Weekly Law Resume - July 18, 2013: Insurance Coverage – Attempted Recovery of Independent Counsel Fees

by Low, Ball & Lynch
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J.R. Marketing, L.L.C. et al. v. Hartford Casualty Insurance Company
Court of Appeal, First District (June 11, 2013)

Under the Independent Counsel provisions of Civil Code Section 2860, a carrier that defends has certain controls over the payment of attorney’s fees to independent or “Cumis” counsel. This case considered the ability of a carrier to recover what it felt to be excessive fees from independent counsel when it had not initially agreed to defend its insured.

Hartford had issued commercial general liability policies to Noble Locks Enterprises, Inc. and J.R. Marketing, LLC. Both of these parties were sued in an action for alleged intentional misrepresentation, breach of fiduciary duty, and other business related intentional and negligent claims in Marin County Superior Court. The matter was tendered to Hartford for defense and indemnity, and Hartford declined coverage, on the grounds, among others, that the acts complained of occurred prior to the inception date of the policies issued by Hartford.

Hartford ultimately agreed to defend Noble Locks and J.R. Marketing, but not until after they brought a coverage lawsuit, and even then, Hartford did not provide for Cumis counsel until ordered to do so and to pay outstanding bills by orders of the trial court in that action. The trial court at one point ordered Hartford to pay all outstanding invoices of attorney’s fees within 15 days and to pay “all future reasonable necessary defense costs within 30 days of receipt.” The order acknowledged that to the extent Hartford sought to challenge fees and costs as unreasonable or unnecessary, it could do so by way of reimbursement after settlement of the underlying action. The order also provided that Hartford was barred from invoking the protective provisions of Civil Code Section 2860, because Hartford “has breached and continues to breach its defense obligations.”

Subsequently, in 2009, the underlying action was resolved. Hartford was provided with fees and costs for defending J.R. Marketing, Noble Locks and others totaling over $15,000,000. Hartford paid these charges, and then filed a cross-complaint in the coverage action against the independent counsel retained by J.R. Marketing and Noble Locks, seeking reimbursement of monies paid under the enforcement order, unjust enrichment, accounting and rescission. Hartford alleged that the law firm submitted improper invoices “under the auspice of the enforcement order,” and that Hartford had a right to reimbursement of “all unreasonable or unnecessary fees.” The trial court sustained a demurrer to the cross-complaint without leave as to the firm, and a judgment of dismissal was subsequently entered. Hartford appealed.

The Court of Appeal affirmed. The primary issue raised by Hartford on appeal was whether it had a quasi-contractual right to maintain a direct action against Squire, the independent counsel of its insured for reimbursement of excessive or otherwise improperly defense fees and costs.

The Court of Appeal first noted that under well-established California insurance law, an insurer has the right to control defense and settlement of a third party action against its insured, so long as no conflict of interest arises between the insurer and the insured. Once a conflict of interest arises, the insured is entitled under Civil Code section 2860 to independent counsel at the insurer’s expense. The Court also noted that although independent counsel owes certain limited duties to the insurer (mainly related to sharing non-privileged information), there is no attorney-client relationship between Cumis counsel and the insurer.

The Court also noted that there are certain protections to the insurer related to the fees charged by Cumis, including the rates actually to be paid, and for arbitration of any disputed amounts. However, to take advantage of these provisions, an insurer must meet its duty to defend and accept the insured’s tender of defense, subject to a reservation of rights. The Court of Appeal held that even though Hartford ultimately reconsidered its position, it had “undisputedly” failed to meet its duty to defend and accept tender of the defense, thereby forfeiting its rights to rely on the statutory protections of section 2860 and to otherwise control the defense.

Turning to whether there was any other basis for right of reimbursement, the Court noted that under the laws of restitution, such a right runs against the person who benefits from “unjust enrichment” and in favor of the person who suffers loss thereby. Prior case law had discussed the potential unjust enrichment of an insured provided a defense where there was no coverage for the claims being defended. This did not extend to a claim for unjust enrichment against the lawyers defending the insured, because this would be contrary to public policy. A carrier who refused its defense obligations would otherwise have a right to sue the attorneys directly, whereas one who fulfilled its defense obligations would only have the right to arbitration against its insured for excessive fees. This would encourage, rather than discourage, carriers from meeting their obligations. The Court of Appeal held that the law would not sanction this inequitable result. The Court noted that if Hartford had a claim for reimbursement from anyone, it would have been its insureds that were defended in the action.

The judgment against Hartford on its cross-complaint was affirmed.

COMMENT

This case confirms that courts will not offer relief on Cumis counsel fees to a carrier who does not meet its obligations to defend the case upon tender from its insured. Rather, the carrier should follow the statutory provisions of Civil Code section 2860 in such an action to insure its ability to control or limit such fees.

For a copy of the complete decision see:

http://www.courts.ca.gov/opinions/documents/A133750.PDF

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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