California Supreme Court Holds Carriers Can Sue Cumis Counsel for Repayment of Excessive Fees
Hartford Cas. Ins. Co. v. J.R. Marketing, Inc., 61 Cal. 4th 988 (2015)
In J.R. Marketing, L.L.C., the California Supreme Court held that, under certain circumstances, a carrier can sue Cumis counsel to recover excessive fees paid in an underlying litigation.
In JR Marketing, the insurer, Hartford Casualty Insurance Company (“Hartford”), issued CGL policies to two insureds. In September 2005, a lawsuit was filed against the Insureds and several individuals alleging, among other things, intentional misrepresentation, breach of fiduciary duty, defamation, and conspiracy (the “Marin Action”).
The Insureds tendered the defense to Hartford. Hartford denied any duty to defend or indemnify on the grounds that the acts complained of occurred prior to the policies’ effective dates, and also on the ground that many of the individual defendants were not insured under the Hartford policies. The Insureds and several individual defendants filed a coverage action against Hartford (the “Coverage Action”).
On January 19, 2006, Hartford agreed to defend the Insureds and several individual defendants, subject to a reservation of rights. However, Hartford still refused to pay for any defense costs incurred prior to that date, and also refused to provide independent counsel in place of panel counsel. In July 2006, the trial court in the Coverage Action found that Hartford breached its duty to defend the Marin Action as of the date first tendered, and that Hartford was required to furnish Cumis counsel pursuant to Section 2860 of the California Civil Code (“Section 2860”). Squire Sanders was hired to serve as Cumis counsel.
In September 2006, the trial court issued an enforcement order (the “Order”) requiring Hartford to pay all past and future defense costs in the Marin Action. The Order, which was drafted by Squire Sanders, further stated that Squire Sanders’ bills had to be “reasonable and necessary,” and that, because of Hartford’s prior breach, Hartford would be precluded from “invoking the rate provisions of Section 2860.” Finally, the Order stated 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 [Marin Action].”
After the Marin Action concluded, Hartford filed claims against Squire Sanders. Asserting restitution and unjust enrichment, Hartford argued that it was entitled to reimbursement of a significant portion of defense fees incurred in defending individuals for whom coverage was not afforded under either CGL policy. Hartford also asserted that Squire Sanders’ fees were excessive, unreasonable, and unnecessary. Squire Sanders demurred, arguing that direct actions for reimbursement against Cumis counsel are disallowed. The trial court and appellate court agreed with Squire Sanders. The matter was appealed to the California Supreme Court.
The California Supreme Court reversed, finding that Hartford could maintain an action for reimbursement directly against Squire Sanders. The Supreme Court reasoned that it was Squire Sanders (and not the Insureds) that would be unjustly enriched if it was allowed to retain unreasonable and unnecessary defense payments. In reaching its decision, the Supreme Court also emphasized that its holding relied upon the particular facts of the case, thereby limiting its ruling to the “unusual” scenario here, where there was an Order that i) required Hartford to pay for “reasonable and necessary” costs of Cumis counsel; and ii) provided that Hartford had a right to reimbursement where such costs were not reasonable or necessary.
According to the Court, the terms of the Order removed from consideration (and thus the Court did not decide) the questions of: (1) whether an insurer who breaches its defense obligation has any right to recover from anyone excessive fees paid to Cumis counsel; (2) whether such disputes should be required to be resolved by arbitration pursuant to Section 2860; and (3) whether resolution of such a fee dispute should be resolved after or before the conclusion of the underlying litigation.
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