The California Supreme Court ruled that Hartford Casualty Insurance Co. can bring a direct action against Squire Patton Boggs LLP to recover some of the $13.5 million it paid the law firm as independent counsel under C.C. Section 2860 (Cumis) to defend its insured against claims that it stole business from a former employer. In Buss v. Superior Court (1997) 16 Cal.4th 35 the Court held that an insurer who must defend the entire action even if some claims are not-covered may reserve its right to seek reimbursement back from the insured for fees allocated to the clearly non-covered claims. The Court has taken the next step and held that the insurer also has the right to directly sue “Cumis” counsel for fee gouging, expressly finding that the financial responsibility for excessive billing should fall first on the law firm and not on the clients who face potential exposure for the acts of their lawyers. “We see no persuasive ground to hold that any direct liability to Hartford for bill padding by Squire Sanders must fall solely on the insureds.” The Court noted that the burden of proving the fees were unreasonable and unnecessary falls on the insurer.
The Court indicated its decision was limited to the facts and procedural history presented, which included an Order from the Court that foreclosed the insurer from “invoking the rate provisions of Section 2860” but also admonished that counsel’s bills must be “reasonable and necessary.” The Order provided that the insurer could challenge the billings in a subsequent reimbursement action, and this Order was affirmed on appeal. The Court expressed no view as to what rights an insurer that breaches its defense obligations might have to seek reimbursement directly from Cumis counsel under different circumstances, and noted that the enforcement Order eliminated Section 2860’s arbitration remedies.
The California Supreme Court’s ruling serves as a warning for private counsel to avoid court orders that allow insurers to pursue reimbursement of defense costs. However, the analysis of the Court may have broader application. When recognizing Cumis counsel and agreeing to discounted fee rates, insurer’s may start expressly reserving their rights to seek reimbursement from the insured and from the insured’s private counsel. Whether such a reservation of rights will be recognized given the limitations stated in Hartford v. J.R. Marketing is yet to be seen. The best practice, as always, is for private counsel to be honest and reasonable in their billing practices and not assume their bills are immune from challenge if they treat the insurer as a cash cow.
For more information about this topic please contact:
Michael B. Geibel, Esq.
Gibbs Giden Locher Turner Senet & Wittbrodt LLP
1880 Century Park East, 12th Floor
Los Angeles, California 90067
Phone: (310) 552-3400
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