• Hartford Casualty Ins. Co. v. J.R. Marketing, L.L.C. (Cal. Sup. CT. 2015) --- Cal. 4th---, ----- W. L. -----, Case. No. S211645
  • August 14, 2015
  • Law Firm: McCormick Barstow Sheppard Wayte Carruth LLP - Fresno Office

    Hartford issued CGL policies to Noble Locks and J. R. Marketing. An action was filed in Marin County against both insureds and several of their employees alleging intentional misrepresentation, breach of fiduciary duty, unfair competition, restraint of trade, defamation, interference with business relationships, mismanagement and conspiracy. Related actions were also filed in Nevada and Virginia. Defense of the Marin County action was tendered to Hartford on September 26, 2005. Hartford denied coverage in January 2006, contending the insureds' alleged wrongful conduct occurred before the inception dates of the Hartford policies and certain defendants did not qualify as insureds. A coverage action was filed by the insureds against Hartford which subsequently agreed to defend Noble Locks, J. R. Marketing and certain of the individual defendants. However, this defense was subject to a reservation of rights, and Hartford refused to pay fees incurred prior to January 19, 2006, and declined to provide independent counsel. The trial court subsequently entered a summary adjudication order to the effect that Hartford had a duty to defend as of the date of tender and that independent counsel must be provided.

    The law firm of Squire Sanders was retained by the insureds as their independent counsel. When Hartford continued to fail to pay the defense bills, the trial court issued an enforcement order, drafted by Squire Sanders, requiring that Hartford promptly pay all defense invoices submitted as of August 1, 2006, and that all future invoices be paid within 30 days of receipt. The order also noted that Hartford had breached its defense duties by refusing to provide independent counsel and by failing to pay bills in a timely manner. Although the bills had to be "reasonable and necessary," Hartford was precluded from invoking the Civil Code section 2860 independent counsel rate provisions due to its breach. Finally, under the order, Hartford could challenge fees and costs as unreasonable and unnecessary after the resolution of the underlying action. The summary adjudication and enforcement orders were subsequently affirmed by the Court of Appeal.

    The underlying Marin County action was resolved in October 2009. Hartford filed a cross-complaint in the coverage action against both Squire Sanders and those for whom it had paid defense fees and costs. The cross-complaint contained causes of action for reimbursement under the enforcement order, unjust enrichment, accounting/money had and received, and rescission. Among other allegations, Hartford contended it was entitled to reimbursement of fees and services beyond the enforcement order to the extent the legal services were "abusive, excessive, unreasonable or unnecessary." Squire Sanders demurred on the ground no claim for reimbursement could be stated against non-insureds, including independent counsel. The trial court agreed, sustained the demurrer without leave to amend on the reimbursement and rescission causes of action as to the non-insureds, and dismissed Squire Sanders. Hartford appealed and the Court of Appeal affirmed, reasoning that Hartford had initially breached its duty to defend, forcing the insureds to retain their own counsel, and allowing recovery from independent counsel would frustrate the policies of section 2860. Harford filed a petition for review with the California Supreme Court which petition was granted as to the following 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?"

    The Supreme Court noted that in Buss v. Superior Court (1997) 4 Cal. 4th 35, it did not address the issue of who is unjustly enriched if independent counsel is allowed to retain fees and expenses which were unreasonable and unnecessary to the insured's defense. The Supreme Court determined that, under these circumstances, assuming bills are objectively unreasonable and unnecessary to the defense and such bills were not incurred for the insured's benefit, independent counsel is responsible for reimbursement under theories of unjust enrichment and restitution. It is of note that the Supreme Court stressed that its conclusion rested on the particular facts and history of the litigation at hand, namely the trial court's order which specifically ordered that independent counsel's bills be "reasonable and necessary" and provided that Hartford could challenge the bills in a subsequent reimbursement action. Under these particular facts, the Supreme Court concluded, the insurer was permitted to seek reimbursement directly from independent counsel. The court refused to express any view as to what rights an insurer would have which had breached its defense obligations under facts dissimilar to the present case.

    Squire Sanders argued that it was merely an incidental beneficiary of Hartford's obligation to defend its insureds and, as such, restitution was not required. The Supreme Court disagreed, noting that Hartford's obligation to pay independent counsel was not unlimited but extended only to reasonable costs of defense. Furthermore, Hartford did not voluntarily pay alleged overcharges out of self-interest beyond the benefit conferred on counsel. Instead, Squire Sanders, pursuant to a court order it had drafted, submitted bills and received payment subject to an order that its bills must be reasonable and that Hartford could later obtain reimbursement for unreasonable and excessive amounts.

    Squire Sanders also complained that allowing an insurer who has breached its obligations to file a direct action against independent counsel would violate the public policy behind San Diego Navy Federal Credit Union. et al. v. Cumis Ins. Society, Inc., (1984) 162 Cal.App.3d 358 and section 2860, and would interfere with the insured's attorney-client privilege and the insured's right to control the defense. The Supreme Court again disagreed, noting that counsel's independence was not inconsistent with its obligation to justify its fees and that, in fact, section 2860, by providing for a method of resolution of such disputes, recognizes counsel may have to do so at times. In this case, the Supreme Court noted that, by providing for a method of resolution of such disputes, it was not deciding when or in what forum a breaching insurer may challenge independent counsel's legal bills. Instead, the Supreme Court was simply deciding whether, "assuming the insurer may seek reimbursement of allegedly excessive, unreasonable, and unnecessary fees from a court after the underlying litigation has concluded, the insurer may seek such reimbursement directly from counsel" (emphasis in original).

    Squire Sanders next argued that, since the insureds alone have the authority to control independent counsel's conduct and expenditures, where the insured fails to do so, it should be the responsible party, with a potential right to indemnity from counsel. In dismissing this argument, the Supreme Court noted that the insureds in this case were not sophisticated, frequent litigators expected to monitor their counsel's actions. Furthermore, they paid premiums to be spared costs of defense and did not expect to be faced with defending a later action for unreasonable and excessive bills pursued by the insurer.

    Finally, Squire Sanders argued that Hartford's direct action against it contravened California's prohibition against assignment of legal malpractice claims. Again, the court disagreed as Hartford did not seek to stand in the insureds' shoes to assert a claim of malpractice on counsel's part but instead was seeking to recover excessive legal fees and costs it had paid, pursuant to a court order allowing such action. The Supreme Court recognized that independent counsel must be free to represent the insured as they see fit subject only to "generally applicable legal provisions and professional standards" (Buss), but that any post litigation claim for reimbursement is the same as a contemporaneous one: namely, were the charges objectively reasonable at the time incurred and under the circumstances known by counsel. The Supreme Court agreed that this was the appropriate standard for such fee disputes. It added, though, that the burden is on the insurer to show that the fees and costs were unreasonable and unnecessary. The Supreme Court concluded:

    "When the insurer seeks to carry that burden in a case such as this one, however, the insurer may proceed directly against Cumis counsel in its reimbursement action. We recognize that this conclusion is a limited one, and a particularly apposite one given the history of this litigation. The trial court's 2006 enforcement order plainly permits Hartford to pursue someone for reimbursement of allegedly excessive legal charges. The clarity and finality of this order removes from our consideration the question whether Hartford, as a 'breaching' insurer that was arguably caught shirking its defense duties, ought to be able to pursue anyone for alleged overpayments. Similarly off the table is the question of whether the trial court ought to have cut Hartford off from section 2860's arbitration provisions, even as a sanction for its breach." (Italics in original.)

    The Supreme Court found that any unfairness in allowing a breaching insurer to seek reimbursement stemmed from the 2006 order and not from the court's holding. Taking the order into consideration, Hartford was free to seek reimbursement from Squire Sanders. In addition, Squire Sanders' own conduct supported the conclusion as it was Squire Sanders who drafted the order specifically preserving Hartford's right to seek reimbursement. Under these circumstances, "allowing Hartford to pursue a narrow claim for reimbursement against Squire Sanders under the terms of the 2006 enforcement order neither rewards an undeserving insurer nor penalizes unsuspecting Cumis counsel." The judgment of the Court of Appeal was therefore reversed to the extent it upheld the dismissal of Squire Sanders from Hartford's cross-suit.

    The California Supreme Court repeatedly stated that its decision was narrow and limited to the specific and unusual facts and circumstances surrounding this particular lawsuit. The court often focused on the trial court's enforcement order permitting the insurer to later seek reimbursement, which order had been appealed and was final, in deciding that Hartford, as the breaching insurer, could nevertheless seek reimbursement directly from independent counsel for excessive, unreasonable and unnecessary fees. In doing so, the Supreme Court seemed to be sending the message that, under a different set of facts, such as where no trial court allowing for reimbursement order exists, the result could be different. The Supreme Court specifically noted at footnote 7 that "[i]n light of the 2006 enforcement order's express provision authorizing Hartford to seek reimbursement for excessive fees, we need not and do not decide here whether, absent such an order, an insurer that breaches its defense obligations has any right to recover excessive fees it paid Cumis counsel (emphasis in original). .

    Furthermore, the Supreme Court noted that, although section 2860 requires that disputes over fees are to be resolved by binding arbitration, the 2006 enforcement order provided that such a dispute would be addressed in a court action. Since that order was final and not reviewable, and because Squire Sanders did not raise the issue of section 2860's arbitration provision in the present lawsuit, the Supreme Court declined to decide whether the dispute was more appropriately resolved through arbitration or court action. In addition, the Supreme Court declined to decide the issue of when such fee disputes should be decided in relation to the underlying litigation because the 2006 order required that the issue be decided after conclusion of the underlying litigation.

    In light of the foregoing, the implications of this ruling appear to be quite limited and, in fact, would apply only to the particular and unusual facts presented in this case. It is of note, however, that the court's ruling to the effect that independent counsel could be pursued directly did not depend on the particulars of the 2006 enforcement order. In fact, the enforcement order did not dictate in any way who could be pursued in a reimbursement action. Thus, the California Supreme Court's ruling would suggest that independent counsel can be pursued directly for reimbursement in actions where the carrier has not breached its duty to defend. The question which remains open is whether an insurer who has breached the duty to defend even has a right to pursue reimbursement in the absence of a final trial court order stating that it may do so.

    As a final note, the concurring opinion of Justice Liu focused on the fact that the majority opinion permitting reimbursement directly against independent counsel, where the duty to defend has been breached, was premised on not just a finding that the bills were objectively unreasonable and unnecessary to the defense but also that they were not incurred for the insured's benefit. According to the concurring opinion, even if such fees were not objectively reasonable, if they were incurred for the insured's defense any reimbursement action would have to be against the insured as opposed to independent counsel. According to the concurring opinion, the majority did not address how it should be determined by the trial court who benefited from the unreasonable bills. Justice Liu opined that, under the circumstances presented, Hartford should have to overcome a presumption that fees billed were primarily for the benefit of the insured. Assuming that the remainder of the California Supreme Court would agree with this analysis, any direct action against independent counsel would then place a burden on the insurer to demonstrate that the unreasonable fees were incurred primarily for the benefit of counsel as opposed to the insured.