In Hartford Casualty Ins. Co. v. J.R. Marketing, L.L.C. et al. (2015) 61 Cal. 4th 988, the California Supreme Court recently ruled that in narrowly defined circumstances, an insurer may recover directly from independent counsel for reimbursement of unreasonable and/or unnecessary attorney fees.
Pursuant to Buss v. Super. Ct. (1997) 16 Cal.4th 35, 49, an insurer may pursue the insured for reimbursement of non-covered claims. The question of whether the insurer may pursue independent counsel in Cumis situations for recovery of unreasonable and/or unnecessary fees was not addressed in the code governing Cumis situations, the Cumis case itself, or in Buss. Thus the new ruling in the Hartford case provides important answers to address that situation.
However, for the Hartford rule to apply, the case must have a factual and procedural history similar to the Hartford case. In Hartford, Noble Locks Enterprises, Inc. and J.R. Marketing, LLC (collectively “Insureds”) were sued for defamation in a civil action (“Tort Action”). The Insureds were the beneficiaries of insurance policies issued by Hartford Casualty Insurance Company (“Hartford”). Hartford initially denied the Insureds’ tender of defense for the Tort Action. The Insureds sued Hartford in a coverage action (“Coverage Action”) with Squire Sanders as counsel (who also represented the Insureds in the Tort Action). Hartford thereafter agreed to defend the Insureds in the Tort Action, subject to a reservation of rights, but insisted that panel counsel defend the Insureds. The trial court ruled in favor of the Insureds’ motion for summary adjudication in the Coverage Action, holding that Hartford had a duty to defend, and that the Insureds were entitled to independent counsel in the Tort Action. The Insureds retained Squire Sanders to represent them in the Tort Action.
Still, Hartford failed to pay Squire Sanders’ fees and costs in the Tort Action. The trial court entered an enforcement order (“Enforcement Order”) in the Coverage Action, which required that:
- Hartford permit independent counsel in the Tort Action;
- Hartford pay reasonable and necessary attorneys’ fees and costs to independent counsel;
- Hartford be denied the right to invoke the rate provisions set forth in Civil Code section 2860; and
- if Hartford sought to challenge independent counsel’s fees and costs, it could do so by way of a reimbursement action after the conclusion of the Tort Action.
At the conclusion of the Tort Action, Hartford filed a Cross-Complaint in the Coverage Action, naming Squire Sanders as a Cross-Defendant, seeking reimbursement from Squire Sanders on equitable theories for amounts paid for defense legal services deemed to be unreasonable or unnecessary. Squire Sanders demurred to Hartford’s Cross-Complaint, asserting that an insurer may not bring claims against a non-insured for reimbursement and that permitting an action for recovery against independent counsel would contravene public policy considerations.
The trial court sustained Squire Sanders’ demurrer without leave to amend and Squire Sanders was dismissed from the case. The Court of Appeal upheld the trial court’s ruling, reasoning that Hartford, having initially breached its duty to its Insureds, and in so doing forfeiting its right to control the defense, had also forfeited the right to maintain a direct suit against independent counsel for recovery of fees and costs considered to be unreasonable or unnecessary.
The Supreme Court granted Hartford’s petition for review on the narrow question, as follows:
“From whom may a[n] insurer seek reimbursement when: (1) the insurer initially refused to defend its insured against a third-party lawsuit; (2) compelled by a court order, the insurer subsequently provided independent counsel under a reservation of rights – [citations] to defend its insured in the third party suit; (3) the court order required the insurer to pay all ‘reasonable and necessary defense costs,’ but expressly preserved the insurer’s right to later challenge and recover payments for ‘unreasonable and unnecessary’ charges by counsel; and (4) the insurer now alleges that independent counsel ‘padded’ their bills by charging fees that were, in part, excessive, unreasonable, and unnecessary?”
The Court held that Hartford was entitled to recover directly from Squire Sanders. The overarching concern of Squire Sanders and amici curiae in support thereof, was that a ruling permitting the insurer to obtain reimbursement directly from independent counsel on a fee dispute in a Cumis situation would have the unintended consequence of limiting counsel’s independence. Squire Sanders and amici curiae argued that if an insurer could recover directly from independent counsel for what the insurer perceives to be unreasonable and/or unnecessary legal expenses, counsel might take steps to avoid such an action, thereby forfeiting the independence that the Cumis rule is intended to foster.
But the Hartford Court made clear that its decision has a very narrow application. An insurer may seek recovery of unreasonable and/or unnecessary legal expenses directly from independent counsel only when the above-quoted four factual circumstances are present.
The rationale used by the Court was simple. Premised on the assumption that the disputed fees were objectively unreasonable and unnecessary (i.e., not incurred for the benefit of the Insureds), it was independent counsel who unjustly benefitted from Hartford’s over-payments, thus, it was independent counsel from whom Hartford had a right to recover. In support of its decision, the Court stressed the terms of the Enforcement Order which required Squire Sanders’ billings to be reasonable, foreclosed Hartford from invoking Civil Code section 2860 to remedy fee disputes, and further limited Hartford’s remedy for same to a subsequent reimbursement action.
Squire Sanders argued that it did not need to make restitution for a benefit incidentally conferred by Hartford – i.e., Hartford’s contractual obligation to pay the defense costs for potentially covered third-party claims in the Tort Action. The Supreme Court disagreed, noting that Hartford’s obligation to pay for independent counsel was not unlimited, as counsel was governed by ethical principles in addition to the terms of the Enforcement Order which limited Hartford’s obligation to the payment of the reasonable cost of defense.
In response to Squire Sanders’ argument that reimbursement actions should be conducted pursuant to Civil Code section 2860, the Court pointed to the dispositive Enforcement Order, drafted by Squire Sanders, which precluded Hartford from use of the rate provisions contained in Civil Code 2860, and which required fees to be reasonable, reserving to Hartford, the right to seek reimbursement of unreasonable legal fees at conclusion of the Tort Action.
The Court declined to shift the burden for unreasonable and/or unnecessary fees incurred for independent counsel to the Insureds. Because Squire Sanders drafted the Enforcement Order requiring defense fees to be reasonable, there was no reason that any direct liability for unreasonable fees should fall on the Insureds.
Lastly, the Court ruled that Hartford’s reimbursement action did not violate California’s prohibition on assignment of legal malpractice claims. Hartford was not standing in the shoes of its Insureds to assert Squire Sanders violated a duty owed them. Rather, Hartford was attempting to recover legal charges it paid pursuant to the Enforcement Order.
In light of the Court’s narrow application of the ruling to cases with factually and procedurally similar circumstances, Hartford should not erode the independence of counsel in Cumis situations.