Battling for Equity-Securing Appropriate Fee Rates in C. C. §2860 Disputes

Battling for Equity-Securing Appropriate Fee Rates in C. C. §2860 Disputes

By David A. Gauntlett*

Introduction

The rates insurers pay their appointed counsel to defend similar actions in similar communities sets the benchmark when California Civil Code § 2860 is applied. To pay a rate less than the reasonable rate virtually every other forum requires strict and complete compliance with California Civil Code § 2860 which provides that:

[T]he insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.

This defense fee reimbursement scheme will apply if California coverage law applies, and that is likely to be the case under California choice-of-law rules if the suit is pending in California.[1] Where a case is governed by an insurance policy obtained outside of California, a case litigated in California may nonetheless be governed by the law in which the policyholder’s principle place of business.[2] Where multiple insurers each have separate contractual obligations to the insured arising out of the same risks, each insurer is severally and not jointly liable to perform under their separate contracts of insurance.[3] The principal of severally enforceable obligations applies to the duty to indemnify and the duty to defend.[4]

Validating Rates Paid to Appointed Counsel for Same Community/Similar Actions

An insurer must establish that it satisfies the provisions of C.C. §2860(c) by paying appointed counsel whose rate meets the criteria therein to use it as a benchmark to apply that rate to independent counsel.[5] Cal. Civ. Code §2860 articulates an exception to this general reasonableness rule. But rates of reimbursement of independent counsel pursuant to that statute may not be set by virtue of an unsubstantiated rate that an insurer unilaterally decides to pay appointed counsel.[6] The statutory implication of C.C. §2860 rests the burden of proof in establishing whom the insurer retained as qualified panel counsel to serve as “benchmark” for the rates it seeks to use in limiting the rates chargeable by independent counsel.[7]

 To meet the rate structure criteria of C.C. §2860(c), an insurer must substantiate that: (1) it has previously retained counsel to defend the interests of its policyholders at the rate stated; (2) the issues, exposure and magnitude of those cases were similar to those involved in the defense case; (3) the cases that arose were defended in the forum where the underlying action is pursued; and (4) the counsel retained with qualified experience to defend the actions.

The insurer must provide the identity of the law firms that it contends to have paid lower rated for defense fees in similar lawsuits pending in California. Thus for each law firm identified, the insurer must:

• the years and type of experience of the attorneys working on these files at the time of the defense of the action;

• the case names, numbers and courts where the cases were filed, and the names, addresses, and telephone numbers of opposing counsel;

• the nature of the claims;

• the results obtained by counsel in those suits;

• any evidence which supports the insurer’s contention that the lawsuits are comparable in complexity, magnitude, risk and exposure to the suit;

• the dates the allegedly similar suits were filed; and

• the hourly rates Universal paid for each attorney and paralegal working on these matters.

Clarifying with Granularity What Are “Similar” Actions Under C.C. §2860

An insurer must prove rates paid in similar actions. C.C. §2860 does not define what constitutes a “similar” action. A commonly accepted meaning of “similar” set forth in Murphy[8] is that the words of the statute are to be given “a plain and commonsense meeting.” “Similar” is commonly defined to mean “having characteristics in common, strictly comparable; alike in substance or essentials.”[9] California Rule of Professional Conduct 4–200 should apply which simply bars attorneys from charging unconscionable fees and sets forth various factors to determine if that provision is violated. One of these is the amount of the fee in proportion to the value of the service's is provided the relative sophistication of the attorney and the client, the nature and length of the professional relationship with the client, and the experience and reputation of the attorney. [10]

The Same Community Does not Encompass “Equivalent” Community under C.C. §2860 

C.C. §2860(c) requires the insurer to pay rates that it pays in the community where the claim arose or is being defended. Insurers can rarely show rates which “are actually paid” to panel counsel “in the defense of similar actions” in the “community where the claim arose or is being defended.”

Conclusion

Insurers frequently ignore issuance of a reservation of rights letter to avoid confronting whether a right to independent counsel arises. Claiming they control selection of counsel, their appointed counsel simply requests the file and seek to take over the litigation. This is premature as a policyholder is entitled to review the basis for an insurer’s agreement to defend by insisting they produce a reservation of rights letter. Until receipt of this letter, it is unclear whether appointed counsel under C.C. §2860(f) is merely non-controlling co-counsel paid at the insurer’s expense but not discharging its duty to defending the suit or control. Once it is established that independent counsel is appropriate the rate of reimbursement is a separate inquiry requiring assessment of whether the proposed “benchmark” appointed counsel meet criteria under C.C. §2860(c) so as to impact the rates payable to independent counsel.

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* David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.  

[1] Frontier Oil Corp. v. RLI Ins. Co., 153 Cal. App. 4th 1436, 1143 (2007) (“[Where] California, as the location of the risk insured under the policy, was the state where RLI would be obligated to perform its defense obligations under the policy,” its law governed.)

[2] RSUI Indem. Co. v. Murdock, 248 A. 3d 887, 901 (Del. 2021) (“Delaware’s interest in protecting the ability of its considerable corporate citizenry…[as such] Delaware has the most significant relationship to the Policy and the parties”.); JACO Envtl., Inc. v. American Int’l Specialty Lines Ins. Co., No. 2:09-cv-0145 JLR, 2009 U.S. Dist. LEXIS 51785 (W.D. Wash. May 19, 2009) (Washington law applied to the underlying suit pending in California.); PhotoMedex, Inc. v. St. Paul Fire & Marine Ins. Co., Civil Action No. 09-00896, 2009 U.S. Dist. LEXIS 65335, *38 (E.D. Pa. Jul. 28, 2009) (“[T]he court concludes that Pennsylvania enjoys more significant contacts with the insurance policy and that Pennsylvania harbors a greater government interest in the application of its law to this matter [than California]. Accordingly…Pennsylvania law applies.”)

[3] Montrose Chemical Corp. v. Admiral Ins. Co., 10 Cal. 4th 645, 681 (1995)

[4] Continental Casualty. Co. v. Zurich Ins. Co., 57 Cal. 2d 27, 37 (1961) (“The facts that the agreement to defend the insured may be severable from the general indemnity provisions, and that each insurer independently owes that duty to its insured, constitute no excuse for any insurer's failure to perform.”)

[5] Aerojet-General Corp. v. Transport Indem. Co., 17 Cal 4th 38, 69 (1997) (“’‘Evidence Code §500 provides that, generally, a party desiring relief must carry the burden of proof thereon…Further, ‘Evidence Code §115 . . . provides that the burden of proof that is generally applicable is proof by a preponderance of the evidence. Of course, this burden is the ‘ordinary’ one for civil actions. [Citations.] It is applicable to contractual causes of action.’ Buss v. Superior Court, 16 Cal. 4th at pp. 53-54.”) 

[6] See, Verteq Inc. v. Northbrook Property and Casualty Insurance Co. of Illinois, No. 8:93 CV-00334-AHS-RWR (C.D. Cal. Nov. 1, 1993) (finding that Cal. Civ. Code § 2860 did not control the appropriate rate for payment of attorneys’ fees in defense of a patent infringement case where the insurer could not demonstrate that it retained panel counsel who had defended similar claims – the insurer did not have counsel to use as a benchmark for the rate payable to the insured’s independent defense counsel).

[7] Travelers Ins. Co. v. Lesher, 187 Cal. App. 3d 169, 181-82, 186, 191, 231 Cal. Rptr. 791 (1986) (An insurer has duty to hire competent defense counsel – in antitrust suit, this means competent antitrust counsel), disapproved of on other grounds in Buss v. Superior Ct., 16 Cal.4th 35, 50, 52 (1997) (An insurer’s selection of counsel who was inexperienced in the defense of antitrust actions was found to be a breach of the duty of good faith and fair dealing.); See also Assurance Co. of America v. Haven, 32 Cal. App. 4th 78, 90, 38 Cal. Rptr. 2d 25, 33 (1995) (emphasis in original) (“[I]n the usual insurance defense setting, the insurer has a duty to hire competent defense counsel…”).

[8] People v. Murphy, 25 Cal. 4th 136, 142 (2001)

[9] Webster's New Collegiate Dictionary Online

[10] See, In re Marriage of Keech, 75 Cal. App. 4th 860, 870 (1999) (“Factors to be considered include “the nature of the litigation, its difficulty, the amount involved, the skill required and the skill employed in handling litigation … [the attorney’s] experience in the particular type of work demanded … the intricacies and importance of litigation”)