Often when an HOA gets sued, the insurance
company for the HOA agrees to defend the homeowner association under a
“reservation of rights”.
This means the insurance company reserves its right to later deny the claim should facts be discovered that would justify the denial of coverage. The minute a homeowner association defendant receives a reservation of rights letter from the insurance company, the HOA has a conflict of interest with both its insurance company and the law firm they have hired.
In the landmark 1984 Cumis decision, the California Court of Appeal Stated:
We conclude the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage.
If the insured does not give an informed consent to continued representation, counsel must cease to represent both. Moreover,
in the absence of such consent, where there are divergent interests of the insured and the insurer brought about by the insurer’s reservation of rights based on possible noncoverage under the insurance policy, the insurer must pay the reasonable cost for hiring independent counsel by the insured.
The insurer may not compel the insured to surrender control of the litigation … Disregarding the common interests of the two diverge to such an extent as to create
an actual, ethical conflict of interest warranting payment for the insureds’ independent counsel.
The law firm of Michael T. Chulak & Associates is available to act as Cumis Counsel for homeowner associations that are defending lawsuits where they have received a reservation of rights letter from their insurance company.