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Reversing an appellate court decision, the California Supreme Court ruled that an insurer may seek reimbursement of allegedly excessive defense fees directly from Cumis counsel.  Hartford Cas. Ins. Co. v. J.R. Mktg., L.L.C., 353 P.3d 319 (Cal. 2015).

Hartford initially refused to defend its insureds against a third-party lawsuit, but later agreed to defend subject to a reservation of rights.  However, Hartford declined to pay defense costs previously incurred and to provide independent (so-called Cumis) counsel.  A California trial court ruled that Hartford was required to defend from the date of original tender and to fund Cumis counsel to represent its insureds in the underlying action.  The trial court also issued an enforcement order that required Hartford to pay “reasonable and necessary” counsel bills in a timely fashion.  Although the order precluded Hartford from invoking the rate provisions of California Civil Code section 2860 (which provides guidelines relating to an insurer’s duty to provide independent counsel), it specifically 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].”  An appellate court affirmed the enforcement order.   

Following resolution of the underlying lawsuit, Hartford sought to recoup approximately $13.5 million in defense costs directly from Cumis counsel Squire Sanders.  The trial court rejected the claim, finding that to the extent Hartford had any right to reimbursement, it was from its insureds rather than from Cumis counsel.  The appellate court affirmed, reasoning that allowing Hartford to obtain reimbursement directly from Squire Sanders “would frustrate the policies underlying section 2860 and the Cumis scheme generally.”  The Supreme Court of California reversed. 

The California Supreme Court ruled that under the particular facts and procedural history presented, Hartford was entitled to seek reimbursement directly from Squire Sanders.  Emphasizing the limited nature of its holding, the court explained that: 

[the] enforcement order plainly permits Hartford to pursue someone for reimbursement of allegedly excessive legal charges.  The clarity and finality of this order removes from our consideration the question of whether Hartford, as a “breaching” insurer that was arguably caught shirking its defense duties, ought to be able to pursue anyone for alleged overpayments… .Taking the ... enforcement order as we find it, we conclude that equitable principles of restitution and unjust enrichment dictate that Hartford may seek reimbursement for the allegedly unreasonable and unnecessary defense fees directly from Squire Sanders.