Can an Insurer Seek Reimbursement for Uncovered Defense Costs Directly From Cumis Counsel?

Numerous jurisdictions have recognized an insured’s right to independent counsel where a conflict of interest exists between the insured and the insurance company (Alaska, Arkansas, California, Connecticut, Florida, Illinois, Indiana, Louisiana, Maine, Maryland, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New York, North Dakota, Ohio, Pennsylvania, Rhode Island, Texas, Virginia and Wisconsin). Steven Plitt and Jordan R. Plitt, Practical Tools for Handling Insurance Cases (Thomson Reuters 2011), §2:26, pp. 2-147 through 2-149, fns. 8-30 (the authors list each state where the right to independent counsel is recognized with appropriate case law support).

In several jurisdictions where the insured has the right to select independent counsel, the Legislature and the courts have given significant guidance on what is required. As an example, California Civil Code § 2860 provides that the insurance company need only pay the customary hourly rate for defense counsel and may require that the counsel selected by the insured possess minimum qualifications that included five years of civil litigation experience. California’s Civil Code defines the nature of the conflict of interest which must exist to permit the insured’s retention of independent counsel at the insurance company’s expense. Generally, the California courts have found that there is no entitlement to independent counsel where the damages are only partially covered by the policy or where only some aspects of the claim are covered while others may not be covered. See Dynamic Concepts, Inc. v. Truck Ins. Exchange, 61 Cal.App.4th 999, 71 Cal.Rptr.2d 882, 887 (4th Dist. 1998), as modified (March 27, 1998); Blanchard v. State Farm Fire & Cas. Co., 2 Cal.App.4th 345, 2 Cal.Rptr.2d 884, 887 (2nd Dist. 1991).

Several courts have held that a liability insurer may recover fees that it has paid for the defense of its insured under a reservation of rights if it is subsequently found not to owe coverage. Plitt & Plitt, Practical Tools for Handling Insurance Cases, § 2:25, p. 2-139. However, there is no clear majority among the courts that have ruled on the issue of whether an insurer is entitled to the reimbursement of fees and costs expended in the defense. In California, it is well-settled that the insurer does have a right to reimbursement. See, e.g., Buss v. Superior Court, 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766 (1997); Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th 643, 31 Cal.Rptr.3d 147, 115 P.3d 460 (2005). In Buss v. Superior Court, 16 Cal.4th at 49, 65 Cal.Rptr.2d 366, 939 P.2d 766, the California Supreme Court concluded that an insured would be unjustly enriched at the insurer’s expense if not ultimately required to bear the cost of litigating those claims for which the insured had never purchased defense or indemnity protection if the insurance company was unable to seek recovery or reimbursement of attorney’s fees and costs expended in the defense of the insured under reservation. Accordingly, the Court in Buss held that the insurer was entitled to seek reimbursement from the insured of defense costs and expenses solely attributable to the claims that were clearly outside policy coverage.

Recently, the California Supreme Court amplified the Buss decision in the case of Hartford Cas. Ins. Co. v. J.R. Marketing, LLC, 61 Cal.4th 988, 190 Cal.Rptr.3d 599, 353 P.3d 319 (2015). In J.R. Marketing, the Court addressed the related question of “from whom” the insurer could seek reimbursement in a situation 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—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 unnecessary” charges by counsel; and (4) the insurer alleged that independent counsel had “padded” their bills by charging fees that were, in part, excessive, unreasonable, and unnecessary. J.R. Marketing, LLC, 61 Cal.4th at 992, 190 Cal.Rptr.3d at 602, 353 P.3d at 321-22. The insurer argued that it was entitled to recoup the overbilled amounts direction from Cumis counsel themselves. Cumis counsel, on the other hand, responded that, if the insurer had any right at all under the facts of the case to recover overbilled amounts, the insurer’s right ran solely against its insureds. Cumis counsel asserted that the insured client might then have a right of indemnity from Cumis counsel but that the insurer’s initial focus of reimbursement had to be against the insured.

The California Supreme Court in J.R. Marketing concluded that the insurer was entitled to seek reimbursement directly from Cumis counsel. The Court concluded that: “[i]f 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 [had] been unjustly enriched at the insurer’s expense.” 61 Cal.4th at 992-93, 190 Cal.Rptr.3d at 602-03, 353 P.3d at 322. The Court found that Cumis counsel provided no convincing reason as to why Cumis counsel should be absolutely immune from liability for enriching themselves at the expense of the client or insurer.