Serving clients in civil litigation since 2003.

Photo of Professionals At Powers Miller Attorneys At Law
  1. Home
  2.  » 
  3. Legal News
  4.  » Obligations And Right To Restitution Of Insurer In Providing A Defense Under Commercial Liability Policy Clarified By California Supreme Court

Obligations And Right To Restitution Of Insurer In Providing A Defense Under Commercial Liability Policy Clarified By California Supreme Court

On Behalf of | Sep 1, 2015 | Legal News

In Hartford Casualty Insurance Company v. J.R. Marketing, L.L.C., (August 10, 2015) 2015 WL 4716917, the California Supreme Court was faced with the question that when an insurer provides an independent counsel to its insured under a reservation of rights, co-called Cumis counsel (see San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 whether and from whom the insurer may seek reimbursement for billing that is deemed excessive, unreasonable, or unnecessary. The Court of Appeal concluded that reimbursement of such costs could not be obtained from Cumis counsel and instead were only to be sought against the insureds. The California Supreme Court reversed the judgment finding that such excessive, unreasonable, or unnecessary amounts charged could be recovered from counsel under the principles of unjust enrichment.

It has been long held that if there are any claims in a third party complaint against a person or entity protected by a commercial general liability insurance policy which are even potentially covered by the policy, an insurer must provide its insured a defense to all of the claims. (E.g., Horace Mann Ins. Co. v. Barbara B. (1993) 4 Cal.4th 1076, 1081.) However, an insurer could later seek reimbursement from its insured any defense fees and expenses solely attributable to the claims that were clearly outside policy coverage to avoid unjust enrichment of the insured if the insurer were forced to bear the costs of litigating claims for which the insured never purchased defense or indemnity protection. (Buss v. Superior Court (1997) 16 Cal.4th 35, 49.)

Respondent J.R. Marketing, L.L.C. and several other defendants were sued for various claims including intentional misrepresentation, unfair competition, and other counts in California and several other states. Hartford Casualty Insurance Company (Hartford) had issued a commercial general liability insurance policy to respondent promising to defend and indemnify their insured against certain claims for business-related defamation which were a portion of the claims raised against the insureds in the action. Respondents in the California action retained independent counsel and also filed cross-complaints. Hartford initially denied the tender of the defense claiming that the acts appeared to have occurred before the policy inception dates and certain defendants appeared not to be covered insureds. After a coverage action was filed by respondent’s independent counsel, Hartford addressed to provide a defense under a reservation of rights but declined to pay defense costs incurred prior to that time and declined to provide independent counsel. Upon a motion for summary adjudication, it was held that Hartford had a duty to provide a defense from the date of the original tender as well as fund Cumis counsel to represent its insureds. As part of the order, Hartford was prevented from invoking the provision of Civil Code section 2860, and it was stated that to the extent that Hartford wished to challenge any fees or costs of Cumis counsel as unreasonable or unnecessary, it was to do so by way of a claim for reimbursement following the conclusion of the superior court action for intentional misrepresentation, etc. which they were then ordered provide a defense. Shortly after the resolution of the first action, Hartford sought reimbursement from both its insured and Cumis counsel for portions of the defense fees and costs including: (1) costs of legal services rendered to non-covered individuals and entities, (2) prior to any proper tender, (3) for any individual in the actions in the other states, and (4) for any individual or entity to the extent which the services or costs were “abusive, excessive, unreasonable, or unnecessary.”

The trial court in the coverage action sustained a demurrer which held that Hartford’s right to reimbursement, if any, was from its insureds and not directly from the Cumis counsel. The Court of Appeals agreed with the conclusions of the trial court reasoning that when an insurer breaches its duty to defend and Cumis counsel is provided, it loses all right to control the defense and likewise is barred from later maintaining a suit against the independent counsel for reimbursement of fees and costs where Hartford considers the fees unreasonable or unnecessary.

Limiting its inquiry to whether Hartford could maintain an independent claim against Cumis counsel for the right of reimbursement where a lower court order allowed it to challenge the reasonableness and necessity of the fees, the California Supreme Court disagreed with the lower courts holding that Hartford could seek a right of reimbursement directly against Cumis counsel. Relying on its opinion in Buss that an insured had an obligation to pay restitution to the insurer for those fees and costs solely attributable to defending claims clearly not covered by the policy in order to avoid unjust enrichment, it was held that the principles of restitution and unjust enrichment also dictated that Cumis counsel should be directly responsible for reimbursing Hartford for counsel’s excessive legal bills.

Disclaimer: The information contained in this post is provided for informational purposes only. Such information is not intended as, nor does it constitute legal advice, and information is current only as of the date indicated. No attorney-client relationship is created by this website, nor by any exchange of information in connection therewith, unless and until a written agreement containing all terms of representation has been signed.