The California Supreme Court ruled recently that Hartford Casualty Insurance Company can recoup payment of allegedly unreasonable and excessive fees it paid to the policyholders' independent defense counsel from counsel itself, rather than from its policyholder. The Court acknowledged that the facts of the case before it were "unusual" and that its holding was narrow and limited to those facts.
The dispute arose after Hartford denied a defense to its policyholders, which were sued for various business-related torts. The policyholders initiated coverage litigation and obtained summary adjudication that Hartford owed a duty to defend and, because of its reservation of rights, was required to pay for independent counsel to represent the policyholders. The policyholders retained Squire Patton Boggs (US) LLP as independent counsel; Squire also represented them in the coverage action. After Hartford failed to promptly pay independent counsel's defense invoices, the policyholders sought, and won, an enforcement order from the trial court. That order, drafted by Squire, stated that "'[t]o 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 action].'"
After the underlying action was resolved, Hartford, by way of a cross-complaint filed against Squire in the coverage action, sought reimbursement of $13.5 million in defense costs it had paid to Squire. Squire demurred, contending that Hartford's right to reimbursement, if any, was against its insureds, not its independent counsel. The trial court agreed, and the Court of Appeal affirmed. The California Supreme Court accepted review.
The Court reversed, relying on the language of the order drafted by Squire. The Court found that allowing Hartford to seek reimbursement from Squire was "consistent" with the terms of the order, which "expressly preserved Hartford's right to pursue reimbursement for excessive fees and grounded that reimbursement right in principles of restitution and unjust enrichment." In allowing the insurer to purse a reimbursement claim against the law firm, the Court found no interference with the attorney-client privilege or the right of independent counsel to control the defense—an argument that found somewhat more traction in the concurring opinion. That opinion noted that "where the insurer and insured are bitterly divided and the insurer has forfeited its statutory oversight authority, counsel will face a conflict between its duty of loyalty to the insured and its understandable desire to avoid liability in a subsequent reimbursement action by the insurer."
Because this was a narrow ruling, the Court expressly left open the broader—and arguably more important—question of whether a breaching insurer, absent a court order such as the one before it, "ought to be able to pursue anyone for alleged overpayments." Stay tuned.
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