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May 2011

Richards et al. v. Sequoia Insurance Company ? Compensation for Self-Representation is Not Payment of "Attorney's Fees Expended by the Insured."

Duty to Defend Does Not Include Obligation to Pay Insureds for Time They Expended Working As Attorneys On Their Own Behalf.

(April 28, 2011) ____ Cal.App.4th ____; 2011 Cal.App.Unpub. LEXIS 3176

In this review of a grant of summary judgment in favor of the insurer, Sequoia Insurance Company ("Sequoia"), the appellate court determined that plaintiff insureds, Linda and Thomas Richards (the "Richards"), had no breach of contract or bad faith causes of action against Sequoia for denying them compensation for time they spent, as attorneys, providing their own defense in the underlying cause of action. 

The Richards, owners of the Jack London Lodge, made a claim under their Sequoia general liability policy when a lawsuit was brought against them for negligently serving a minor alcohol that contributed to the minor's death.  On February 29, 2006, the Richards tendered defense of the lawsuit to Sequoia.  On March 8, 2006, Sequoia responded by letter, advising that it was referring the matter to coverage counsel for evaluation, and in the meantime the Richards should retain counsel at their own expense.  Sequoia stated that if it has an obligation to assume the defense, it would reimburse the Richards their "reasonable defense costs incurred from the date of tender?."  The Richards hired an attorney, Brian Charter, who agreed to represent them without a retainer, with the understanding that the Richards, who were licensed attorneys, would do the majority of the legal research, pleadings, and investigation in the case.  On March 17, Sequoia accepted the tender of defense by letter.  Sequoia later settled the suit at its expense and paid all attorney fees owed to Brian Charter and other attorneys who represented the Richards after Sequoia assumed their defense. 

The Richards then wrote to Sequoia demanding $30,000 to settle their claims against the insurer for "denial of the defense and indemnity."  The Richards sought compensation for their time "spent every day for a week and a half after receiving [Sequoia's March 8] letter researching and evaluating [the lawsuit]."  Sequoia requested and received a detailed invoice from the Richards accounting for approximately $43,000 in fees for the work by the Richards.  The Richards sued Sequoia for breach of contract and breach of the covenant of good faith and fair dealing.  The court granted summary judgment for Sequoia on the basis that the Richards were not entitled to recover for the time they expended in their own defense, and that Sequoia expeditiously accepted defense and coverage of the lawsuit.  The Richards appealed.  

In interpreting the insurance contract, the appellate court found that it obligates Sequoia to compensate the Richards for "expenses incurred" at Sequoia's request, but not expenses voluntarily assumed by the Richards.  It found likewise in regards to Sequoia's March 8th Letter to the Richards.  The March 8th letter authorized the Richards to retain counsel of their choice, subject to Sequoia's possible reimbursement of the "reasonable defense costs incurred."  Citing Trope v. Katz (1995) 11 Cal.4th 274, 280, the court explained that the common usage of the term "incur" means "to become obligated to pay [a fee]," and that an attorney litigating in propria persona cannot be said to "incur" compensation for his time and lost business opportunities. 

The appellate court found nothing in the record to suggest that Sequoia consented to compensate the Richards for their efforts in propria persona, or that the Richards could have had any reasonable expectation of compensation in light of the language of the Sequoia policy.  The appellate court concluded that the measure of attorney's fees possibly owed by Sequoia were those "expended" by the Richards, not those based upon the value of their time or services.  Because plaintiffs could not show payment of legal expenses they were not able to show contract damages due to an insurer's delay in assuming responsibility. 

As to the bad faith cause of action, the appellate court found no legal basis.  The appellate court explained that since a bad faith action seeks recovery of a property right, not personal injury, to prevail the insured must show proof of economic loss, and the claim for plaintiffs' time is not a claim seeking compensation for economic loss (for the reasons discussed above). 

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This opinion is not final. It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court. These events would render the opinion unavailable for use as legal authority.

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David L. Jones
Shannon L. Wodnik