Last August, the California Supreme Court issued its opinion in Hartford Casualty Ins. Co. v. J.R. Marketing, LLC. 353 P.3d 319 (Cal. 2015). In its decision, the Court was faced with whether or not an insurer can recover litigation costs directly from Cumis counsel for “unreasonable and unnecessary” fees, or whether an insurer is limited to recover only from an insured in such an action. Id. at 324. In its opinion, the Court concluded that an insurer can seek reimbursement directly from Cumis counsel. Id. Although limited to its facts, this case signals a separation from the Court’s precedent in Buss v. Superior Court and opens the door for insurers to seek reimbursement from third parties not listed as insureds under a policy.
Hartford Casualty Insurance Company (“Hartford”) issued a CGL insurance policy to J.R. Marketing in 2005. In the policy, Hartford agreed to defend and indemnify the insured in instances of claims for business-related defamation and disparagement. An action was filed with J.R. Marketing as one of the defendants and Hartford disclaimed its duty to defend claiming that the alleged conduct occurred before the policy’s inception date. Id. at 322. In 2006, the trial court issued an enforcement order directing Hartford to pay all defense invoices submitted to it as well as all future defense costs in the action. Additionally, the order stated that the costs still had to be “reasonable and necessary.” Id. at 323.
After the underlying action was resolved, Hartford filed a cross-complaint asserting that it was entitled to recoup a significant portion of the $15 million in defense fees from Cumis counsel who represented the defendants in the underlying action. Hartford alleged in its cross-complaint that it was due this reimbursement from counsel because the firm had been unjustly enriched due to their charging “unreasonable and unnecessary” fees. In its demurrer, counsel separately alleged that Hartford could not recover costs from the firm because they were non-insureds and an insurer’s right to reimbursement stems from the contractual relationship between the insurer and the insured. Id.
The trial court sustained the demurrer and the Court of Appeals affirmed. The Court of Appeals explained that because Hartford had breached its duty to defend its insured, they lost all right to control the defense. Taking that rationale one step further, the Court of Appeals reasoned that since Hartford had lost its right to control the defense, it also lacked the ability to maintain a direct suit against independent counsel for reimbursement of fees alleged to be “unreasonable and unnecessary.” Additionally, the Court of Appeals reasoned that counsel conferred a benefit on the insured, not on Hartford. Therefore, the insured had been unjustly enriched and Hartford would have to file suit against its insured to recover for any “unreasonable or unnecessary” fees. Id. at 324.
The California Supreme Court reversed the decision of the Court of Appeals, concluding that, given the facts of the case, the reimbursement rights of the insurer should run directly against counsel. The Court ruled that counsel would have received an unjust enrichment had they charged for “unreasonably and unnecessary” fees. The Court came to this conclusion citing the specific facts of the case with particular reference to the trial court’s enforcement order stating that the fees still had to be “reasonable and necessary.” Id. at 325.
In its decision, the Court made specific mention of its previous case Buss v. Superior Court. In Buss, the Court addressed whether an insurer could seek reimbursement of costs from its insured where the insurer defended a claim ultimately found not to be covered by the policy. However, the Court distinguished Buss because it did not deal with the issue of counsel charging unreasonable and unnecessary fees and the resulting possibility of counsel being unjustly enriched. Id. at 326.
Counsel raised a number of objections based upon contract law and public policy. However, none of counsel’s objections persuaded the Court to reach the conclusion that a reimbursement claim by the insurer is foreclosed as against counsel. However, it is important to note that the Court specifically limited its ruling to the facts of the case. Id. at 327-332.
Despite the narrow focus of this case, the Court’s decision is noteworthy due to the separation from the Court’s previous Buss decision and the potential for an increase in insurer’s rights down the road. Insurers in similar situations as Hartford may be able to successfully file a claim against Cumis counsel in the future. Insureds and their counsel should follow carefully any future case law coming out of California so as to be aware of the issue and their developing rights and liabilities.