California’s “Independent” Cumis Counsel Regime Faces A Novel Challenge

On May 5, the California Supreme Court will hear argument in a case that has the potential to profoundly change the relationship between the insurer, its insured and the insured’s independent defense counsel under Civil Code section 2860.  The case is Hartford Casualty Insurance Company v. J.R. Marketing, LLC, Case No. S211645.  If Hartford convinces the Supreme Court to reverse the dismissal of its case, independent defense counsel may be exposed to claims for reimbursement of defense costs they’ve been paid by their client’s insurers.  This would be a very unfortunate outcome, both for law firms and Section 2860’s independent counsel regime.

In J.R. Marketing, Hartford refused to defend its insureds against several lawsuits.  The insureds hired their own defense counsel and sued Hartford for breaching its duty to defend.  Hartford then agreed to defend, albeit partially, and continued to insist that certain defense costs were not covered and that it was not required to provide independent counsel under Section 2860.  The court ruled that Hartford was wrong on both scores and indicated that, after the underlying litigation concluded, Hartford could seek reimbursement of any defense costs it paid that it believed were solely attributable to uncovered claims or parties.  Helpful to insureds, the trial court and Court of Appeal added to a growing line of cases holding that an insurer, after having breached its duty to defend, is not entitled to the billing rate limitations of Section 2860.

After paying $15 million in defense costs through the conclusion of the underlying litigation, Hartford sued for reimbursement.  And Hartford took a very unusual step.  In addition to suing the insured, Hartford also sued its insured’s defense counsel for reimbursement, alleging a novel quasi-contractual theory.  According to Hartford, the law firm that the insured hired (after Hartford initially refused to defend) was unjustly enriched by Hartford’s court-ordered defense cost payments relating to uncovered claims, so the law firm naturally should pay it back.

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