Thursday, August 13, 2015 The California Supreme Court recently ruled in Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C., No.nS211645, 2015WL 4716917 (Cal. Aug. 10, 2015) that an insurer may seek direct reimbursement from independent defense counsel (referred to as Cumis counsel in California) for allegedly excessive and unreasonable fees. While this decision may have defense counsel running for the hills or, at the very least, taking a closer look at the time and effort spent on matters, it has little impact outside the precise parameters articulated by the court.

The decision focused on a court order requiring Hartford, the insurer, to promptly pay fees charged by Squire Patton Boggs, Cumis counsel. The order additionally required Squire Patton’s  fees to be necessary and reasonable, and, “[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 [underlying lawsuit].”

After Hartford attempted to avoid its duty to defend for nearly 10 years, while Squire Patton generated the disputed fees, Hartford sought to be reimbursed by Squire Patton for some of the $15 million paid by Hartford for the independent defense. The law firm argued in response that the insurer must instead obtain reimbursement from the insured, who may then have the right to indemnification from the firm. Squire Patton further claimed a ruling in Hartford’s favor would violate public policy by contravening the Cumis rule and section 2860.

These arguments did not convince the court that Cumis counsel “should be absolutely immune from liability for enriching themselves.” Accordingly, the California Supreme Court determined a CGL insurer may seek reimbursement when (and only when):

(1) the insurer initially refused to defend its insured against a third-party lawsuit; (2) compelled by a court order, the insurer provided independent counsel under a reservation of rights—so called Cumis counsel—to defend its insured in the third party suit; (3) the court order required the insurer to pay all “reasonable and necessary defense costs,” but expressly preserved the insurer’s right to later challenge and recover payments for “unreasonable and necessary” charges by counsel; and (4) the insurer now alleges that independent counsel “padded” their bills by charging fees that were, in part, excessive, unreasonable, and unnecessary[.]

Throughout the opinion, the court limited its holding. The court did not decide “whether, absent such an order, an insurer that breaches its defense obligations has any right to recover excessive fees it paid Cumis counsel." The court also stopped short of deciding who is “unjustly” enriched if independent counsel—representing the insured, but compensated by the insurer—is allowed to retain payments that were unreasonable and unnecessary in the underlying defense, nor “whether a dispute over allegedly excessive fees is more appropriately decided through a court action or an arbitration.” The opinion was tied to a specific court order with express provisions enforcing Hartford’s payment of defense fees.

On remand, the trial court will have to address whether the underlying defense fees are, in fact, unreasonable and unnecessary and whether Squire Patton was unjustly enriched by the allegedly unreasonable fees. While limited in its application, Cumis or independent counsel must be aware of the possibility that if fees charged are susceptible to a reasonableness challenge, the insurer may seek recoupment directly from the law firm, instead of the insured.