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Insurers’ Right To Recover Fees Directly From Independent Counsel To Be Decided

Under California Civil Code 2860, an insured who is entitled to a defense from a liability insurer may also be entitled to select counsel of its choice, even though the insurance policy states that the insurer has the right and duty to defend the insured. If an insurer agrees to defend under a reservation of rights (a letter advising that, at the end of the day, the insurer may actually not cover a loss even though it is currently defending), the insured may have a right to select defense counsel of its choice.  Whether this reservation letter does, in fact, trigger the right of an insured to select its own counsel usually is determined by whether the reservation letter creates a conflict between the insured and the attorney that has been selected by the insurance company.

Some insurers have erred on the side of caution by allowing an insured to select its own counsel (so-called Cumis counsel), while reserving rights to recover money spent on this Cumis counsel.  This reservation would be something similar to an insurer’s reservation under the California Supreme Court decision in Buss v. Superior Court 16 Cal. 4th 35 (1997). There, the court held that, under certain circumstances, an insurer can provide a defense, while reserving its right to recover some, or all, defense fees paid by the insurer at the end of the case. In the recent case of Signal Products , Inc. v. American Zurich Ins. Co. , a federal district court, applying California law, held that an insured who had tendered its defense to an insurer was entitled to fees from that date. This has been black letter law for quite some time.  The court held that the fact that after tender an insured hires independent counsel under Civil Code Sect. 2860 does not violate the no voluntary payment provision of a liability insurance policy. Additionally, the court held that, similar to the Buss decision, an insurer that does agree to independent counsel under Civil Code sect. 2860 may reserve rights to recover those fees, if they are unreasonable.

The next step in this evolution will be determined soon when the California Supreme Court hears a case entitled Hartford Cas. Ins. Co. v. J. R. Marketing.  There, Hartford has alleged it has the right to sue the independent firm directly for alleged excessive and unreasonable fees incurred by independent counsel. We will update this after the anticipated ruling by the Supreme Court.

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.