Insurer May Seek Reimbursement of Overbilled Amounts Directly from Cumis Counsel, California Supreme Court Rules

August 31, 2015

The California Supreme Court has ruled that an insurance company may seek reimbursement of overbilled amounts directly from Cumis counsel.

Background

In California, if any claims in a complaint against an insured under a commercial general liability (“CGL”) insurance policy are potentially covered by the policy, the insurer must provide its insured with a defense to all of the claims.

In its 1997 decision in Buss v. Superior Court, the California Supreme Court reasoned that the insurer was required to provide a complete defense in a “mixed” action – where some claims were covered, and some were not – to “protect the insured’s litigation rights” with respect to the potentially covered claims. Significantly, the court also ruled in Buss that the insured would be unjustly enriched at the insurer’s expense if the insured was not ultimately required to bear the cost of defending those claims for which the insured had never purchased defense or indemnity protection. Accordingly, the court declared in Buss that an insurer could seek reimbursement from the insured of defense fees and expenses solely attributable to the uncovered claims.

The California Supreme Court in Buss did not consider the related question of from whom a CGL insurer may seek reimbursement.  It addressed that issue for the first time last month.  In J.R. Marketing, the insurer initially refused to defend its insured in a suit by a third party. Compelled by a court order, the insurer later provided independent counsel under a reservation of rights (“Cumis counsel”) to defend its insured in the third party suit. 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. The insurer alleged that independent counsel had “padded” their bills by charging fees that were, in part, excessive, unreasonable, and unnecessary.

The California Supreme Court’s Decision

The court ruled that if Cumis counsel, operating under a court order expressly allowing the insurer 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, then Cumis counsel would have been unjustly enriched at the insurer’s expense. In these circumstances, the court held, the insurer could obtain reimbursement “directly from Cumis counsel.”

Specifically, the court decided that where Cumis counsel’s fees were excessive, unnecessary, and were not incurred for the benefit of the insured, it was “counsel who should owe restitution of the excess payments received.” The court found no reason why liability for Cumis counsel’s bill padding should fall solely on the insureds.

The case is Hartford Cas. Ins. Co. v. J.R. Marketing, L.L.C., No. S211645 (Cal. Aug. 10, 2015).

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  • Robert Tugander





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