Insurance Law Client Alert: Insurer That Breaches Duty to Defend Loses Protections of Civil Code Section 2860 as to Independent Counsel Fees

In J.R. Marketing v. Hartford Casualty (No. A133750, filed 5/17/13, ord. pub. 6/11/13), Hartford had issued CGL insurance to two business entities but declined to defend several business tort actions brought against them. The insureds filed a coverage lawsuit and Hartford then agreed to defend one of the actions subject to a reservation of rights, but refused to authorize the insureds to retain independent “Cumis” counsel. Later, the insureds obtained a summary adjudication that Hartford had a duty to defend and for independent counsel.

But Hartford delayed in paying, and the trial court granted another motion for the insureds, ordering Hartford to pay all invoices within 30 days, and stating that Hartford was barred from invoking the protections of Civil Code section 2860. The statute places restrictions on the qualifications and rates of independent counsel, and authorizes arbitration of fee disputes between the insurer and counsel.

The resulting defense fees totaled in excess of $15 million, which were paid by Hartford under the court order. Hartford then filed a cross-complaint in the coverage action which added the independent counsel law firm as a cross-defendant, seeking reimbursement of fees: (1) for parties not qualifying as insureds; (2) incurred prior to tender; (3) for the lawsuits that were not defended; (4) for prosecution of affirmative cross-complaints; and/or (5) for abusive, excessive, unreasonable or unnecessary charges. While permitting the action to proceed against the insureds, the trial court sustained a demurrer for the law firm, dismissing it from the action.

The sole question on appeal was whether the insurer could sue independent counsel for reimbursement on a theory of quasi-contract, since the law firm was not a party to the insurance contract and had no retainer agreement with Hartford. The claim against the law firm was based on the California Supreme Court’s decision in Buss v. Superior Court (1997) 16 Cal.4th 35, which held that an insurer with the duty to defend must defend the entirety of a lawsuit, but has a right to reimbursement for defending claims not potentially covered under the policy. According to the Buss court, that right is implied under the law of quasi-contract.

The J.R. Marketing court answered that question in the negative. The court said that once an insurer breaches its duty to defend by refusing to provide Cumis counsel, but later agrees to provide that counsel, it cannot take advantage of the rate limitation provision of Civil Code section 2860. The court stated that such an outcome would encourage insurers to reject their Cumis obligation for as long as they chose, safe in the notion that they could, at any point, invoke the protection of the statute. And the court went on to hold that having lost the protection of section 2860, including the right to arbitrate fee disputes with counsel, the insurer could not obtain a similar result as against the attorneys under the right of reimbursement annunciated in Buss:

“Retroactively imposing the insurer’s choice of fee arrangement for the defense of the insured by means of a post-resolution quasi-contractual suit for reimbursement against the insured’s separate counsel, such as Hartford seeks to pursue here against Squire, runs counter to these Cumis-scheme principles…. To hold otherwise would effectively afford the insurer that has waived the protections of section 2860 through its own wrongdoing more rights in a fee dispute with independent counsel than the insurer that has not waived such protections.”

Having reached that conclusion, however, the J.R. Marketing court limited the scope of its holding by stating that nothing precludes an insurer from suing independent counsel for fraudulent billing practices. Moreover, the insurer still has the right under Buss to seek reimbursement from the insured who retained the independent counsel, if it believes the fees were incurred to defend claims not covered by the policy, or the insured agreed to pay counsel more than was reasonable for the services performed.

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June 17, 2013