Insurer may seek reimbursement for excessive fees charged by insured’s counsel in third-party action.
Hartford Casualty Insurance Company (Hartford) issued a commercial general liability (CGL) insurance policy to J.R. Marketing and Noble Locks Enterprises in which Hartford promised to defend and indemnify J.R. against certain claims for business-related defamation and disparagement. Suit was later brought against both parties in Marin County Superior Court for claims including defamation. J.R. and Noble Locks were defended by Squire Sanders LLP; Hartford disclaimed a duty to defend on the grounds that the acts complained of occurred before the insurance policies began. J.R. and Noble Locks then sued Hartford in a coverage action. Hartford agreed to defend both parties, but declined to pay defense costs incurred before that date and declined to provide independent counsel in place of Squire Sanders. Finding for J.R. and Noble Locks in the coverage action, the court ordered Hartford to pay all defense invoices already submitted, as well as future defense costs that were “reasonable and necessary.” The order noted Hartford could seek reimbursement for unreasonable fees after conclusion of the underlying action, which was resolved three years later, in 2009. Hartford then sought a reimbursement of a significant portion of the $15 million in defense fees
and expenses Squire Sanders had charged. The trial and appellate courts sided with Squire Sanders.
Reversed in part. When an insured under a standard CGL policy is sued by a third party, the insurer’s contractual duty to defend the insured extends to all claims that are “even potentially subject to the policy’s indemnity coverage.” Even where some claims are clearly outside the policy’s coverage (assuming some claims are clearly within it), the insurer has a duty to defend the entire action. Where the insured agrees otherwise (because of the insurer’s reservation of rights based on possible non-coverage under the policy), the insurer must pay reasonable costs for retaining independent counsel by the insured. Meanwhile, “an individual who has been unjustly enriched at the expense of another may be required to make restitution.” Here, as to representation, this latter circumstance occurred, as Squire Sanders acted as the insureds’ independent counsel, rather than Hartford. This court further held that, due to the particularities of this case (especially the court order expressly providing that the insurer could recover payment of excessive fees from the counsel), an insurer such as Hartford may seek reimbursement directly from counsel such as Squire Sanders, where the latter incurred unreasonable costs in the defense action.