High Court Changes Cumis Landscape

Posted in: Attorneys Fees, Case Updates, Duty to Defend, General Liablity August 26, 2015

We all know the maxim that “bad facts make bad law.”  Two years after J.R. Marketing, LLC prevailed in the Court of Appeal concerning its dispute with its commercial general liability insurer, Hartford, it ran out of luck before the California Supreme Court in its fight over important Cumis counsel issues.  Hartford Cas. Ins. Co. v. J.R. Marketing, LLC, 190 Cal. Rptr. 3d 599, 2015 DJDAR 9111 (Cal. Aug. 10, 2015).  This is a must read for every lawyer in California that acts as Cumis counsel.

The High Court held an insurance company can sue independent counsel (i.e., Cumis counsel) directly for reimbursement of unreasonable or unnecessary legal charges counsel billed it to defend its insured.  This decision may dramatically change the entire Cumis counsel landscape.  Previously, an insurer could only sue its insured for reimbursement of defense fees.  The High Court’s decision, no doubt, will have a chilling effect on how Cumis lawyers represent their clients.  They will fear subsequent fee litigation from the insurer.  One has to wonder if “independent counsel” will truly be independent anymore.  Quite possibly, this case will practically (though not legally) relegate Cumis counsel to a similar role as an insurance company’s panel counsel, who has to pander to the “hand that feeds them” even though, under the law, Cumis counsel has two clients, the insured and the insurer.

The facts of this case were unique because Cumis counsel racked-up a whopping $15 million in legal bills under a court order it drafted that allowed it to bill the insurer without any fear whether or not the bills would be immediately paid in full.  Hartford had issued J.R. Marketing a commercial general liability policy that covered business-related defamation and disparagement.  J.R. Marketing was sued in Marin County (and other liability actions) for interference with business relationships, defamation, unfair competition and other business-related torts.  It tendered the defamation lawsuit to Hartford under the policy.  Hartford denied any duty to defend or indemnify.

J.R. Marketing sued Hartford for breaching the insurance policy.  Hartford, only after the coverage action was filed, agreed to defend under a reservation of rights but only prospectively.  It refused to pay J.R. Marketing’s legal bills back to the date of tender, and it also refused to provide Cumis counsel in place of its own panel defense counsel.  The trial court in the coverage action found Hartford breached it duty to defend by failing to provide and pay for Cumis counsel from the date of tender.

A few months later, because Hartford still had not paid Cumis counsel’s bills violating the trial court’s summary adjudication order, the trial court entered an enforcement order in the coverage action.  The order, drafted by J.R. Marketing’s Cumis counsel, Squire Sanders, required Hartford to promptly pay all of Squire Sanders’s past defense invoices within 15 days and to pay “all future defense costs” in the defamation action “within 30 days of receipt.”  The order stated Hartford breached its duty to defend by failing to honor it until ordered to do so by the court and by thereafter failing to pay counsel’s submitted bills in a timely fashion.  The order further stated that Squire Sanders’s bills had to be reasonable and necessary and that, to “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 defamation action.  The trial court’s order did not specify from whom Hartford could seek reimbursement, i.e. from its insured, J.R. Marketing or from Squire Sanders.

After the defamation suit ended, Hartford filed a cross-complaint in the coverage action for “reimbursement pursuant to the enforcement order,” unjust enrichment and other claims.  It directly sued Cumis counsel, Squire Sanders, as well as its insured J.R. Marketing.  “The cross-complaint asserted that Hartford was entitled to recoup from the cross-defendants a significant portion of some $15 million in defense fees and expenses, including some $13.5 million Hartford paid to Squire Sanders pursuant to the enforcement order.”

Squire Sanders, representing itself and J.R. Marketing, demurred to Hartford’s cross-complaint.  It argued, among other things, that an insurer has no direct claim against an insured’s independent counsel for reimbursement.  The trial court agreed and “concluded that Hartford’s right to reimbursement, if any, was from its insureds, not directly from Cumis counsel.”  The appellate court affirmed the decision.  It rejected Hartford’s argument that an insurer has a right to recover directly from Cumis counsel unreasonable and excessive fees it pays counsel because counsel (and not just the insured) is unjustly enriched in that scenario.

The California Supreme Court reversed.  The Court was very careful to narrowly frame the issue before it because it did not want its holding to apply to all Cumis counsel cases, just ones where the insurer had a reimbursement right rooted in a trial court order.  It therefore stated the issue in great detail as:

From whom may a CGL insurer seek reimbursement when: (1) the insurer initially refused to defend its insured against a third-party lawsuit; (2) compelled by a court order, the insurer subsequently provided independent counsel under a reservation of rights . . . 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 unnecessary” 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?

The Court emphasized again, “We granted Hartford’s petition for review, which raised a narrow question: May an insurer seek reimbursement directly from counsel when, in satisfaction of its duty to fund its insureds’ defense in a third party action against them, the insurer paid bills submitted by the insureds’ independent counsel for the fees and costs of mounting this defense, and has done so in compliance with a court order expressly preserving the insurer’s post-litigation right to recover ‘unreasonable and unnecessary’ amounts billed by counsel?” [Emphasis added].

To that very narrow issue the High Court responded:

We conclude that under the circumstances of this case, the insurer may seek reimbursement directly from Cumis counsel. If Cumis counsel, operating under a court order that expressly provided that the insurer would be able to recover payments of excessive fees, sought and received from the insurer payment for time and costs that were fraudulent, or were otherwise manifestly and objectively useless and wasteful when incurred, Cumis counsel have been unjustly enriched at the insurer’s expense. [Emphasis added].

As alluded to earlier, bad facts make bad law.  The Court could not ignore the fact that the law firm acting as independent counsel, Squire Sanders, had racked up $15 million in legal bills defending the insured!  Moreover, the Squire firm had written its own meal-ticket.  It drafted the proposed order adopted by the trial court finding the defendant insurance company owed a duty to defend its insured through independent counsel.  But Squire Sanders did not stop there.  It included language in the order requiring Hartford to pay all of its legal bills in the case within thirty days, no questions asked, and that Hartford could not challenge any of the bills until after the underlying liability action had ended. The Squire firm’s aggressive and expensive litigation tactics completely unchecked by anyone, and the fact that the firm had drafted the very order permitting that highly advantageous scenario to them, lead the High Court to decide it had to allow a direct reimbursement action by Hartford against Squire Sanders.  It could not allow $15 million in legal bills to stand without affording Hartford an opportunity to contest their reasonableness.

Unfortunately, the extreme facts of J.R. Marketing may forever change the Cumis counsel landscape, and not in a good way.  While the Supreme Court was careful to clarify its holding was limited to the unusual facts of the case before it, its opinion unrealistically downplays the chilling effect it will have on Cumis counsel’s ability to zealously represent their client’s interests independent from the influence of its insurer.

We emphasize that our conclusion hinges on the particular facts and procedural history of this litigation.  . . . We . . . express no view as to what rights an insurer that breaches its defense obligations might have to seek reimbursement directly from Cumis counsel in situations other than the rather unusual one before us in this case.

While firms acting as independent counsel will try to zealously defend their clients and look out solely for their interests (as the law requires), the threat of fee litigation looming over their heads by insurance companies will shape Cumis counsel’s strategy.  Cumis lawyers will consider whether the insurance company is likely to challenge their defense strategies as unnecessary in a subsequent reimbursement action for fear of having to re-pay large legal bills.  They are likely to decide how to defend the case based not just on their client’s best interests but, on their own and the insurer’s too.

If insurance companies had a record of integrity and looking out for their insured’s interests (and the lawyers that defend them), the Court’s opinion might work.  But they don’t.  They have a well-earned reputation of unreasonably nitpicking lawyer’s bills, refusing to pay for necessary legal work, demanding to pay antiquated hourly rates rather than market rates, employing auditing firms paid on a commission by how much of a lawyer’s bills they cut, and by trying to impose unreasonable billing guidelines on law firms.  Cumis firms therefore will make legal strategy decisions against that backdrop.  They will decide strategy based not only on whether they think legal work is necessary to their client’s defense, but, the possibility that the insurer paying their bills will file an expensive reimbursement action against them that unreasonably challenges their fees.

In the proceedings below, the trial court and the appellate court held a breaching insurer has no right to seek reimbursement directly from Cumis counsel.  The lower court’s opinion enhanced the ability of independent counsel retained by insureds to vigorously prosecute their clients’ cases without fear of a possible action for reimbursement by insurers.  It sent a strong message: insurers who reserve their rights and refuse to fund the defense of Cumis counsel take a big chance that they will be stuck paying those fees without any real ability to challenge them.

The California Supreme Court obliterated that vitally important message and sent its own.  Cumis lawyers better carefully scrutinize their bills and only perform legal work that is absolutely reasonable and necessary to defending their clients because, if they cross the line, they will end up with a huge legal bill of their own.  This decision, no doubt, will have a chilling effect on how Cumis lawyers represent their clients.

This decision would appear to undermine the purpose of the Cumis doctrine codified in Civil Code section 2860: when the insurer has a conflict with its insured on how to defend the underlying liability case because the outcome of a reserved coverage issue can be controlled by how it is defended, the insurer must pay for an independent defense lawyer chosen by and with allegiance solely to its insured to defend the case.  How can a lawyer be truly independent from the client’s insurer and solely dedicated to protecting the insured’s interests when the insurer has the power to question every defense decision the lawyer makes and recoup legal fees that were arguably not wisely spent?  Even the most ethical, skilled lawyer will measure each strategy decision he makes not just by whether it will benefit his client’s defense but by whether an insurer may have room to argue against the strategy.  What is the silver lining?  Perhaps the courts will indeed limit this holding to its very unique facts and confine its application.  We can only hope.

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The Reasonable Expectations of the Covered Party, Even an Additional Insured, Determines the Interpretation of Ambiguous Policy Language

Posted in: Case Updates, Duty to Defend, General Liablity, Policy Interpretation January 27, 2014

In California, courts have long held that where a policy provision is ambiguous because it is susceptible to multiple interpretations, the reasonable expectation of the covered party governs.  But which parties’ objectively reasonable expectations should govern where there are both a named insured and an additional named insured claiming coverage?  In its significant decision in Transport Insurance Company v. Superior Court of Los Angeles County, __ Cal. App. 4th __, 2014 Cal. App. LEXIS 28 (Jan. 13, 2014), the Court of Appeal of California held that it is the objectively reasonable expectation of each party seeking coverage that is applied in determining the meaning of language within an insurance contract as it applies to that party, even where it is an additional insured who is not a party to the contact.

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Insurers Have a Duty to Defend at the Outset of Litigation Even If a SIR Has Not Been Exhausted

Posted in: Case Updates, Commercial General Liability Insurance, Duty to Defend, General Liablity, Policy Interpretation October 16, 2013

Insurers providing general liability insurance cannot shirk their duty to defend insureds at the outset of litigation by relying on self-insured retention (SIR) provisions in those policies unless the policies expressly and unambiguously make the insurer’s duty to defend contingent upon the SIR.  So held the Fourth District Court of Appeals in American Safety Indemnity Company v. Admiral Insurance Company, __ Cal. App. 4th ___, 2013 Cal. App. LEXIS 779 (2013).  The court’s decision in American Safety is highly favorable to insureds because it substantially limits the ability of insurers to circumvent their obligation to pay first-dollar for the defense of their insured by arguing that the SIR has not been exhausted. 

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Insurers Forfeit Their Protections Under Civil Code Section 2860 (Cumis Statute) When They Fail to Meet Their Duty to Defend Obligations

Posted in: Attorneys' Fees, Case Updates, Duty to Defend, General Liablity June 27, 2013

If you want to read an important case on Cumis counsel and the consequences to insurers who fail to fulfill their obligations relating thereto, we have one for you.  J.R. Marketing LLC v. The Hartford Cas. Insurance Co., __ Cal.App.4th __ (May 17, 2013).  This case has a lot to offer: Cumis counsel, attorneys’ fees, Buss allocations, duty to defend, and insurance bad faith issues.  In this case, the California Court of Appeal for the First District handed down a very important decision that is highly beneficial to insureds and their independent counsel (i.e., Cumis counsel).  Significantly, the court expanded upon the limitations on the ability of insurers to impose upon their insureds’ choice of defense counsel when they do not properly defend their insureds, most likely committing insurance bad faith.  Specifically, the Court found that insurers who wrongfully refuse to defend their insureds are barred from maintaining suits against their insureds’ independent counsel for reimbursement of fees and costs charged by such counsel and are barred from relying on the protections afforded insurers under Civil Code section 2860.

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California Court Holds That Third-Party Plaintiffs Can Bring Claims Against Defendant's Insurer for Breach of Contract and Bad Faith After a Settlement

Posted in: Case Updates, General Liablity, Insurance Bad Faith June 21, 2013

In a case of first impression, the California Court of Appeal for the Sixth District held that a plaintiff who sued a defendant and settled the case can later sue the defendant’s insurer directly for breach of contract and bad faith concerning a medical expense provision.  This unprecedented decision potentially opens a new avenue for injured plaintiffs to pursue redress directly from insurers for injuries caused by their insureds.

Barnes v. Western Heritage Insurance Co., __ Cal.App.4th __, 2013 Cal. App. LEXIS 480 (June 18, 2013) involves a Plaintiff who was injured in 2001 when a table fell on his back during a recreational program co-sponsored by the Defendant.  Plaintiff made a claim against the Defendant.  But when Plaintiff subsequently requested payment from Defendant’s insurer, Western Heritage Insurance Company, more than one year after the accident for consultation with a medical specialist, the insurer denied the request under the insured’s Comprehensive General Liability Policy.  The insurer asserted that to qualify for medical payment coverage under the applicable policy, Plaintiff had to report a claimed medical expense to the insurer within one year of the accident

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California Courts Give Effect to the Intent of the Parties to an Insurance Contract

Posted in: Breach of Contract, Case Updates, General Liablity, Property & Casualty Insurance December 28, 2012

A recent California Court of Appeals decision served as a reminder of the long-standing rule in California that the mutual intent of the parties will always control the interpretation of potentially conflicting provisions in an insurance contract.  In its recent decision in Gemini Ins. Co. v. Delos Ins. Co. (Dec. 5, 2012, B239533) __ Cal.App.4th __ [2012 WL 6050774] [Second Dist., Div. Five], the Court of Appeals was faced with the task of interpreting the inter-insured exclusion (i.e., an exclusion for claims between two insureds) in a liability policy as it applied to an additional insured named in the policy when the additional insured’s property has been damaged.

The Facts:  A restaurant owner, and tenant to the property, negligently caused a fire which caused damage to property of the landlord.  The landlord was an additional insured under the policy at issue, which insured him from liability for acts caused by the restaurant.  The policy also contained an exclusion for claims asserted between two insureds.  After the fire, the landlord sought relief from the restaurant for damage to his property.  On a motion for summary judgment by the landlord’s insurer, the landlord argued that he was not an insured under the policy, and therefore the inter-insured exclusion did not apply.  The trial court granted the motion.

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The Ninth Circuit Amends Opinion in Du v. Allstate removing policyholder friendly language

Posted in: Auto Insurance, Case Updates, General Liablity, Insurance Bad Faith October 15, 2012

We recently wrote about a policyholder friendly opinion by the Ninth Circuit Court of Appeals that seemingly held that an insurer’s duty of good faith and fair dealing, which is implied in every contract of insurance, may be violated by the insurer’s failure to attempt to effectuate a settlement within policy limits after liability of its insured has become reasonably clear, even without a policy limits settlement demand.  In other words, the court held that a demand within policy limits was not an element of a bad faith failure to settle claim.  The Ninth Circuit, on October 5, 2012, issued an amended opinion deleting this language and leaving open the questions: 1) whether the duty to settle can be breached absent a settlement demand from the third party claimant; and 2) whether the genuine dispute doctrine can be applied in third-party cases. 

 

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Bad Faith Liability May Be Premised on an Insurer's Failure to Effectuate Settlement When Insured's Liability Was Reasonably Clear

Posted in: Assignment of Claim, Auto Insurance, Case Updates, General Liablity, Insurance Bad Faith June 20, 2012

The Ninth Circuit Court of Appeals in a recent decision held that an insurer’s duty of good faith and fair dealing, which is implied in every contract of insurance, may be violated by the insurer’s failure to attempt to effectuate a settlement within policy limits after liability of its insured has become reasonably clear.  In essence, the Court found that an insurer’s unreasonable refusal to attempt to effectuate settlement after the evidence reasonably indicates that the insured’s liability will be in excess of the policy limits constitutes bad faith.

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California Court of Appeal Upholds Insurance Coverage for Health Net Finding The "Dishonest Acts" Exclusion Did Not Preclude Coverage

Posted in: Case Updates, Duty to Defend, ERISA, General Liablity May 29, 2012

In Health Net, Inc. v. RLI Insurance Company, et al., the California Court of Appeal, Second District, reversed a trial court’s entry of judgment on a Motion for Summary Judgment finding some coverage for Health Net, Inc. (“Health Net”) in connection with numerous lawsuits filed against it arising under the Employee Retirement Income Security Act of 1974 (“ERISA”).  Health Net brought suit against four of its insurers (one primary and three excess carriers) seeking a declaratory judgment that the insurers had a duty to defend and indemnify Health Net in over 20 underlying actions involving Health Net’s insurance plans provided by employers, which plans were subject to the requirements of the ERISA. The parties, however, directed their attention to two specific underlying actions, as the amount of indemnity sought in those actions would far exceed the combined policy limits of the defendant insurers.  Relying on a policy exclusion for “dishonest acts,” the trial court granted summary adjudication to the insurers with respect to Health Net’s claim for reimbursement of its defense costs and the costs of settling the specified underlying actions. The parties subsequently settled their dispute regarding the remaining underlying actions, and summary judgment was granted in favor of the insurers.  Health Net appealed the ruling.

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New ED CA Decision is a Feast of First-Party and Third-Party Insurance Coverage and Bad Faith Principles

Posted in: Case Updates, Commercial General Liability Insurance, Duty to Defend, General Liablity, Insurance Bad Faith, Policy Interpretation, Property & Casualty Insurance March 15, 2011

Every now and then a court decision comes along that is a virtual one-stop shop for basic insurance coverage and bad faith principles—a primer for newbie insurance attorneys and a refresher for seasoned litigators.  Chief Judge Anthony Ishii’s recent decision granting in part and denying in part an insurer’s motion for summary judgment on a farm-owners insurance policy is one. Ted Gaylord, et al. v. Nationwide Mutual Insurance Company, et al., 2011 U.S. Dist. LEXIS 21736 (Eastern District of California, March 4, 2011).  The Gaylord decision also sounds a cautionary note to policyholder attorneys to be mindful that first-party and third-party claims in a single action may be subject to different limitations periods.

The Facts

AlfalfaGaylord owns and operates a livestock operation, raising his own cattle and raising cattle for others.  In June 2008 some of the cattle die suddenly.  By September and October 2008 cattle begin dying at an alarming rate.  Gaylord suspects feed poisoning.  Autopsies and feed testing confirm that the cattle are dying from liver failure caused by toxic plants in the alfalfa feed.  There is no known cure, so Gaylord gets permission from the Department of Agriculture to sell the cattle off for early slaughter—but at a financial loss for Gaylord and the other cattle owners. 

Nationwide issued a farm-owners insurance policy to Gaylord in March 2008.  One part insures against physical loss to covered property (first-party); one part insures against third-party liability claims.  Gaylord says he moved his farm-owners insurance from Fireman’s Fund to Nationwide because his long-trusted insurance agent told him that Nationwide had better coverage, including coverage for cattle loss from poisoned feed.  But Gaylord’s agent says he told Gaylord that a “custom feeding of livestock” endorsement was necessary to cover cattle loss from poisoned feed, and that Gaylord declined it because it was too expensive.

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