at this time. I authorize my insurer to select a defense attorney to represent me in this lawsuit.”
(f) Where the insured selects independent counsel pursuant to the provisions of this section, both the counsel provided by the insurer and independent counsel selected by the insured shall be allowed to participate in all aspects of the litigation. Counsel shall cooperate fully in the exchange of information that is consistent with each counsel’s ethical and legal obligation to the insured. Nothing in this section shall relieve the insured of his or her duty to cooperate with the insurer under the terms of the insurance.
In Dynamic Concepts v. Truck Ins. Exch., 61 Cal. App. 4th 999 (1998), the California Court of Appeals held that:
“Not every reservation of rights entitles an insured to select Cumis counsel…….the conflict must be significant, not merely theoretical, actual, not merely potential.”
Other California courts have also held that an actual, significant conflict exists where the facts of the underlying case between the insured and third party are determinative of whether coverage exists under the policy and the insurer-appointed counsel is in a position to control such coverage issues. See Long v. Century Indem. Co., 163 Cal. App. 4th 1460 (2008).
What can Cumis counsel do for you if you still have an insurance company lawyer on the case?
If the carrier in the example above issues you a “reservation of rights letter” agreeing to defend you in the general broker negligence claim, while reserving their rights on claims made against you such as fraud, breach of fiduciary duty or other cases of action like fraud, financial elder abuse and misrepresentation. If this is the case, and if you feel like you cannot even discuss your case with your current counsel given their desire to be able to deny your claim one day, you need to consider asking the insurance company to provide you with Cumis counsel (paying all or some of your attorneys hourly rate), highlighting the fact of the conflict of interest, and how the defense attorney was not fighting the case the same way you would. An insurance company has a duty to defend, but the question is what type of defense are you going to get if the carrier really just wishes they could deny coverage if you can be found guilty of an intentional act, or even a breach of fiduciary duty (which is a cause of action often filed in a real estate broker lawsuit, and a cause of action that can trigger the reservation of rights letter mentioned above).
What can cumis counsel do for you in your civil lawsuit?
We can help protect and defend your legal rights and seek to minimize your legal exposure. As mentioned above, we cooperate with your insurance counsel to the extent required. We can oversee your defense and make sure your proper legal arguments are made, and to make a case that your damages that result, it any, should be covered by the insurance company.
Contact one of our California real estate lawyers to discuss your lawsuit, defense, and whether Cumis counsel can be demanded in your case. To discuss retaining Cumis counsel in your case, call us at (877) 276-5084. Or to have one of our lawyers call you, please leave your name and phone number below and we can reach out to you, normally within the hour.
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