How Insurers Challenge Fees Owed to Independent Counsel
by Gary W. Osborne and Dominic S. Nesbitt
(
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Where a liability insurer owes a duty to defend an insured against a third-party
claim, the question of who gets to pick the defense counsel arises. Generally
speaking, the insurer has this selection right. There are, however, several
important exceptions to this general rule which allow the insured to select
an attorney who is "independent" of the insurer.
[1]
When an insured exercises its right to independent counsel, issues invariably
arise concerning the amount of fees and costs which the insurer has to
pay. This article discusses the propriety of three techniques used by
insurers to control, and challenge, the fees and costs billed by an insured's
independent counsel.
A.
Hourly Rates
California Civil Code Section 2860(c) limits the attorney "rates"
an insurer must pay to independent counsel, as follows:
The 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 subdivision does not invalidate other different
or additional policy provisions pertaining to attorney's fees. . . .
The foregoing statutory language governs the "financial" relationship
between an insurer and its insured's independent counsel. It provides,
simply, that insurers need only pay independent counsel the same "rates"
they pay other lawyers to defend similar actions in the same locale.
While this rule appears straightforward enough, there are nonetheless several
important issues for independent counsel to consider when negotiating
fee agreements with a client's insurer.
1. Contemplate periodic rate increases
Insurers typically impose a "panel rate" on independent counsel
without discussing, or contemplating, that the rate may be increased at
some future point in time. Independent counsel should request, in writing,
that the rate be increased in line with any increases paid to the insurer's
panel counsel.
2. Verify the rates the insurer is paying its panel counsel
Insureds and their independent counsel should ask the insurer to verify,
in writing, that the rate offered equates to the highest rate currently
being paid to panel counsel to defend similar actions in the same geographic
area. Insurers arguably have an implied-in-law duty to disclose the rates
they pay to panel counsel. Otherwise, how is an insured to verify that
the rate offered by the insurer is correct?
3. Section 2860 limits "rates" only, not "costs"
The reference only to "rates" in the statute indicates that there
is no limitation on the insurer's duty to pay "costs" incurred
by independent counsel.
See, Gray Cary Ware & Freidenrich v. Vigilant Ins. Co., 114 Cal.App.4th 1185 (2004).
4. Section 2860 only applies to insurers with a "duty to defend"
Section 2860 by its own terms applies only where "the provisions of
a policy of insurance impose
a duty to defend" on the insurer.
See, Cal. Civ. Code §2860(a) (italics added). Consequently, section 2860
– and its rate limitation provision – has no application to
a policy of insurance (
e.g., a typical Directors and Officers policy) which only obligates the insurer
to "indemnify" the insured against defense expenses.
See, e.g., National Union Fire Ins. Co. of Pittsburgh, PA v. Stiles Professional
Law Corporation, 235 Cal.App.3d 1718, 1727 (1991). Arguably, an insurer with a duty to
"indemnify" defense expenses has no legal basis for reducing
the hourly rates of its insured's defense counsel.
5. Argue that the statutory language permits reference to the attorney
rates insurers pay to defend
themselves
Insurers typically argue that they pay independent counsel no higher rates
than they pay to their
panel counsel to defend
other insureds against similar actions. Since such rates are usually deeply discounted,
independent counsel is thus forced to either accept these lower "panel
rates" or look to the insured to make up the rates differential.
However, the language of Section 2860 – limiting rates to those
paid by the insurer
"in the ordinary course of business" to defend
"similar actions" – arguably permits reference to the far higher rates insurers typically
pay lawyers when defending
themselves
in business litigation.
B.
Audits and "Billing Guidelines"
Despite the absence of any mention in Section 2860 of so-called "billing
guidelines", it is common practice for insurers to insist upon independent
counsel's chapter-and-verse compliance with such guidelines. Oftentimes,
legal auditors are then brought in to scrutinize the bills, and adjust
down any fee or cost entries they determine are not in compliance. Such
practices by insurers, and their auditors, are arguably unlawful.
1. Insurer "billing guidelines" don't apply to independent counsel
While no California case has yet addressed the issue, billing guidelines
should not apply to independent counsel since there exists no statutory
or contractual basis for requiring their compliance. They are not mentioned
in section 2860 nor in standard insurance policies.
[2]
Billing guidelines are intended to apply to an insurer's panel counsel.
This is often reflected in the language of the guidelines themselves.
Panel counsel agree to comply with the billing guidelines as a condition
of their employment. However, such a condition does not exist for independent
counsel who are hired by the insured, not the insurer.
2. Insurer "billing guidelines" are not a measure of the "reasonableness"
of independent counsel's fees and costs
While insurers obviously have no duty to pay unreasonable fees and costs,
the proper measure of reasonableness are not insurer billing guidelines.
In fact, such guidelines are designed solely to minimize litigation costs
for insurers, often at the expense of providing the insured a full and
complete defense.
The proper measure of "reasonableness" is the developed common
law in this area. (
See, ABA Disciplinary Rule No. 2-106;
see also, California Rule of Professional Conduct No. Rule 4-200;
see also,
Glendora Community Redevelopment Agency v. Demeter, 155 Cal. App. 3
rd 465, 474-481 (1984);
People ex rel. Dept. of Transportation v. Yuki, 31 Cal. App. 4
th 1754, 1767 (1995) ["[C]ourts have developed general rules to guide
the exercise of that discretion in determining a reasonable fee."].)
Such common law requires the examination of numerous factors in determining
reasonableness such as: (1) the novelty and difficulty of the questions
involved and the skill requisite to perform the legal service properly;
(2) the fee customarily charged in the locality for similar legal services;
(3) the amount of the fee in proportion to the value of the legal services
performed; (4) the amount involved and the results obtained; and (5) the
experience, reputation, and ability of the lawyer or lawyers performing
the services.
Insurer billing guidelines do not supplant the common law in measuring
the reasonableness of independent counsel's fees and costs.
3. Ethical implications of insurer "billing guidelines."
Even for panel counsel, complying with insurer "billing guidelines"
can impact upon their ethical obligations to their clients. For this reason,
one California appellate court has questioned "the wisdom and propriety"
of billing guidelines, stating,
[W]e question the wisdom and propriety of so-called "outside counsel
guidelines" by which insurers seek to limit or restrict certain types
of discovery, legal research, or computerized legal research by outside
attorneys they retain to represent their insureds where there is a potential
for an uncovered claim. Some guidelines go so far as to call for the use
of paralegals, rather than attorneys, to respond to "routine"
discovery requests or prohibit the retention of experts or the filing
of certain pretrial motions until shortly before trial. Under no circumstances
can such guidelines be permitted to impede the attorney's own professional
judgment about how best to competently represent the insureds. If the
attorney's representation is to be limited in any way that unreasonably
interferes with the defense, it is the
insured,
not the insurer, who should make that decision.
Dynamic Concepts, Inc. v. Truck Insurance Exchange, 61 Cal.App.4
th 999, fn. 9 (1998). (Emphasis in the original.)
Furthermore, ethical considerations may actually prohibit independent counsel,
who has no attorney-client relationship with the insurer, from complying
with billing guidelines to the extent that such compliance would interfere
with his or her exercise of professional judgment. (ABA's Canon No.
5, ["A lawyer should exercise independent professional judgment on
behalf of a client."];
see also, ABA's Ethical Consideration No. 5-1, ["The professional judgment
of a lawyer should be exercised, within the bounds of the law, solely
for the benefit of his client and free of compromising influences and
loyalties. Neither his personal interests, the interests of other clients,
nor the desires of third persons should be permitted to dilute his loyalty
to his client."];
see also, ABA's Disciplinary Rule No. 5-107 (B) ["A lawyer shall not permit
a person who recommends, employs, or pays him to render legal services
for another to direct or regulate his professional judgment in rendering
such legal services."])
C.
Allocation
"Allocation" is another common technique utilized by insurers
to reduce the fees and costs billed by independent counsel. For example,
where an insured is both a defendant and plaintiff in the same lawsuit,
the insurer will often argue that the independent counsel's fees should
be allocated one-half to defense (payable by the insurer) and one-half
to prosecution (payable by the insured). Or where independent counsel
defends both an insured defendant and a non-insured defendant in the same
lawsuit, the insurer may try to allocate one-half of the fees to the defense
of the insured and one-half to the defense of the non-insured.
Such arbitrary allocations are most likely inappropriate for two reasons.
First, fees and costs which are "inextricably linked" to both
prosecuting an insured's action and defending a covered cross-action
must be paid by the insurer.
See, California v. Pacific Indemnity, 63 Cal.App.4
th 1535, 1548-1549 (1998). This rule parallels the common law rule of apportionment
that is applied in non-insurance cases.
See, e.g.,
Reynolds Metals Company v. Alperson, 25 Cal.3
rd 124, 129-130 (1979).
Second, an insurer is required to pay fees and costs which are "reasonably
related" to the defense of its insured.
See,
Safeway Stores v. National Union Fire Ins. Co., 64 F.3
rd 1282, 1289 (9
th Cir. 1995). Thus, where independent counsel also represents non-insured
defendants, it is only appropriate to allocate to the extent this joint
representation results in an
increase
in the fees and costs billed.
Id., at 1287, citing
Raychem Corp. v. Federal Ins. Co., 853 F. Supp. 1170, 1180 (N.D. Cal. 1994).
D.
Conclusion
It is our hope that by using some of the arguments and suggestions set
forth in this article, insureds and their independent counsel can successfully
resist their insurer's attempts to inappropriately limit rates and/or
to discount fees and costs via billing guidelines, audits and allocation.
©Copyright 2004 Osborne & Nesbitt LLP
The views and opinions expressed in these materials are solely those of
the authors. While these materials are intended to provide accurate and
authoritative information in regard to the subject matter covered, they
are designed for educational and informational purposes only. Nothing
contained herein is to be construed as the rendering of legal advice for
specific cases, and readers are responsible for obtaining such advice
from their own legal counsel. Use of these materials does not create an
attorney-client relationship between the user and the author.
[1]
The most common exception being where defense counsel selected by the
insurer could manipulate the litigation so as to result in a forfeiture
of coverage for the insured. For example, by "defending" the
case in a manner which results in a finding of intentional conduct against
the insured.
See, San Diego Navy Federal Credit Union v. Cumis Ins. Soc., 162 Cal.App.3d 358 (1984); California Civil Code §2860.
[2]
Of course, the analysis would be different if a policy contained a provision
requiring independent counsel's compliance with the insurer's
"billing guidelines." Such a provision, however, would be extremely unusual.