The Duty to Defend and Recovery from Cumis Counsel

Author: Kelly Denham

Under the provisions of Civil Code Section 2860, an insurance carrier providing defense has certain control over the payment of attorney’s fees to independent, or Cumis, counsel. The case discussed below considers the ability of a carrier to recover “excessive fees” from independent counsel when it initially refused to defend its insured.

In 2005, Hartford Casualty Insurance Co. issued commercial general liability (“CGL”) insurance policies to Noble Locks Enterprises, Inc. (effective July 28, 2005 to July 28, 2006) and to J.R. Marketing (effective August 18, 2005 to August 18, 2006). In the policies, Hartford promised to defend and indemnify the named insured, and their members and employees, against claims for business-related defamation and disparagement.

While the policies were in effect, several individuals filed suit in Marin County Superior Court against Noble Locks, J.R. Marketing and several of their employees for intentional misrepresentation, breach of fiduciary duty, unfair completion, and other causes of action. J.R. Marketing and Noble Locks tendered the suit to Hartford for defense.

In the Marin matter, Hartford refused to defend or indemnify on the grounds the acts complained of appeared to have occurred before the policies’ inception dates. JR Marketing, Noble Locks and others subsequently filed a coverage lawsuit against Hartford. As a result, Hartford agreed to defend the underlying claims under reservation of rights. However, Hartford refused to pay defense costs incurred before the coverage action was filed or to provide Cumis counsel.

The trial court subsequently found Hartford had a duty to defend, and the insureds were entitled to independent Cumis counsel. The insureds retained Squire Sanders (now Squire Patton Boggs LLP) as Cumis counsel. The trial court issued an enforcement order, directing Hartford to pay all defense invoices and future defense costs. The order was drafted by Squire Patton Boggs and adopted by the court. The order stated Hartford breached its defense obligations by refusing to provide Cumis counsel until ordered to do so, and by failing to pay counsel’s submitted bills in a timely fashion. The order also declared that although Squire Patton Bogg’s bills “had to be reasonable and necessary,” Hartford was precluded from invoking the rate provisions of Civil Code Section 2860 because of its breach. Furthermore, the order said the insurer could challenge any unreasonable and unnecessary fees in a reimbursement action after conclusion of the underlying suit.

Civil Code section 2860 limits the amounts an insurer must pay for independent Cumis counsel, specifically limiting the insurer’s obligation to “the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” (See Civil Code § 2860(c).) In this case, the court reasoned that allowing an insurer to initially refuse to defend or provide Cumis counsel and then allow the insurer to take advantage of the rate limitation of Civil Code § 2860(c), would encourage insurers to reject their Cumis obligations as long as they could invoke the benefit of the statute at any time.

Hartford subsequently received and paid for defense costs totaling over $50 million. Hartford then cross complained against Squire Patton Boggs LLP and sought reimbursement for “overpayments.” The trial court sustained Squire Patton Bogg’s demurrer, and Hartford appealed.

The California Supreme Court ruled Hartford could bring a direct action against Squire Patton Boggs for reimbursement of the excessive and unreasonable fees billed by the law firm to independently defend its policyholder. The Supreme Court opined the lower court order, drafted by Squire Patton Boggs, preserved Hartford’s right to pursue reimbursement for excessive fees under principles of restitution and unjust enrichment. (Hartford Casualty Insurance Company v. J.R. Marketing LLC (2015) S211645.)

ABOUT THE AUTHOR
Kelly Denham graduated from Loyola Law School in 2012. Ms. Denham’s primary focus at Tyson & Mendes is construction defect litigation. Contact Kelly at 858.263.4117 or kdenham@tysonmendes.com.

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