Key Decisions

September 2013 – A Pollution Exclusion Reservation Of Rights Did Not Create A “Cumis” Conflict

(filed under: Key Decisions Archive | September 24, 2013)

A Pollution Exclusion Reservation Of Rights Did Not Create A “Cumis” Conflict

Federal Insurance Company v. MBL, Inc.
(Cal. Ct. of App., 6th Dist.), filed August 26, 2013, published August 26, 2013


The federal government brought a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action against owners of a dry cleaning facility. The action was to recover the costs of monitoring and remediating the contamination. The defendants in that action filed third-party actions against MBL, Inc., a supplier of dry cleaning products, including perchloroethylene. In it, they sought indemnity, contribution and declaratory relief.

MBL tendered its defense to its liability insurance companies, including Federal Insurance Company, Centennial Insurance Company, Atlantic Mutual Insurance Company, Nationwide Indemnity Company, Utica Mutual Insurance Company and Great American Insurance Company. The insurers accepted the tender, subject to reservations of rights. They appointed counsel to defend MBL.

MBL refused to accept appointed counsel asserting the insurers’ reservations of rights created a conflict of interest and that it was entitled to “Cumis” (or independent) counsel. The insurers denied any conflict of interest and filed declaratory relief actions.

The trial court granted summary judgment in favor of the insurers, finding there was no actual conflict of interest.


The Court of Appeal affirmed.

In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984), the court held that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer’s expense. Such counsel became known as “Cumis counsel.” The principle was partially codified in 1987 by the enactment of Civil Code Section 2860.

For independent counsel to be required, the conflict of interest generally must be “significant, not merely theoretical, actual, not merely potential.”

The court rejected MBL’s contention that the “qualified pollution exclusions” in some of the policies created a conflict of interest. That exclusion eliminated coverage for property damage arising out of discharges of pollutants, but provided coverage if those discharges were “sudden and accidental.” However, to the extent insurers did not assert the exclusion as a basis for noncoverage, it did not trigger a conflict of interest.

The court rejected MBL’s contention that there was a conflict of interest because of the “absolute pollution exclusion.” It agreed with the insurers that the underlying actions arose out of pollution and sought indemnity and contribution from MBL for cleanup costs related to soil and groundwater contamination. Whether the absolute pollution exclusion barred a claim arising out of MBL’s activities was not an issue that would be litigated in the underlying actions. As such, appointed counsel could not influence the outcome of this coverage issue, which was strictly a matter of contract interpretation.

The court rejected MBL’s contention that there was a conflict of interest because there was a question of whether there was one or several “occurrences.” This question, MBL argued, impacted the limits available for payment of a judgment. However, the insurers did not reserve rights based on questions about the number of occurrences. Therefore, there was no conflict of interest.

The fact that some of the insurers provided insurance to defendants or cross-defendants other than MBL did not create a conflict of interest that gave rise to a right to “Cumis counsel.” MBL did not show how the appointed attorneys’ defense of other insureds could control coverage. The court saw any conflict arising from multiple insureds as not significant, but merely theoretical.

The fact that the insurers reserved their rights to deny coverage for liabilities for damages that occurred outside their policy periods did not create a conflict of interest. The court noted: “MBL provided no evidence to establish how defense counsel could have controlled the issue of when certain damages occurred. Defense counsel could not control the facts at issue below, such as when MBL delivered solvents to the dry cleaning facility, or when the seepages and resulting environmental contamination occurred.”

The court also held that the insurers’ “general” reservations of rights did not create a conflict of interest. Such reservations might have given rise to specific reservations and those specific reservations might or might not have triggered a conflict of interest. However, absent a specific reservation that would create a conflict, a “general” reservation would create nothing more than a theoretical conflict.


California insurers, policyholders, attorneys, and courts continue to struggle with precisely when an insured’s reservation of rights creates a conflict of interest that requires independent counsel at the insured’s expense. Courts often see no conflict of interest when policyholders simply point to the reservation of rights and argue that the reservation, in and of itself, creates a conflict of interest. Where a specific decision has to be made by the insurer-appointed attorney, and where that decision could directly impact the likelihood of coverage, courts are much more likely to find a conflict of interest that requires the insurer to pay for an independent attorney that the policyholder selects.