A carrier issued two CGL policies, and when the insured tendered their defense of a lawsuit under the policies the carrier initially denied a duty to defend, claiming the occurrences took place prior to the policy periods.  After the insureds filed a lawsuit against their insurer, the carrier agreed to defend under a reservation of rights, but declined to provide and pay for independent counsel, or Cumis counsel, pursuant to the California Supreme Court decision in San Diego Fed. Credit Union v. Cumis Ins. Society Inc. (1984) 162 Cal.App.3d 358.

When the court granted the insureds’ motion for summary adjudication, it held that the carrier not only had a duty to defend, but also had a duty to retain independent Cumis counsel.  The carrier then paid over $15 million in fees and costs incurred by Cumis counsel, but in an effort to seek reimbursement of certain fees, the carrier then filed a cross-complaint against the Cumis firm for reimbursement of fees incurred in unrelated, uncovered matters, fees incurred for uninsured entities, pre-tender fees and any unnecessary and unreasonable fees. 

The Court of Appeal first recognized that certain protections were normally available to the carrier under Civil Code Section 2860, including a provision limiting the hourly rates paid to independent counsel, and the right to arbitrate the fee issues.  But the carrier was deemed to have forfeited those 2860 protections due to its refusal to accept tender of the defense.

Secondly, the Court recognized that an insurer may very well have a right of reimbursement under Buss v. Superior Court, (1997)16 Cal.4 35, but the novel question before the Court was, “from whom?”  

Reasoning that due to the important policies created by 2860, the court held that the breach of 2860 meant that the carrier lost all right to control the defense, and that consequently the carrier should not be able to obtain the same result by seeking reimbursement from the firm after the fact.  The insured was left to negotiate the fee arrangement with the firm on its own, and otherwise control the defense of the action, so the carrier was not allowed to seek reimbursement in a direct action against the firm. 

But the Court also limited its holding to the facts of the case, explicitly stating that the decision did not apply to carriers seeking reimbursement from the insureds directly, and did not apply to those situations where the carrier may be claiming that independent counsel utilized fraudulent billing practices.