## Facts

- A former employee sued a credit union and two officers seeking compensatory and punitive damages, alleging claims including wrongful discharge and intentional infliction of emotional distress.
- The insureds tendered the defense to their liability insurer under policies excluding coverage for intentional acts.
- The insurer agreed to defend but issued a reservation of rights, asserting it could later deny coverage depending on whether the insureds’ conduct was intentional.
- The insureds retained independent counsel to protect against the coverage conflict and sought payment of those fees from the insurer.
- The insurer initially paid some bills but then refused further payment, claiming no disqualifying conflict existed.

## Issues

1. Whether an insurer that defends under a reservation of rights must pay for independent counsel selected by the insured when disputed coverage depends on facts to be developed in the underlying action.

## Decision

- The Court of Appeal affirmed the judgment for the insureds.
- The court held that where a reservation of rights creates an actual conflict because coverage turns on issues being litigated and developed in the underlying case, the insured is entitled to independent counsel.
- The insurer must pay the reasonable past and future fees and costs of that independent counsel.

## Legal Principles

- An insurer’s duty to defend includes providing a conflict-free defense consistent with the implied covenant of good faith and fair dealing.
- A reservation of rights does not automatically require independent counsel; the right arises when the reservation creates a genuine conflict over coverage-related issues that defense counsel can influence through factual development, litigation strategy, or settlement.
- When insurer-appointed counsel would effectively represent clients with divergent interests on coverage-determinative facts, counsel cannot provide undivided loyalty to the insured, and independent counsel at the insurer’s expense is required.

## Conclusion

Because the insurer’s reservation of rights placed coverage at issue on facts to be litigated in the underlying case (intentional versus non-intentional conduct), the resulting conflict entitled the insureds to independent counsel paid by the insurer.


San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y, Inc., 162 Cal. App. 3d 358 (Cal. Ct. App. 1984)