An insurer could not seek reimbursement for money paid to independent counsel via a direct suit, the California Court of Appeal has ruled.

In an unpublished decision, the court held that because Hartford failed to provide a defense for its insured, a series of consequences flowed from that proved improvident decision.

“California law bars an insurer, like Hartford, in breach of its duty to defend from thereafter imposing on its insured its own choice of defense counsel, fee arrangement or strategy.” Here, the court made a natural extension of those consequences by preventing the insurer from attempting to end-run the insured and seek reimbursement directly from the low firm that defended the case: “This court now takes the law one slight step further by holding Hartford likewise is barred from later maintaining a direct suit against independent counsel for reimbursement of fees and costs charged by such counsel for crafting and mounting the insureds’ defense where Hartford considers those fees unreasonable or unnecessary.”

This case initially presented the classic Cumis issue under California law. When an insurer denies or otherwise reserves its rights with respect to its duty to defend, the policyholder is allowed to engage independent counsel. The significance is that the insured and independent counsel maintain attorney-client protection that cannot be breached by the insurer. Second guessing of the defense also is barred.

Here, at the conclusion of the underlying litigation, Hartford paid more than $15 million in defense fees and costs to Squire Sanders. With the invoices paid, Hartford sought reimbursement from the law firm, arguing that Squire submitted improper invoices. Hartford requested money back for amounts paid for non-insureds and those in the non-California litigation as well as excessive fees or costs.

The panel dismissed the suit, ruling that Hartford did not have a quasi-contractual right rooted in common law to maintain a direct suit against independent counsel for reimbursement of allegedly excessive or otherwise improperly invoiced defense fees and costs where it had disclaimed coverage for the action under the relevant policy.

Simply put, Hartford’s fight was with the wrong party, the court said. Independent counsel owes certain limited duties to the insurer, the court acknowledged, but it “represents the insured alone.”

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

Why it matters: The case represents further confirmation that Cumis counsel owes complete fidelity to the insured and has no quasi-contractual relationship with an insurer that disputes its defense obligations. The insurer has no standing after the fact to second-guess the law firm’s handling of the case and cannot gain access to otherwise privileged information in some effort to discredit the defense for its own pecuniary interest. It is the representation of the “insured alone” that is most noteworthy as a guiding principle. Insurance coverage disputes should never prejudice in any respect the defense of the underlying claim.