Insurer Permitted to Recover Defense Fees from Independent Counsel Directly

In a recent case from the Supreme Court of California, the court held than an insurer can recover allegedly excessive and unnecessary defense fees directly from the insureds’ independent Cumis counsel.  Although the court limited its holding in a number of respects, the case could have major implications for those serving as independent Cumis counsel in California and other jurisdictions.

In Hartford Cas. Ins. Co. v. J.R. Marketing, L.L.C., 61 Cal. 4th 988 (2015), Hartford Casualty issued CGL insurance policies to two insureds, but disclaimed its duty to defend under the policies after the insureds were named as parties in several lawsuits.  The insureds filed a separate coverage action against Hartford. The insurer was subsequently determined by the trial court to have breached its duty to defend and was ordered to furnish a defense through independent Cumis counsel, subject to Hartford’s reservation of rights.  The enforcement order, which was drafted by the insureds’ independent counsel and adopted by the court, directed Hartford to promptly pay all defense costs for the insureds, but specified that the costs had to be “reasonable and necessary.”  The order preserved Hartford’s right to challenge the fees and costs by way of reimbursement following resolution of the underlying matter.  The coverage action was stayed pending resolution of the underlying action.

The coverage action ultimately resumed, but not before millions had been spent on the underlying case.  Hartford filed a cross-complaint against independent counsel and others seeking to recoup a significant portion of the approximately $15 million in defense fees and expenses that had been paid in the underlying litigation.

The Supreme Court of California ultimately concluded that Hartford could assert its right to reimbursement of excessive fees directly against independent counsel.  The court, however, limited its holding in a number of respects and noted the “rather unusual” aspects of the case.  Specifically, the court noted that the enforcement order, which was drafted by independent counsel, expressly preserved Hartford’s right to recover “unreasonable and unnecessary” amounts billed by counsel.  Because the order did not specify from whom the Hartford might obtain such reimbursement, the court’s task was to decide whether Hartford could seek reimbursement directly from independent counsel.  The court concluded that Hartford could claim against counsel directly, but in doing so, the court “accept[ed] for the sake of argument that [independent counsel’s] bills were objectively unreasonable and unnecessary to the insured’s defense in the underlying litigation and that they were not incurred for the benefit of the insured[.]”  This opinion is thus arguably inapplicable where Cumis counsel can argue the fees were reasonable and necessary.

The court also noted that it was “express[ing] no view as to what rights an insurer that breaches its defense obligations might have to seek reimbursement directly from [independent] counsel in situations other than the rather unusual one before us in this case.”  While the court added that the burden of proving that independent counsel’s fees were in fact unreasonable and unnecessary falls entirely on the insurer, the evolution of this case will be interesting to watch, as courts in California and other jurisdictions apply the principles of Hartford v. J.R. Marketing in similar cases.

If you would like assistance in addressing your insurance questions, or in reviewing your current insurance coverage, feel free to contact Alex J. Brown, Esq., a partner at Shapiro Sher Guinot & Sandler P.A. and Chairman of the firm’s Insurance Practice Group, at 410-385-4220, or by email at ajb@shapirosher.com.