High Court Changes Cumis Landscape
Business Insurance Employment Labor Law
Summary: This article discusses a case from the Calif Supreme Court that changes the "Cumis" Landscape
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 liabilityinsurer,
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., Cumiscounsel)
directly for reimbursement of unreasonable or unnecessary legal charges counsel
billed it to defend its insured. This decision may dramatically change
the entire Cumiscounsel 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 Cumiscounsel.” 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
requiredthe 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.