Why it matters: An insurer that is compelled to pay the fees of its insured's independent counsel or Cumis counsel may seek reimbursement of unreasonable or excessive fees directly from those lawyers, the California Supreme Court recently ruled. Reversing the lower courts, the court rejected the argument that independent counsel was merely an incidental beneficiary of the insurer's preexisting responsibility to pay the costs of defending covered claims against its insureds. The court based its decision on the fact that in an earlier proceeding the insurer was ordered to provide independent counsel and part of the order specifically preserved the insurer's right to seek a subsequent recovery of any "unreasonable and unnecessary" fees. The court reasoned that the insured's obligation to pay for Cumis counsel was not unlimited and did not extend beyond the duty to pay reasonable fees and costs. While the court emphasized that its conclusion "hinges on the particular facts and procedural history of this litigation," and should be construed narrowly, insureds should be wary of insurers trying to use this decision to further exert influence over, or otherwise interfere with, the relationship between an insured and its independent counsel.

Detailed discussion: In September 2005, a lawsuit was filed against J.R. Marketing, LLC (J.R. Marketing) and several of its employees. J.R. Marketing immediately tendered the claim to its carrier Hartford Casualty Insurance Company (Hartford). Hartford rejected the tender.

Following Hartford's denial of a defense, J.R. Marketing retained the law firm of Squire Sanders LLP to defend it in the underlying lawsuit and to file a bad faith lawsuit against Hartford for denying coverage.

In the bad faith action, the trial court ordered Hartford to pay all past and future defense costs. Per the order, Hartford reserved the right to challenge fees and costs as being unreasonable or unnecessary and that it may do so by way of reimbursement after resolution of the underlying matter.

After the underlying litigation concluded, Hartford sought to recoup over $13 million in legal fees it paid to Squire Sanders, but which Hartford claimed were excessive and unreasonable. Affirming a dismissal of Hartford's claim by the trial court, the California Court of Appeal concluded that Hartford's claim for reimbursement, if any, was from its insureds, not directly from Squire Sanders.

The California Supreme Court reversed, holding that under the facts of the case, Hartford could maintain an action for reimbursement directly against Squire Sanders. The court reasoned that it was Squire Sanders (and not the insureds) that would be unjustly enriched if allowed to retain payments that were unreasonable and unnecessary for the insureds' defense:

"We conclude that under the circumstances of this case, the insurer may seek reimbursement directly from Cumis counsel," the court ruled. "If Cumis counsel, operating under a court order that expressly provided that the insurer would be able to recover payments of excessive fees, sought and received from the insurer payment for time and costs that were fraudulent, or were otherwise manifestly and objectively useless and wasteful when incurred, Cumis counsel have been unjustly enriched at the insurer's expense."

The Supreme Court also rejected Squire Sanders' argument that Cumiscounsel's independence would be compromised if it had to defend an insurer's lawsuit challenging the reasonableness of its efforts in hindsight. The independence required for Cumis counsel "is not inconsistent with an obligation of counsel to justify their fees," the court explained, and attorneys in numerous settings in the legal system are required to justify their fees to a third party.

A concurring opinion added some details about what happens next. On remand, Hartford—having breached its duty to defend—should be required "to overcome a presumption that any fees billed by Squire Sanders—even fees later found to be unreasonable—were incurred primarily for the benefit of J.R. Marketing."

To read the opinion in Hartford Casualty Insurance Co. v. J.R. Marketing, click here.