On August 10, 2015, the California Supreme Court issued a unanimous decision that could have broad implications regarding an insurer’s right to seek reimbursement of unreasonable fees and costs directly from so-called Cumis counsel. In Hartford Casualty Insurance Company v. J.R. Marketing, LLC, ___ Cal.4th ___ (2015), the court held that an insurer — operating under an order that expressly provided that the insurer would be able to recover payments of excessive fees — can seek reimbursement directly from Cumis counsel.
Hartford originally refused to defend its insureds, J.R. Marketing and Noble Locks, in three underlying actions, including one pending in Marin County. After the insureds’ counsel, Squire Sanders, filed the instant coverage action, Hartford agreed to defend pursuant to a reservation of rights, but declined to pay defense costs incurred before that agreement and declined to provide independent counsel to the insureds. On motion for summary adjudication, the trial court ruled that Hartford had a duty to defend from the date of tender and, based on its reservation, had to provide the insureds with independent counsel in the Marin County action under Civil Code section 2860. The trial court issued an enforcement order drafted by Squire Sanders that: directed Hartford to promptly pay all defense invoices; declared that Squire Sanders’ invoices had to be “reasonable and necessary”; precluded Hartford from invoking section 2860’s rate provisions; and allowed Hartford to challenge the defense fees and costs as unreasonable or unnecessary by reimbursement after resolution of the Marin County action. The Court of Appeal affirmed the summary adjudication and enforcement orders. The insureds retained Squire Sanders as their independent counsel.
After the Marin County action was resolved, Hartford filed a cross-complaint in the coverage action against Squire Sanders to recover a significant portion of the $13.5 million that Hartford had paid to Squire Sanders under the enforcement order. Hartford alleged that Squire Sanders “padded” its bills by charging “abusive, excessive, unreasonable or unnecessary” fees. Squire Sanders demurred to the cross-complaint on the ground that Hartford could not assert a legal or equitable claim directly against Squire Sanders because Hartford and Squire Sanders did not have a contractual relationship. The trial court agreed, sustaining without leave to amend the demurrer and concluding that Hartford’s right to reimbursement, if any, was against its insureds.
The Court of Appeal affirmed. The court determined that because Hartford breached its duty to defend, allowing Hartford to sue Cumis counsel directly would frustrate the policies underlying section 2860 and the independent counsel scheme generally. The court determined that an insurer that breaches its duty to defend “loses all right to control the defense.” The court concluded that because Hartford had “waived” its right to arbitrate under section 2860, allowing it to bring a direct action against Squire Sanders would place Hartford in a better position than if it had not breached its duty to defend. The court suggested that Hartford look to its insureds to recover any unreasonable fees.
The California Supreme Court reversed. It held that Hartford could seek reimbursement based on the equitable principles of restitution and unjust enrichment. The court stated, “accepting for the sake of argument that Squire Sanders’ bills were objectively unreasonable and unnecessary to the insureds’’s defense in the litigationand that they were not incurred for the benefit of the insured, principles of restitution and unjust enrichment dictate that Squire Sanders should be directly responsible for reimbursing Hartford for counsel’s excessive legal bills.” (Emphasis in original.) Pursuant to the enforcement order and the ethical rules governing attorney conduct (see Rule Prof. Conduct 4-200(a)), Hartford’s obligation to finance its insureds’ defense did not extend beyond the duty to pay the reasonable costs of the defense.
The court cautioned, however, that its decision hinged on the enforcement order: “We … express no view as to what rights an insurer that breaches its defense obligation might have to seek reimbursement directly fromCumis counsel in situations other than the rather unusual one before us in this case.” The court explicitly did not decide: (1) whether, absent such an order, an insurer that breaches its defense obligations has any right to recover excessive payments it paid to Cumis counsel; (2) whether, in general, a dispute over allegedly excessive fees is more appropriately decided through a court action or arbitration; or (3) when such fee disputes generally ought to be decided relative to the underlying action. Although the court did not decide these issues, its opinion provides language that could support an insurer’s ability to assert direct reimbursement claims against independent counsel in situations where independent counsel have been guilty of excessive billing.