By Dominic Nesbitt
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Are insurers always entitled to rely upon the
Cumis statute’s rate cap when paying for an insured’s independent
counsel? As discussed below, depending upon how a particular policy is
worded, the answer may be “No.”
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The
Cumis Statute
By way of brief background, California Civil Code § 2860 (the
Cumis statute) was enacted by the California Legislature in 1987, and codified
the California Court of Appeal’s earlier landmark decision in
San Diego Navy Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal. App. 3d 358 (1984).The statute protects an insured against conflicts
of interest that may arise when an insurer conducts the insured’s
defense under a reservation of rights.
The statute provides that if a policy imposes a “duty to defend”
upon an insurer, and the insurer reserves its rights on a coverage issue
that could be controlled by its panel counsel, the insurer is required
to provide the insured with “independent counsel.”See § 2860 (a) and (b).The statute further provides, at subsection (c),
that the insurer’s obligation to pay fees to the insured’s
independent counsel is limited to those hourly rates the insurer pays
its panel counsel to defend similar actions.These rates are often referred
to as “panel rates.”
Importantly, subsection (c)’s rate cap includes an often-overlooked
qualifier. It provides that the rate limitation provision does “not
invalidate otherdifferent or additional policy provisions pertaining to attorney’s fees . . . .” (Italics added.)
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The
Cumis Statute Only Applies To Insurers That Have A “Duty To Defend”
Not all liability policies impose on the insurer a “duty to defend.”
For example, many Directors & Officers policies only require the insurer
to advance or reimburse the insured’s defense expenses, while the
insured assumes responsibility for selecting its own counsel and controlling
its own defense.
See, e.g.,
National Union Fire Ins. Co. of Pittsburgh, PA v. Stiles Professional Law
Corporation, 235 Cal. App. 3d 1718, 1727 (1991) (noting that “the insurance
policy principally obligated [the insurer] to reimburse the insured for
the costs of the defense.”).
Because the
Cumis statute expressly applies only if an insurance policy imposes a “duty
to defend” upon the insurer, it follows that the statute’s
rate cap has no application to a policy that only requires an insurer
to advance or reimburse defense expenses. Under such a policy, absent
language to the contrary, an insurer’s obligation to advance or
reimburse its insured’s defense costs should be limited only by
common law requirements that fees be reasonable.
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The
Cumis Statute’s Rate Cap May Not Apply Where A Policy Defines “Defense
Expenses”
As noted, the
Cumis statute’s rate cap states that it does “not invalidate other
different or additional policy provisions pertaining to attorney’s fees . . . .”(Italics
added.)Thus, where they conflict, an express provision of a policy pertaining
to the payment of attorney fees should override the statutory rate provision.
While Commercial General Liability policies typically contain no provision
pertaining to the attorney fees payable by the insurer, there are other
policies that do include such a provision.For example, some Directors
& Officers, Errors & Omissions and Employment Practices Liability
policies expressly define the fees and expenses an insurer will pay in
discharging its duty to defend.Frequently, such policies will define “Defense
Expenses” to mean“reasonable and necessary” legal fees and expenses.
There would seem to be a clear difference between a promise made in a policy to pay
“reasonable and necessary” fees, and a statutory provision that narrowly limits an insurer’s
obligation to pay only panel rates to an insured’s independent counsel.The
policy provision reflects an objective measure of reasonableness,
i.e., market rates.
See
PLCM Group v. Drexler, 22 Cal. 4th 1084, 1095 (2000) (“Reasonable rates” are rates
“prevailing in the community for similar work”).The statutory
provision, in contrast, reflects a subjective measure based upon the insurer’s
experience in negotiating rates with its panel defense counsel.See Foxfire, Inc. v. New Hampshire Ins. Co., 91 2940 (N.D. Cal. July 1, 1994) (distinguishing between “marketplace
rates” and “those [an insurer] can negotiate by reason of
its position”).
Accordingly, a policy provision requiring payment of
“reasonable and necessary” fees should be considered a“different or additional” provision that controls over the statutory rate cap.See generally Compulink Management Center, Inc. v. St. Paul Fire &
Marine Ins. Co., 169 Cal. App. 4th 289, 301 (2008) (noting that a policy’s promise
to pay “reasonable expenses” was “an additional policy
provision,” albeit not one pertaining to fees).
In summary, when confronted with an insurer’s attempt to apply the
Cumis statute’s rate cap, an insured is well advised to review the precise
terms of its liability policy, and answer the following two questions.
First, does the policy impose on the insurer a “duty to defend”?
If not, then the
Cumis statute, including its rate cap, does not apply. And second, does the
policy include any
“different or additional” provision pertaining to the payment of attorney fees? If so, then such
a provision may control over the
Cumis statute’s rate cap.