Key Decisions

July 2013 – An Insurer Can’t Seek Reimbursement From “Cumis” Counsel

(filed under: Key Decisions | July 22, 2013)

An Insurer Can’t Seek Reimbursement From “Cumis” Counsel

J.R. Marketing, LLC v. Hartford Casualty Insurance Company
(Cal. Ct. of App., 3d Dist.), filed May 17, 2013, published June 11, 2013

KEY FACTS

Hartford issued a commercial general liability policy to Noble Locks Enterprises, Inc.  It also issued one to J.R. Marketing, L.L.C.  Under these policies, Hartford promised to defend and indemnify claims against the named insureds for certain business-related damages subject to various exclusions.

When the insureds were sued, they tendered the defense to Hartford.  Hartford refused to defend.  This refusal led the insureds to hire attorneys to defend them. The insureds also sued Hartford.

In the action against Hartford, the court found a duty to defend and a duty to provide “independent” or “Cumis” counsel.  The court ordered Hartford to pay the insureds’ outstanding invoices within 15 days and to pay “all future reasonable and necessary defense costs within 30 days of receipt.”  It acknowledged that Hartford might have a right to reimbursement, saying:  “[t]o the extent Hartford seeks to challenge fees and costs as unreasonable or unnecessary, it may do so by way of reimbursement after resolution of theAvganim matter.”

The order provided that, while the insured’s attorney’s bills had to be reasonable and necessary, Hartford was barred from invoking the protective provisions afforded insurers under Civil Code Section 2860 because it “has breached and continues to breach its defense obligations by (1) failing to pay all reasonable and necessary defense costs incurred by the insured and by (2) failing to provide Cumis counsel.”  These protective provisions included that “Cumis” counsel’s hourly rate may be no more than what is charged by attorneys regularly retained by the insurer to defend its insureds.

At the conclusion of the case against the insureds, Hartford filed a cross-complaint in the coverage action.  In its cross-complaint, Hartford sought reimbursement for what it considered unreasonable or unnecessary work.  It sued both the insureds and their attorney.  Hartford also sought reimbursement from Scott Harrington, one of the individuals that the insureds’ attorney was defending, but who was not even an insured under its policies.  It sued Harrington for the benefits received by virtue of having been defended at Hartford’s expense.

The trial court sustained demurrers by both the insured’s attorney and Harrington.

HOLDING & REASONING

The Court of Appeal affirmed.

The court first considered if Hartford had a quasi-contractual right rooted in common law to maintain a direct suit against the insured’s “independent” or “Cumis” counsel for reimbursement of excessive or otherwise improperly-invoiced defense fees and costs.

There is no attorney-client relationship between the insurer and “independent” or “Cumis” counsel.  Any right to dispute fees charged by such counsel comes from Civil Code Section 2860.  However, to take advantage of that section, the insurer must fulfill its duty to defend.

When the insurer fails to meet its duty to defend, it forfeits the protections of §2860, including its statutory limitations on fee rates and resolution of fee disputes.

Because Hartford failed to defend, it could not use Section 2860’s rate cap.

The fact that Hartford forfeited its rights under Section 2860 did not mean it forfeited its right to reimbursement for costs attributable to claims that could not possibly have resulted in a covered liability.  That right was established in Buss v. Superior Court, 16 Cal.4th 35 (1997), where the California Supreme Court held that if there was a potential for a covered liability, the insurer had to defend all claims against the insured, but could seek reimbursement of fees attributable to claims that, if asserted by themselves, would not trigger a defense duty.

The remaining issue was who Hartford could sue to obtain reimbursement.  The court held that Hartford could seek reimbursement from its insureds, not their counsel.

The court reasoned that Hartford was seeking restitution and the fact that one person benefits is not, by itself, sufficient to require restitution.  Rather, the person receiving the benefit is required to make restitution only if the circumstances are such that, as between the two individuals, it is unjust for the person to retain it.  Since the insureds hired counsel to defend them after Hartford failed to do so, and had obligated themselves to pay counsel, there was nothing unjust about counsel being paid what the insureds had agreed to pay him.

This left just the insureds as sources of recovery of excessive or improperly-invoiced fees and costs attributable to the defense of claims that did not otherwise trigger a duty to defend.

The court then turned to the question of whether Hartford had a quasi-contractual right against Harrington, who had received the benefit of the defense for which Hartford paid, even though he was not an insured.

The court affirmed the dismissal of Hartford’s claim against Harrington without actually deciding if Hartford had a right as against him.  It did so because in its complaint, Hartford failed to allege that any fees or costs were incurred or legal services provided solely for Harrington’s defense (as opposed to for one or more of the insured cross-defendants).  This failure supported the trial court’s ruling that Hartford had failed to state a cause of action.

ANALYSIS

The court’s holding had one important caveat:

“[W]e have no reason to, and do not, take a position as to whether an insurer would have the right to maintain a direct suit against independent counsel for fraudulent billing practices in connection with the underlying defense of its insured.”

Significantly, this case expressly holds that Civil Code Section 2860’s rate cap will not apply when the insurer refuses to defend.