In an August 10, 2015 opinion, the California Supreme Court held that an insurer, ordered to appoint and timely pay for independent counsel under California Civil Code section 2860 (“Section 2860”), could later seek reimbursement directly from such counsel for excessive or unreasonable fees paid by the insurer.  See Hartford Cas. Ins. Co. v. J.R. Marketing, LLC, __ Cal.4th __ (August 10, 2015, Slip Opinion (“Slip Op.”)).  While the court’s opinion stated that is was limited to the particular facts and procedural history before the court (see Slip Op., at 3, 12-13, 23), the decision establishes that insurers are not foreclosed from seeking reimbursement directly from Cumis counsel, under appropriate circumstances.

The decision also provides helpful guidance that:

  • independent counsel is not relieved of the duty to justify that their fees are both reasonable and necessary to the insured’s defense at the time incurred (see Slip Op., at 16-17);
  • nothing in Section 2860 forecloses or requires the insurer to resolve fee disputes contemporaneously as opposed to after the conclusion of the underlying action against the insured (Slip Op., at 19); and
  • in sustaining its burden of proving that fees paid to Cumis counsel were excessive or unreasonable, the insurer must show that based on the circumstances then known to counsel, such fees were objectively unreasonable at the time they were incurred (Slip Op. at 23).

While the Hartford decision was decided in the somewhat unique circumstances before the court, it helps to further refine the obligations owed under Section 2860 by not only insurers but also by those attorneys appointed to act as independent defense counsel under the statute.

Discussion of the Hartford Decision

Background

The Hartford decision involved two CGL policies; one policy was issued to Noble Locks Enterprises, Inc. (“Noble”) and the other was issued to J.R. Marketing, L.L.C. (“J.R. Marketing”).  The policies promised to defend and indemnify the named insureds, and members and employees, against certain claims for business-related defamation and disparagement.  (Slip Op., at 3)

An action was filed against Noble and J.R. Marketing, along with several of their employees, in Marin County, California, for alleged intentional misrepresentation, breach of fiduciary duty, unfair competition, restraint of trade, defamation, interference with business relationships, mismanagement and conspiracy.  (Id. at 3-4)  Related actions were also filed in other states against many of the same defendants.  Defense of the Marin action was tendered to Hartford, which initially declined coverage.  (Id. at 4)  A coverage action ensued and, ultimately, Hartford agreed to defend subject to a reservation of rights but refused to pay for Cumis counsel and for certain defense expenses before the acceptance of the defense.  (Id.)  An order was later entered in the coverage action, finding that Hartford was required to pay for defense expenses from the date of the original tender and that it must pay for independent counsel; the law firm of Squire Sanders (“Squire”) was retained as Cumis counsel to defend the insured.  (Id., at 4-5)

The trial court issued a further order in the coverage action, drafted by Squire, which required Hartford to promptly pay all defense invoices and also found that Hartford breached its defense obligations by refusing to provide Cumis counsel until ordered to do so.  While the order stated all defense bills had to be “reasonable and necessary” to the defense, the order also stated that because of the breach, Hartford was precluded from raising the rate provisions of Section 2860.  (Slip Op., at 5)  The order further provided that after conclusion of the underlying litigation, Hartford could seek reimbursement of amounts it deemed excessive.  The order did not, however, specify from whom Hartford could obtain such reimbursement.  (Id., at 10-11)

Once the underlying action concluded, the coverage action resumed with Hartford filing a cross-complaint against certain individuals and Squire, seeking reimbursement, unjust enrichment, accounting/money had and received, and rescission.  (Id. at 5-6)  A demurrer was filed and sustained to that cross-complaint; in sustaining the demurrer as to Squire, the court held that any right Hartford had to seek reimbursement would be against its insureds and not directly from Cumis counsel.

The Court of Appeal affirmed the dismissal of Squire, finding that when Cumis counsel is provided after an insurer’s breach of its duty to defend, the insurer loses all right to control the defense and from maintaining a direct action against counsel for reimbursement of fees and costs that the insurer finds unreasonable or unnecessary.  (Slip Op., at 7-8)  The California Supreme Court granted review to decide whether an insurer, which fulfills its defense obligation and in satisfaction of a court order that expressly preserves the insurer’s post-litigation rights to recover unreasonable and unnecessary amounts billed by counsel, may seek reimbursement directly from such counsel.  (Id. at 8-9)

Decision by the Court

In reaching this issue, the California Supreme Court expressly refused to address: (1) whether an insurer that breaches its defense obligation has any right to recover excessive fees paid to Cumis counsel; (2) whether a dispute over allegedly excessive fees, as a general matter, should be decided by a court or in an arbitration under Section 2860; and (3) whether fee disputes should be decided before, during or after the underlying litigation against the insured concludes.  (Slip Op., at 9 fn.6; see also pp.23-24)

In reaching the conclusion that Hartford could seek restitution directly from Cumis counsel, the court was careful to base its findings on the particular facts and procedural history of the case before it.  (Id. at 3, 12-13, 23)  Specifically, the court found that in discharging its duties, Hartford proceeded under a court order (drafted by Cumis counsel) which required counsel’s bills to be “reasonable and necessary” and expressly provided that Hartford could challenge such bills in a subsequent reimbursement action.  (Id. at 12-13)  Notwithstanding its attempt to limit its holding to the facts of the case, the court made several observations regarding Section 2860 and obligations arising under that statute.

First, the court rejected Squire’s objection that in receiving payment from the insurer, it was just an “incidental” beneficiary of the insurance policy and, therefore, could not be subject to a reimbursement action.  The court found that Hartford’s duty to defend did not extend beyond paying reasonable costs of defense; that Squire had control of the fees it billed and received from Hartford; and that its drafting of the order, which required Hartford to pay such fees subject to a later right to seek recovery of any overpayment, helped establish that Squire was not merely a recipient of an incidental benefit under the policy.  (See Slip Op., at 13-15)

Second, the court rejected Squire’s arguments regarding public policy and procedure.  (See Slip Op., at 15-24)  The court rejected the notion that allowing the insurer to proceed directly against counsel for unreasonable fees would undermine the independence and zeal with which Cumis counsel must defend the insured.  “Although Cumis counsel must indeed retain the necessary independence to make reasonable choices when representing their clients, such independence is not inconsistent with an obligation of counsel to justify their fees.”  (Id. at 16)  The court cited several other contexts in which attorneys must justify the reasonableness of their fees and found that Squire offered no convincing explanation why attorney independence is possible in those settings but not in the Cumis setting.  (Id. at 16-17)

The court also held that Section 2860 itself contemplates requiring counsel to justify their fees:  “What is more, the very statute codifying the Cumis doctrine already contemplates that counsel will be called upon to justify their fees … Thus, under the Cumis statutory scheme itself, counsel face the prospect that insurers may question and resist their bills, and insurers are not precluded from doing so in a proceeding directly against counsel.”  (Slip Op., at 17)  And while Squire attempted to limit the scope of issues and parties involved in a fee dispute under Section 2860, the California Supreme Court rejected such limitation.  (Id. at 17-19)  “But nothing in the statute itself limits the parties or the issues in a section 2860 fee dispute in this manner.”  (Slip Op., at 17)

The court further rejected Squire’s attempt to argue that Section 2860 requires that fee disputes be resolved contemporaneously during the defense of the underlying litigation.  “These concerns about timing are speculative at best.  For one thing, although nothing in the language of section 2860 forecloses the contemporaneous resolution of fee disputes, nothing requires it.  In any event, there is no obvious reason why, if Cumis counsel can be required to defend their bills while simultaneously representing their clients, counsel should not equally be able to defend their bills after the third party litigation has concluded.”  (Slip Op., at 19)

Lastly, the court rejected: (1) the contention that the insured should be required to monitor and control defense expenses of Cumis counsel (id. at 20-21); (2) that counsel’s due process rights would be violated in defending a reimbursement action unless the insured agreed to waive the attorney-client privilege (id. at 21-22); and (3) that allowing direct reimbursement by the insurer against Cumis counsel would violate the prohibition against the assignment of legal malpractice claims (id. at 22).  In rejecting these other arguments, the court found where an insurer can sustain its burden, in a case such as the one at bar, of proving that Cumis counsel’s fees were “objectively unreasonable at the time they were incurred, under the circumstances then known to counsel,” the insurer will be permitted to proceed directly against such counsel in its reimbursement action.  (See Slip Op., at 23, emphasis omitted.)