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Insurer May Not Sue Independent Counsel for Reimbursement of Unreasonable Defense Costs

A recent decision by the California Court of Appeal held that once an insurer breaches its duty to defend, the insurer may not sue independent counsel hired by the insured for reimbursement fees and costs which were allegedly unreasonable or otherwise outside the scope of the insurer's contractual defense obligations.  In J.R. Marketing, LLC v. Hartford Casualty Ins. Co. (2013) 216 Cal. App. 4th 1444, the court followed established California law that when the insurer fails to meet its duty to defend, the insurer forfeits the protections of section 2860, including its statutory limitations on independent counsel’s fee rates and resolution of fee disputes and the insured is relieved of his or her obligation to allow the insurer to manage the litigation and may proceed in whatever manner is deemed appropriate.

The court took “the law one slight step further by holding [the insurer] likewise [is] barred from later maintaining a direct suit against independent counsel for reimbursement of fees and costs charged by such counsel for crafting and mounting the insureds' defense where [the insurer] considers those fees unreasonable or unnecessary. To hold otherwise would effectively afford the insurer that has waived the protections of section 2860 through its own wrongdoing more rights in a fee dispute with independent counsel than the insurer that has not waived such protections. Specifically, while the insurer in compliance with its duty to defend would be limited under section 2860 to arbitrating a fee dispute, the insurer in breach of its duty could bring the fee dispute to court.”  Id. Further, the court upheld the trial court’s order requiring the insurer to pay the insured’s counsel’s outstanding invoices within 15 days and to pay all future reasonable and necessary defense costs within 30 days of receipt.  Id.

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