Employers Insurance v. Albert D. Seeno Construction Co.
1988 U.S. Dist. LEXIS 8367, 692 F.Supp. 1150, 1988 WL 79795 (1988)
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Rule of Law:
Independent 'Cumis' counsel, retained by an insured but paid for by an insurer due to a conflict of interest, represents only the insured and is not precluded from representing the insured in a coverage dispute against the insurer. A party's right to disqualify opposing counsel for a conflict of interest is waived if the party knowingly fails to assert that right promptly.
Facts:
- Employers Insurance of Wausau ('Wausau') issued insurance policies to Albert D. Seeno Construction Company ('Seeno'), a real estate developer.
- Buyers of several hundred homes built by Seeno brought claims against the company for various alleged construction defects.
- Seeno submitted these claims to Wausau, but a dispute arose over whether the policies covered the defects, leading Wausau to reserve its rights to deny coverage.
- Due to this conflict of interest, Seeno engaged the Archer, McComas & Lageson ('Archer') firm as independent 'Cumis' counsel to defend against the homeowners' claims, with the costs paid by Wausau.
- Wausau retained its own counsel, the Robins, Zelle, Larson & Kaplan ('Robins') firm, to represent its interests.
- Ernest B. Lageson, a partner at the Archer firm, had previously been a partner at the Bronson firm, which had a long history of representing Wausau in liability cases.
- Lageson joined the Archer firm in July 1986, and Wausau was aware of his move and his firm's representation of Seeno in matters adverse to Wausau.
- Wausau continued to pay Archer's bills, including those for Lageson's work, for over a year before objecting to the representation.
Procedural Posture:
- Employers Insurance of Wausau filed a declaratory judgment action against Albert D. Seeno Construction Company in the U.S. District Court for the Northern District of California (court of first instance).
- Seeno asserted counterclaims against Wausau for breach of contract, bad faith, and fraud.
- During the proceedings, Wausau filed a motion to disqualify Seeno's counsel, the Archer firm.
- Seeno responded by filing a cross-motion to disqualify Wausau's primary counsel, the Robins firm.
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Issue:
Does an attorney-client relationship exist between an insurer and the independent 'Cumis' counsel selected by the insured, thereby precluding that counsel from representing the insured in a coverage dispute against the insurer, and can a former client waive its right to disqualify counsel by delaying its motion for over a year?
Opinions:
Majority - Lynch, District Judge.
No, an attorney-client relationship does not exist between the insurer and Cumis counsel that would create a disqualifying conflict, and Yes, a former client can waive its right to disqualify by delay. Cumis counsel's duty of loyalty is exclusively to the insured, not the insurer paying the legal bills. The entire purpose of appointing independent Cumis counsel is to resolve the ethical conflict that arises when an insurer defends an insured under a reservation of rights. The court, citing precedent like Executive Aviation and the recently enacted California Civil Code § 2860, reasoned that this structure mandates separate, independent representation to guarantee the insured's interests are protected without the influence of the insurer's conflicting coverage position. Therefore, the Archer firm's dual role as Cumis counsel in the liability actions and coverage counsel in this action is not an improper conflict. Regarding the second issue, while Lageson's prior representation of Wausau was 'substantially related' to the current litigation and would ordinarily warrant disqualification of the Archer firm, Wausau waived this right. Wausau had knowledge of the potential conflict for over a year but failed to object, continuing to pay Archer's bills and interact with Lageson. This unreasonable delay, combined with the substantial prejudice Seeno would face if its counsel were disqualified at this stage, constitutes a waiver of the right to seek disqualification.
Analysis:
This decision provides a crucial clarification of the ethical duties and loyalties within the tripartite relationship involving an insurer, an insured, and insurer-paid counsel. It firmly establishes that 'Cumis' counsel's fiduciary duty is solely to the insured, thereby allowing such counsel to advocate for the insured in coverage disputes against the very insurer paying their fees. This reinforces the insured's right to genuinely independent and unconflicted representation. Additionally, the ruling underscores that attorney disqualification is an equitable remedy that can be waived, serving as a strong precedent that parties must promptly raise conflict-of-interest objections or risk forfeiting them through laches or waiver.
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