Tuesday, August 11, 2015
S.C. Says Insurer May Sue Cumis Counsel for Overbilling
By KENNETH OFGANG, Staff Writer
An insurer who is compelled to pay the fees of its insured’s independent counsel may sue those lawyers directly in order to recover for excessive or fraudulent billing, the state Supreme Court ruled yesterday.
Reversing the First District Court of Appeal, the justices unanimously agreed that Hartford Casualty Insurance Company may sue Squire Patton Boggs (US) LLP—formerly Squire Sanders (US) LLP—to recover some of the $13.5 million it paid the law firm for its independent representation of J.R. Marketing LLC.
J.R. Marketing, a defendant in related tort actions brought in three states by a former employer of the company’s founders, retained the firm after a San Francisco Superior Court judge ruled that it was entitled to independent counsel under San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358. The order specifically preserved Hartford’s right to seek a subsequent recovery of any “unreasonable and unnecessary” charges by Cumis counsel, and stayed further proceedings regarding coverage while the underlying action was litigated.
The Cumis holding, which has been modified by statute, allows an insured to be represented by independent counsel when the attorneys retained by the insurer have a conflict of interest resulting from the insurer’s reservation of rights.
Coverage Action Resumes
After the underlying litigation settled in 2009, the coverage action resumed, with Hartford filing a cross-complaint against Squire Sanders and various persons for whom it had paid legal fees and expenses in the three lawsuits. Hartford asserted in the cross-complaint that the millions it had paid to Squire Sanders pursuant to the earlier order, along with $1.5 million it had paid to others, should be at least partially recoverable.
The cross-complaint stated theories of reimbursement, unjust enrichment, money had and received, and rescission. It argued that some of the defendants whose costs it had paid weren’t insureds under the policies, that some of the payments were for services rendered prior to a proper tender, that it should not have been required to pay any billings for the out-of-state lawsuits, and that some of the charges that it had paid were “abusive, excessive, unreasonable or unnecessary.”
Squire Sanders asserted in its demurrer that, among other things, it was a “non-insured” and thus not liable under any of the theories asserted by J.R. Marketing. San Francisco Superior Court Judge Loretta M. Giorgi sustained the demurrer, holding that Hartford could only recover, if at all, from its insureds, and the Court of Appeal agreed.
Justice Mariano-Florentino Cuéllar, however, in yesterday’s opinion for the high court, said the lower court holdings were unfair to Hartford.
“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,” the justice reasoned.
“Cumis counsel provide no convincing reason why they should be absolutely immune from liability for enriching themselves in this fashion. Alternatively, Cumis counsel fail to persuade that any financial responsibility for their excessive billing should fall first on their own clients — insureds who paid to receive a defense of potentially covered claims, not to face additional rounds of litigation and possible monetary exposure for the acts of their lawyers.”
The argument that the potential of having to defend its fees in subsequent litigation would compromise a law firm’s efforts on behalf of its client “is not convincing,” Cuéllar said. “Although Cumis counsel must indeed retain the necessary independence to make reasonable choices when representing their clients, such independence is not inconsistent with an obligation of counsel to justify their fees,” he wrote, citing probate, bankruptcy, class-action practice, and fee-shifting statutes as examples of circumstances in which lawyers must litigate first and justify their fees later.
Besides, Cuéllar wrote, Business and Professions Code §2860, which codifies Cumis, expressly provides for the resolution of fee disputes, and nothing in the statute precludes the insurer from using its procedures to “question and resist” the bills of Cumis counsel.
Chief Justice Tani G. Cantil-Sakauye and Justices Kathryn M. Werdegar, Ming Chin, Carol A. Corrigan and Leondra R. Kruger concurred in Cuéllar’s opinion.
Justice Goodwin H. Liu concurred separately. While “Squire Sanders is probably not blameless in this matter,” Hartford—having breached its duty to defend its insured—should be required on remand “to overcome a presumption that any fees billed by Squire Sanders — even fees later found to be unreasonable — were incurred primarily for the benefit of J.R. Marketing,” Liu wrote.
“Such an approach would accord with the purposes behind the Cumis scheme as well as our usual understanding of the attorney-client relationship,” the justice said.
The case was argued in the Supreme Court by Jonathan M. Freiman of Wiggin and Dana in New Haven, Conn. for Hartford and Theodore J. Boutrous Jr. of Gibson, Dunn & Crutcher in Los Angeles for Squire Patton Boggs.
The case is Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C., 15 S.O.S. 4045.
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