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insured reserving its right to assert a defense of non-cov- erage even if it accepts a settlement offer on behalf of the insured. If, having reserved such rights and having accepted a reasonable offer, the insurer subsequently establishes the non-coverage of its policy, it would be free to seek reim- bursement of the settlement payment from its insured. Jo- hansen v. Cal. State Auto. Assoc. Inter-Ins. Bureau, 15 Cal. 3d 9, 123 Cal .Rptr. 288, 538 (1975); Forum Ins. Co. v. County of Nye, Nev., 26 F.3d 130 (9th Cir. (Nev.) 1994).
Reimbursement of Defense Costs
The insurer has a duty to defend the insured as to the claims that are at least potentially covered by the insurance policy. With regard to defense costs for these claims, the insurer has been paid premiums by the insured. It bargained to bear these costs. To attempt to shift them would upset the arrangement. Val’s Painting & Drywall, Inc. v. Allstate Ins. Co., 53 Cal. App. 3d 576, 582-585, 126 Cal. Rptr. 267 (1975). This would not be the case if the policy itself provided for re- imbursement: such a policy would qualify itself. It would also not be the case if there were a separate contract supported by separate consideration. Such a contract would supersede the policy pro tanto. Apart from these exceptions, the insurer may not seek reimbursement. Buss v. Superior Court, 16 Cal. 4th 35, 939 P.2d 766 (1997).
As to the claims that are not even potentially covered, however, the insurer may indeed seek reimbursement for defense costs where reserved. Under the policy, the in- surer does not have a duty to defend the insured as to the claims that are not even potentially covered. With regard to defense costs for these claims, the insurer has not been paid premiums by the insured. It did not bargain to bear these costs. To attempt to shift them would not upset the arrange- ment. Ins. Co. N. Am. v. Forty-Eight Insulations, 633 F.2d 1212, 1224-1225 (6th Cir. 1980) (applying Illinois and New Jersey law, but speaking generally). The insurer therefore has a right of reimbursement that is implied in law as quasi- contractual, whether or not it has one that is implied in fact in the policy as contractual. Buss v. Superior Court, 16 Cal. 4th 35, 939 P.2d 766 (1997).
In a “mixed” action, where some claims are covered and others are not, the insurer may recover defense costs that can be allocated solely to the claims that are not even potentially covered by the policy. Buss v. Superior Court (Transamerica Ins. Co.), 16 Cal.4th 35, 53 (1997).Generally, a party desiring relief must carry the burden of proof thereon. Courts have found no exception for an insurer seeking reim- bursement for defense costs, therefore the burden of proof is on the insurer. Thus, in order to obtain reimbursement from the insured for costs incurred defending such claims, the insurer must prove, “by a preponderance of the evi- dence,” that the claims were not even potentially covered. Id.
Conflicts of Interest and Independent Counsel
The landmark case on independent counsel came from California in 1984. In San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc., the insurance company undertook the defense of its insured, retained a firm, and notified the attorneys of that firm and the insureds them- selves that the insurance company was reserving its rights to disclaim coverage with respect to possible punitive awards. The insureds then retained independent counsel.
The court held that when an insurer reserves its right to assert non-coverage at a later date, a conflict of interest is created between the insurer and the insured. In this situa- tion, “the insured has a right to independent counsel paid for by the insurer» and a right to control his defense, if he so chose. 162 Cal. App. 3d 358, 361, 208 Cal. Rptr. 494 (1984) (emphasis added). If representation by insurer-selected counsel begins and a conflict of interest is subsequently discovered, the insurer’s counsel must cease to represent the insured unless the insured gives informed consent to the continued representation. Id.at 375.
In 1987, the Cumis decision was codified by California Civil Code § 2860, which provides, in sum and substance:
(a) When an insurer has a duty to defend under
a policy, and conflict of interest arises such that the insured requires independent counsel to represent its interests, the insurer must provide such counsel unless the insured “expressly waives [the right to independent counsel] in writing.”
(b) Outright denial of coverage does not create a conflict of interest; “however, when an insurer reserves its rights on a given issue, [the outcome of which]
can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of inter- est may exist.» (emphasis added) Allegations of punitive damages or suits in excess of policy coverage do not, alone, constitute a conflict of interest.
(c) The insurer has the right to require that the insured-selected independent counsel meet certain qualifications of competency and experience. The fees to be paid may be limited to the fees that the insurer usually pays similar counsel for similar litigation in the same location.
(d) The insured and its independent counsel have a duty of timely disclosure to the insurer.
(e) The insured may waive its right to independent representation in writing.
(f) Insurer-selected counsel and insured-selected independent counsel shall work together on overlap- ping parts of the litigation, subject to limits of ethical
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