California Courts Continue To Narrowly Interpret California Civil Code § 2860 In Disputes Over Cumis Counsel Fees
When an insurer’s reservation of rights creates an actual, not theoretical, conflict of interest with its insured, the insured is entitled to independent counsel. See San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 (1984), superseded by statute, Cal. Civ. Code section 2860 (“Section 2860”). While the types of conflicts that warrant independent counsel are well-known, less commonly covered topics are the manner in which Cumis fee disputes arise at the trial court level and the subsequent arbitration of any such disputes. California courts historically have narrowly interpreted California Civil Code § 2860 in determining which issues the courts will decide and which issues are suitable for arbitration; and they continue to do so.
Cumis fee disputes often arise with issues related to an insurer’s duty to defend in the trial courts, but the courts have limited jurisdiction over these issues. Section 2860(c) articulates the mechanism for resolving disputes over independent counsel’s fees. It states that “[t]his subdivision does not invalidate other different or additional policy provisions pertaining to attorney’s fees or providing for methods of settlement of disputes concerning those fees. Any dispute concerning attorney’s fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute.” The California Court of Appeal has found that “[n]otwithstanding the inclusion of other nonarbitrable issues in [the insured’s] complaint, any contested issues concerning the amount of attorney’s fees allegedly owed by [the insurer] for [the insured’s] independent counsel are subject to mandatory arbitration under [§ 2860(c)].” Compulink Mgmt. Ctr., Inc. v. St. Paul Fire & Marine Ins. Co., 169 Cal. App. 4th 289, 300 (2008). Thus, “[a]n assertion of additional claims such as bad faith or breach of contract will not preclude arbitration if fees constitute the ultimate focus of the dispute.” Arrowood Indem. Co. v. Bel Air Mart, 2013 U.S. Dist. LEXIS 78535, at *7 (E.D. Cal. June 3, 2013).
If “an insured raises in a bad faith action the duty to defend, breach and bad faith by an insurer, those issues must be resolved first in the trial court before any Section 2860(c) arbitration because a determination of one or more of those issues in favor of the insured may eliminate altogether the need for arbitration under section 2860.” Janopaul + Block Cos. v. Super. Ct., 200 Cal. App. 4th 1239, 1251 (2011). Thus, California courts typically address preliminary questions regarding whether the insurer has a duty to defend or whether a conflict of interest requires appointment of independent counsel, or disputes over if and when the insurer recognized the insured’s right to select independent counsel, prior to arbitration. See, e.g., Intergulf Dev. LLC v. Super. Ct., 183 Cal. App. 4th 16, 21-22 (2010); Handy v. First Interstate Bank of Cal., 13 Cal. App. 4th 917, 923 (1993).
To the extent that California courts have addressed the scope of fee disputes subject to mandatory arbitration, they have consistently adhered to the plain language of Section 2860(c) by holding that this provision applies only to disputes that are limited to the amount of legal fees or the hourly billing rates. See, e.g., Gray Cary Ware & Freidenrich v. Vigilant Ins. Co., 114 Cal. App. 4th 1185, 1192 (2004); Fireman’s Fund Ins. Cos. v. Younesi, 48 Cal. App. 4th 451, 459 (1996). Thus, disputes over whether the insurer improperly reduced Cumis counsel’s billed hours per the insurer’s “billing guidelines” and cut its hourly rates were subject to Section 2860(c) arbitration. Pepsi-Cola Metro. Bottling Co. v. Ins. Co. of N. Am., 2010 U.S. Dist. LEXIS 144401, at *35, *45 (C.D. Cal. Dec. 28, 2010). Similarly, disputes over which independent counsel hours were reasonably incurred in the insured’s defense and allocation of defensive tasks were submitted to arbitration because they bore “directly on the amount of legal fees owed.” Bel Air Mart, 2013 U.S. Dist. LEXIS 78535, at *5-13.
Conversely, the California Court of Appeal has generally refused to conclude that Section 2860 mandates arbitration of disputes involving costs or expenses, although it has noted that “parties may broaden the scope of arbitration by agreement” and “it may not be unusual for parties to agree to arbitrate the propriety of defense costs along with attorney fees[.]” Gray Cary, 114 Cal. App. 4th at 478-79; see also Truck Ins. Exch. v. Superior Court, 51 Cal. App. 4th 985, 999 (1996) (involving arbitration of Cumis defense costs and attorney fees); Handy, 13 Cal. App. 4th at 776 (same). Again, the court primarily relied upon the plain language of Section 2860(c) in reaching that conclusion. Gray Cary, 114 Cal. App. 4th at 478-79.
Recently, California courts have continued to apply the aforementioned principles. For example, in Wallis v. Centennial Insurance Co., 2013 U.S. Dist. LEXIS 161304, at *20 (E.D. Cal. Nov. 8, 2013), the District Court for the Eastern District of California held that the insureds’ claims for reimbursement of unpaid fees were subject to Section 2860 arbitration. The insureds’ claim for breach of contract was based on contentions that the insurers’ “delay and reduction of payments to [the insureds’] counsel constituted a breach of [the insurers’] duty to defend under the Policy.” Id., at *14. The court noted that because the insurers acknowledged their duty to defend the insureds against a cross-complaint and agreed to provide independent counsel under Section 2860, the insurers were not precluded from seeking arbitration. Id., at *18. In addition, the court found that although the insurers did not pay the disputed bills in full, they were only required to pay “reasonable and necessary” fees, and “withholding any portion of fees cannot constitute a breach per se.” Id. Moreover, because counsel received a “substantial amount of funding, . . . the deficiencies in payments did not rise to the level of a breach of defendants’ duty under the insurance contract” such that the insurers “forfeit[ed] their right to arbitrate the fee dispute.” Id., at *19-20. Thus, the court found that “[w]ithout a determination from the arbitrator that the full amount of fees . . . were ‘reasonable and necessary,’ [the insurers’] withholding of the full amount of fees cannot serve as a basis for [the insureds’] breach of contract and bad faith claims here.” Id., at *18.
In conclusion, California courts generally apply Section 2860 in a narrow manner by focusing on the language of the statute. While it is clear that disputes over the amount of legal fees or the hourly billing rates are subject to arbitration, other issues, such as the reasonableness of costs and expenses, may not be subject to arbitration absent an independent agreement between the carrier and the insured.
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