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Insurance Law News - August 2015

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Insurer May Seek Reimbursement of Allegedly Excessive Legal Fees Directly from Independent "Cumis" Counsel

A liability insurer may seek reimbursement of allegedly excessive legal fees directly from independent "Cumis" counsel in order to prevent the latter from being unjustly enriched. (Hartford Casualty Ins. Co. v. J.R. Marketing, LLC (2015) WL 4716917)

Facts

Hartford Casualty Insurance Company (Hartford) issued a commercial general liability policy to J.R. Marketing, LLC (J.R. Marketing) for the period of August 18, 2005 to August 18, 2006.

In September 2005, third parties sued J.R. Marketing and others for fraud, breach of fiduciary duty, unfair competition, defamation, interference with business relationships and conspiracy. J.R. Marketing promptly tendered the lawsuit to Hartford for defense. Hartford initially refused to defend J.R. Marketing, asserting, among other things, that the acts complained of had occurred before the policy's inception date.

Following Hartford's denial of a defense, J.R. Marketing retained the law firm of Squire Sanders USA LLP (Squire Sanders) to represent J.R. Marketing's interests. J.R. Marketing (through Squire Sanders) defended the underlying litigation. In addition, J.R. Marketing (again through Squire Sanders) filed a bad faith lawsuit against Hartford.

In January 2006, Hartford reconsidered its initial coverage position and appointed panel counsel to defend J.R. Marketing subject to a reservation of rights. However, Hartford refused to pay any defense costs J.R. Marketing had incurred before January 2006, and refused to provide J.R. Marketing with independent "Cumis" counsel in place of Hartford's appointed panel counsel.

In the bad faith action, the trial court ruled that Hartford owed a duty to defend J.R. Marketing from the initial tender of the underlying action in September 2005, and that Hartford was obligated to provide J.R. Marketing with Cumis counsel.

Thereafter, the trial court in the bad faith action issued a separate "enforcement order" requiring Hartford to pay Squire Sanders's bills promptly upon submission. The enforcement order provided that, while Squire Sanders' bills had to be "reasonable and necessary," Hartford as a "breaching insurer" was barred from invoking the protections that are usually available to insurers under California Civil Code section 2860. The order further provided that upon conclusion of the underlying litigation, Hartford could seek reimbursement of amounts it deemed excessive (although the order did not say from whom Hartford might seek any such reimbursement).

Subsequently, J.R. Marketing's independent counsel, Squire Sanders, submitted over $15 million in bills to Hartford. Hartford paid the bills.

In October 2009, the underlying litigation against J.R. Marketing was resolved. Upon resolution of the underlying litigation, Hartford filed a cross-complaint against the insured, J.R. Marketing, and its independent counsel, Squire Sanders. In its cross-complaint, Hartford alleged that it was entitled to reimbursement of all "abusive, excessive, unreasonable or unnecessary" fees and costs which had been billed to and paid by Hartford. Squire Sanders demurred to Hartford's cross-complaint, arguing that while Hartford might have a right to seek reimbursement from J.R. Marketing, Hartford had no legal right to seek reimbursement directly from Squire Sanders. The trial court and the Court of Appeal agreed with Squire Sanders and dismissed Squire Sanders from the litigation. Hartford then sought, and obtained, review by the California Supreme Court.

Holding

The California Supreme Court reversed, and held that Hartford was entitled to seek reimbursement of the allegedly excessive fees directly from Squire Sanders as independent counsel for J.R. Marketing. Hartford alleged that Squire Sanders had charged Hartford for fees and costs that were objectively unreasonable and unnecessary for J.R. Marketing's defense. Those facts, if proven, would give Hartford the right to recover against Squire Sanders on a theory of "unjust enrichment." That is, Hartford had adequately alleged that Squire Sanders had unjustly enriched itself at Hartford's expense, and that Squire Sanders thus owed Hartford reimbursement for the overbilled amounts.

The Supreme Court rejected Squire Sanders' argument that Hartford should only be able to pursue reimbursement against J.R. Marketing (the insured) and not against Squire Sanders (independent counsel). According to the Court, to the extent that Squire Sanders charged Hartford for fees and costs that were not reasonable and necessary for the defense of J.R. Marketing, it was Squire Sanders, not J.R. Marketing, who was "unjustly enriched."

The Supreme Court also rejected Squire Sanders' argument that allowing an insurer to seek reimbursement directly from Cumis counsel would unduly interfere with Cumis counsel's independence and undermine the attorney-client privilege. According to the Court, while Cumis counsel must indeed retain the necessary independence to make reasonable choices when representing insureds, "such independence is not inconsistent with an obligation of counsel to justify their fees." Indeed, California Civil Code section 2860, which codifies the Cumis doctrine, "contemplates that [Cumis] counsel will be called upon to justify their fees" and further suggests that this can occur "in a proceeding directly against counsel."

In sum, Hartford adequately pled that Squire Sanders had charged excessive fees, that Squire Sanders had been unjustly enriched, and that Squire Sanders was thus obligated to reimburse Hartford for the overbilled amounts. The Court thus remanded the case to allow Hartford to proceed against Squire Sanders.

Comment

The Supreme Court emphasized that its decision in this case turned on the narrow facts of the case. The Court noted that the case involved an "enforcement order" requiring the insurer to pay for "reasonable and necessary" costs of independent Cumis counsel but allowing the insurer to subsequently seek reimbursement of any such costs that were not "reasonable and necessary." The Supreme Court stated that in light of the enforcement order, there was no need to consider (1) whether an insurer who breaches its defense obligations has any right at all to recover excessive fees paid to Cumis counsel, (2) whether, in general, a dispute over allegedly excessive fees is more appropriately decided through a court action or an arbitration, and (3) whether, in general, resolution of such a fee dispute should be resolved before or after the conclusion of the underlying litigation.

Notwithstanding the above, the opinion in this case contains some language suggesting that insurers may be able to seek reimbursement directly against Cumis counsel in other scenarios. Thus, even in the more common Civil Code section 2860 arbitration, if an insurer proves that Cumis counsel's fees were patently and objectively unreasonable and unnecessary, the insurer may be able to pursue recovery against Cumis counsel on an unjust enrichment theory. However, no matter what the setting, the insurer will apparently have the burden of proving that Cumis counsel's fees were unreasonable and unnecessary.

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