Where a liability insurer initially breached its duty to defend an insured, and a dispute later arose regarding allegedly excessive or improper fees charged by independent counsel, the insurer could only seek reimbursement of such fees from the insured, not from the independent counsel. ( Hartford Casualty Ins. Co. v. J.R. Marketing, LLC (2013) WL 2500827)
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
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In September 2005, Meir Avganim (Avganim) and others sued J.R. Marketing and others for fraud, breach of fiduciary duty, unfair competition, defamation, interference with business relationships, conversion and conspiracy. J.R. Marketing immediately 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 LLP (Squire) to represent J.R. Marketing interests. J.R. Marketing (through Squire) defended the underlying lawsuit filed by Avganim. In addition, J.R. Marketing (again through Squire) filed a bad faith lawsuit against Hartford. Hartford eventually reconsidered its coverage position and agreed to provide a defense to 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 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 independent counsel.
Thereafter, the trial court issued a separate order requiring Hartford to pay J.R. Marketing’s outstanding invoices within 15 days and to pay “all future reasonable and necessary defense costs within 30 days of receipt.” The order provided that “[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 the [underlying lawsuit].” The order further provided that, while Squire’s bills had to be reasonable and necessary, Hartford was barred from invoking the protective provisions afforded insurers under California Civil Code section 2860 because Hartford “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.”
Subsequently, J.R. Marketing’s independent counsel, Squire, submitted over $15 million in bills to Hartford. Hartford paid the bills.
After paying Squire’s invoices, Hartford filed a cross-complaint for reimbursement against both the insured, J.R. Marketing, and its independent counsel, Squire. In its cross-complaint, Hartford claimed a right to obtain reimbursement of “all unreasonable or unnecessary fees and costs billed to and paid by Hartford.” Squire demurred to Hartford’s cross-complaint, arguing that Hartford had no legal right to seek reimbursement from Squire. The trial court sustained Squire’s demurrer and dismissed Squire from the action. Hartford appealed.
Holding
The Court of Appeal affirmed the dismissal of Hartford’s cross-complaint for reimbursement against Squire.
The appellate court began by acknowledging that Civil Code section 2860 contains provisions limiting the fees an insurer must pay to independent counsel, and requiring arbitration of disputes involving fees charged by independent counsel. However, since Hartford had refused to accept J.R. Marketing’s tender of the defense, Hartford was deemed to have waived the protections of section 2860. According to the court, if Hartford were allowed to directly sue Squire for reimbursement, it would frustrate the purposes underlying section 2860. Specifically, if Hartford had honored its duty to defend, Hartford would be limited under section 2860 to arbitrating a fee dispute with independent counsel, but where Hartford breached its duty to defend, Hartford would be able to seek resolution in superior court of a fee dispute with independent counsel.
The appellate court concluded that if Hartford wanted reimbursement of fees incurred to defend claims that were not covered by the insurer’s policies or that were not reasonable, Hartford’s remedy was against J.R. Marketing as insured, not Squire as independent counsel. Thus, Hartford could not pursue a reimbursement claim against Squire.
Comment
The opinion in this case is somewhat muddled, mostly because the appellate court appears to have conflated the rules allowing an insurer to seek reimbursement of defense costs for non-covered claims (see Buss v. Superior Court (1997) 16 Cal.4th 35) with the rules limiting the amount of fees an insurer owes to independent counsel (see Civil Code § 2860). Although these rules are intended to deal with two distinct issues, the appellate court seemingly blended the rules together and failed to distinguish between them. In any event, the end result of this particular case is that while the insurer was allowed to seek reimbursement of uncovered fees from the insured , the insurer was not allowed to seek reimbursement of such fees from the insured’s independent counsel .
The appellate court did note that an insurer might be able to maintain a direct suit against independent counsel for fraudulent billing practicesin connection with the underlying defense of its insured. However, in this case, the insurer had not pursued a fraud theory against independent counsel.