The California Supreme Court’s recent decision in Hartford Casualty Insurance Company v. J.R. Marketing, LLC, No. S211645 (Cal. Aug. 10, 2015), raises potential concerns for corporate policyholders and their relationship with their counsel. While the Court expressly noted that its decision addressed a “narrow” and an “unusual” question, emphasized that its conclusion “hinges on the particular facts and procedural history of this litigation,” and should be construed narrowly, policyholders should be wary of insurers trying to use this decision to further exert influence over, or otherwise interfere with, the attorney-client relationship between a policyholder and their counsel.
The underlying facts of the case are fairly straightforward. Hartford’s policyholder, J.R. Marketing, and several of its employees were sued. Instead of defending the case from the outset, Hartford initially wrongfully refused to defend. After being sued by its policyholder, Hartford reversed course and agreed to defend, purportedly under a reservation of rights, yet declined to pay defense costs incurred prior to the reversal of its defense decision and also declined to provide independent counsel instead of its panel counsel. The policyholder was forced to seek further relief from the trial court, which entered an order finding that Hartford had a duty to defend the case from the outset (not after it reversed course) and that, because Hartford was purporting to reserve rights, the policyholder was entitled to independent (cumis) counsel. The trial court subsequently entered another order requiring Hartford to promptly pay all defenses invoices within 30 days of receipt. The order further found that Hartford had breached its defense obligations and, thus, could not invoke the rate provision of California Insurance Code Section 2860 (which allows defending insurers to limit rates under certain circumstances). The order also provided that Hartford could challenge fees and costs as unreasonable and unnecessary after the underlying litigation was concluded even though, by breaching its obligations, it should have been found to have forfeited any such right. Instead of forcing Hartford to raise any concerns immediately, the language of the order allowed Hartford to simply pile up its objections to later try to eviscerate the very defense it was ordered by the trial court to provide. It was this particular order that the California Supreme Court addressed in its decision.
After the underlying action was concluded, Hartford brought an action against both its insured and independent counsel seeking to recoup over $13 million it had paid independent counsel. The trial court sustained independent counsel’s demurrer, finding that Hartford, as an insurer, had no right to bring a direct claim against independent counsel and its remedy was against its policyholder only. The trial court expressly noted that “recognizing a reimbursement cause of action against a law firm would result in undesirable consequences.” The Court of Appeal sustained the trial court’s ruling, noting that counsel chosen by policyholders answer solely to their clients in regard to their client’s litigation interests, free from any insurer involvement.
Unfortunately, the California Supreme Court disagreed with portions of both the trial court’s and the Court of Appeal’s reasoning and held that Hartford could pursue reimbursement directly from independent counsel. The irony of the California Supreme Court’s decision is that it put Hartford, a breaching insurer who only defended after being sued by its policyholder and began paying after ordered to do so by a court, in a better position than if it had honored its contractual obligation in the first instance. Importantly, the California Supreme Court did expressly note that it was simply interpreting the specific language of the trial court’s order as presented and not deciding more generally whether Hartford should perhaps not have had any reimbursement right in the first instance. However, by creating such perverse incentives, the Court may have emboldened insurers to exert undue pressure and interference on policyholders and their independent counsel.
A client of course should only pay reasonable fees and costs. However, once a policyholder pays or approves payment of independent counsel’s invoices, those invoices are presumed to be reasonable. If an insurer (assuming it is properly defending and is not in breach) wishes to raise concerns about its contractual obligations for particular invoices, that is a discussion properly held between the parties to the insurance contract – the policyholder and the insurer – not between the insurer and independent counsel, who has neither contractual privity with, nor owes any duty to, the insurer.
Allowing an insurer to pursue direct reimbursement claims against independent counsel, whose duties run solely to its client and not the insurer, opens a veritable Pandora’s box of potential practical and ethical concerns. For example, if in the professional judgment of independent counsel, a particular motion should be filed, but the insurer disagrees, independent counsel is put in an untenable position. By protecting its policyholder client in pursuing a particular legal strategy, it is left potentially financially vulnerable if the insurer later seeks to recoup the amounts incurred even if its policyholder client approved the strategy. While any insurer attempt in that regard should ultimately be rebuffed by a court, independent counsel still faces inappropriate risk, and associated transaction costs, from such a claim.
Additionally, where a breaching insurer is subsequently ordered by a court to reimburse defense costs, policyholders should vigorously assert that the insurer has legally forfeited any right to contest the reasonableness of fees. At a minimum, if the insurer is going to be allowed to retain some ability to challenge reasonableness, any order should clearly specify that the insurer’s remedy is solely with its policyholder, not independent counsel.
Finally, where appropriate, policyholders and their counsel should consider adding language to their engagement terms clarifying that the policyholder will indemnify counsel, or be responsible, for any direct claim by its insurer. Such engagement terms may limit the ability of an insurer to interfere with the attorney-client relationship and reinforce independent counsel’s ability to focus solely on the client’s interests.
While the California Supreme Court made clear in its decision that it was only answering a narrow question under “unusual” factual circumstances, corporate policyholders and their counsel should be vigilant in resisting any insurer attempts to broaden the decision to infringe upon the attorney-client relationship between policyholders and their counsel.