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June 2013

Nondefending Insurer Can't Sue Independent Counsel for Reimbursement of Allegedly Excessive Attorney's Fees

In J.R. Marketing L.L.C. v. Hartford Casualty Insurance Co., filed on May 17 and ordered published on June 11, the California Court of Appeal, First Appellate District, held that a liability insurer could not pursue the insured’s independent counsel for restitution (reimbursement) of allegedly excessive and improper attorney’s fees and costs.  The liability insurer previously was found to be in breach for initially failing to defend its insured and provide independent counsel.

The case has been before the appellate court three times. By way of background for the current dispute, Hartford issued commercial general liability policies to J.R. Marketing and Noble Locks Enterprises, Inc. (the insureds).  The insureds were sued for various business torts and tendered defense of the lawsuits to Hartford.  Hartford refused to defend the insureds on the basis that the acts alleged in the underlying lawsuits occurred before the inception dates of the Hartford policies.  After the insureds sued Hartford, Hartford agreed to defend the insureds, but refused to pay for independent counsel.  The insureds moved for summary adjudication on whether Hartford owed a duty to defend and to provide independent (Cumis) counsel.  The trial court granted the motion, ruling Hartford was required to defend and pay for the independent counsel pursuant to Civil Code §2860. 

The trial court also granted a later motion to enforce Hartford’s duty to defend and pay for independent counsel, ordering Hartford to pay all independent counsel’s fees within 30 days.  The enforcement order provided that Hartford was barred from invoking the protective provisions afforded insurers under §2860 because Hartford breached its defense obligations by failing to pay defense costs incurred by the insureds and provide independent counsel.  This decision was affirmed by the Court of Appeal in a previous opinion.

Pursuant to the order requiring payment, Hartford paid more than $15 million to independent counsel in fees and costs.  Hartford then filed a cross-complaint against the insureds, independent counsel, and an uninsured party (Harrington), asserting causes of action for reimbursement of monies paid pursuant to the enforcement order, unjust enrichment, accounting, and rescission.  Hartford alleged independent counsel submitted excessive and uncovered invoices to Hartford under the auspices of the trial court’s enforcement order.  All cross-defendants demurred to all causes of action.  The trial court sustained the demurrer to the unjust enrichment and accounting causes of action without leave to amend as to all cross-defendants and to the reimbursement and rescission causes of action without leave to amend as to independent counsel and Harrington.  Hartford appealed.

The Court of Appeal affirmed, framing the issue as whether Hartford had a quasi-contractual right to maintain a suit against independent counsel and an uninsured party for reimbursement of excessive or otherwise improperly invoiced defense fees and costs.  The Court of Appeal concluded Hartford had no such right. 

The Court of Appeal explained that an insurer that breaches its duty to defend loses control of the defense and the protections of §2860, which includes the limitations on fees charged by independent counsel and the right to arbitrate the fee dispute.  Hartford could not pursue a similar remedy by suing in court for those fees, or by suing independent counsel for reimbursement.  To hold otherwise, according to the Court of Appeal, would afford a nondefending insurer more rights than a defending insurer.

Further, the Court of Appeal held a restitution claim against independent counsel could not be pursued because restitution is to recover where a benefit has been conferred that in equity should not have been conferred.  Hartford did not confer a benefit on independent counsel; Hartford conferred the benefit on its insureds.  Thus, the Court of Appeal concluded, the insureds were the parties to whom Hartford should look for reimbursement.

The Court of Appeal added, though, that its holding was limited to the facts of the case, and that it took no position as to whether an insurer would have the right to maintain a direct suit against an independent counsel for fraudulent billing practices.

In addition, the Court of Appeal affirmed dismissal of the claim against Harrington because Hartford failed to provide authority for its position and because there was no allegation or showing that any of the fees and costs incurred were solely for the benefit of Harrington.

Please click here for the opinion.

The opinion in J.R. Marketing L.L.C. v. Hartford Casualty Ins. Co., 2013 Cal. App. LEXIS 455 (May 17, 2013) 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.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com.

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