National Trends and Implications Concerning Reservation of Rights: What Every Insurance Professional Must Know

By Thomas Paschos, Esq. of Thomas Paschos & Associates, P.C.

Insurance carriers and coverage professionals are often confronted with a variety of issues related to the duty to defend and the duty to indemnify. The duty to defend is generally broader than the duty to indemnify. The duty to defend is based upon allegations and potential coverage. A suit that triggers the duty to defend does not necessarily mean there is coverage.
A situation arises when the claims alleged include both covered and uncovered claims or where there appears to be a question as to whether the claims alleged fall within the scope of coverage. Under these circumstances, the insurer will often agree to defend its insured through a reservation of rights letter. A reservation of rights letter creates difficult choices for both the insurance company and the policyholder. As such, this election by the insurance company can result in issues other than coverage or policy limits.
Reservation of Rights Triggers Right to Independent Counsel

A reservation of rights letter will effectively inform the insured of potential conflicts with its insurer. In some jurisdictions, such potential conflicts may give the insured the right to independent counsel. The leading national case addressing the rights of policyholders with the respect to the right to independent counsel in “conflicts” cases is San Diego Federal Credit Union v. Cumis Ins. Society, 162 Cal. App.2d 358 (1984). Under the Cumis doctrine, when an insurer agrees to defend its insured under a reservation of rights, a conflict exists between the insurer and insured. In those instances, the insured has a right to retain independent counsel to be paid for by the insurer, commonly referred to as “cumis counsel.”


Several jurisdictions have adopted the position set forth in Cumis that the issuance of a reservation of rights constitutes a per se conflict of interest. These jurisdictions have determined that a policyholder is entitled to representation by independent counsel whenever the insurer issues a reservation of rights. Those states include: Florida, Kentucky, Louisiana, Massachusetts, Missouri, Texas, and Washington.
Three years after Cumis was decided, the California State Legislature enacted Civil Code section 2860 modifying Cumis and limiting the duty of an insurer to provide independent counsel. Where the Cumis court required an insurer to provide independent counsel merely because of a potential conflict of interest, the statute imposes a duty only where “a conflict of interest arises” and states that a conflict does not necessarily arise simply because the insurer has reserved its rights.
Similar to California, several other jurisdictions have held that the existence of a reservation of rights letter does not automatically give rise to a conflict of interest between the insurer and the insured with regard to the conduct of the insured’s defense and instead determine whether independent counsel is necessary based on (1) whether the insurer would be able to direct the policyholder’s defense in a manner adverse to the insured on the disputed coverage issue and/or (2) which party (insurer or insured) bears the greater financial stake in the underlying litigation.
The jurisdictions that require an actual or potential conflict include: Alabama, Alaska, Arizona, Arkansas, California, Hawaii, Illinois, Kansas, Maine, Maryland, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Carolina, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Utah, and Vermont.
Almost all courts find a conflict of interest where the underlying complaint alleges mutually exclusive covered and non-covered theories of recovery, such as negligence and intentional torts, because of the danger that an insurer might deliberately defend the policyholder in a manner that would result in a finding of liability only on non-covered claims.
Issues Related To Control of Defense  

Once it is decided that the insured is entitled to independent counsel and that the insurer is responsible to reimburse this counsel, issues frequently arise as to the conduct of the defense. These issues include (1) the reasonableness of the attorney’s fees and expenses and attempts by an insurer to manage litigation costs; (2) whether the insurer or the policyholder controls the defense; and (3) whether the insurer or policyholder controls settlement.

Reasonableness of Defense Costs

Carriers argue that they should only be required to pay independent counsel the rates that they normally pay their defense counsel. Some carriers now include provisions in their policies stating this position. Similarly, Alaska and California have enacted statutes declaring that in independent counsel situations, the reasonableness of defense costs must be measured from the carrier’s perspective based upon what the carrier typically pays defense counsel.
However, courts generally hold that the insurer’s obligation extends to reimbursing counsel for its “reasonable” fees and expenses incurred in conducting the defense. See San Diego Navy Fed. Credit Union v. Cumis Ins. Soc., Inc., 208 Cal. Rptr. 494 (Ct. App. 1984). There is a vast amount of case law from each jurisdiction that defines what constitutes a reasonable fee for independent counsel.

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