The Massachusetts Appeals Court recently held that an insurer’s refusal to pay any fees incurred by independent counsel hired by the insured was in bad faith, but also held that the insurer was only liable for reasonable fees that the insured actually paid, not counsel’s full rate. Northern Security Ins. Co., Inc. v. R.H. Realty Trust et al., No. 09-P-1757 (Mass. App. Ct. Feb. 8, 2011).

The insurer agreed to defend the insured in the underlying case under a reservation of rights. Due to the reservation of rights, the insured elected to hire independent counsel. The insured sought recovery of that counsel’s fees, which were billed to the insured at a rate of $225/hour. The insurer argued that it should not pay more than its highest panel counsel rate of $150/hour. The insured, as well as the law firm, sued the insurer for violation of Massachusetts’ bad faith / consumer protection statute, c. 93A. The trial judge found the insurer in violation of 93A and held that it was liable for the firm’s fees at its full market rate of $350/hour.

The Appeals Court upheld the trial court’s finding of bad faith, noting that the insurer delayed payment of even the undisputed $150/hour portion and other undisputed court costs for 14 months. However, the court held that the damages must be based upon the fees actually paid by the insured and not the higher market rate. The insurer’s “obligation was to protect and indemnify the [insured] against its losses,” and therefore its liability “should not exceed the amount of fees the [insured] in fact incurred,” said the court.