Source: http://dutytodefend.com/how-much-must-an-insurer-pay-independent-counsel-2/
Timestamp: 2019-04-22 08:36:40+00:00

Document:
Independent counsel often take great interest in exactly how much and how often a policyholder’s liability insurer must pay for independent counsel to defend. Standard liability policies have no language regarding this question and therefore provide no guidance. The statutory measure of how much an insurer must pay is “the costs of defense . . . incurred in good faith, and in the exercise of a reasonable discretion.” The common law measure requires an insurer that fails to defend to pay all costs of defense incurred by the policyholder.
However, Civil Code §2860 provides that as soon as an irrevocable determination is made that [A] a liability insurer has a duty to defend, and [B] a disqualifying conflict of interest exists, then [C] the insurer must provide independent counsel to defend the policyholder, whereupon the insurer may pay a reduced hourly rate.
A Liability insurer has numerous decisions to make that impact the options available to it to control the costs of defense.
An unconflicted, performing insurer may control the cost of defense through dependent counsel pursuant to the terms of a contract and its freedom to hire and fire dependent counsel at will. Such control rarely leads to discord or litigation.
A conflicted, performing insurer may opt to qualify for the protection afforded by Civil Code §2860, which specifies minimum competency requirements for independent counsel, mandatory arbitration of all fee disputes, and an hourly rate limitation. Thus, the statute supplies what common law does not – specific controls over the cost of defense even though the insurer may not control the conduct of the defense. The statute does not limit the policyholder’s right to a vigorous defense nor the insurer’s obligation to pay immediately and entirely.
The Insurance Services Office (ISO) drafts standard language for a variety of liability insurance policies that are used widely by the insurance industry. Civil Code §2860(c) “does not invalidate other different or additional policy provisions pertaining to attorney’s fees.” However, most, if not all forms have no language addressing the question of how much the insurer must pay any lawyer who represents a policyholder. Given this void, a statutory standard applies.
In order to qualify for the rate limitation provision, the insurer must satisfy an A + B = C formula specified by the statute. The statute does not apply unless there is a conclusive determination that [A] the liability insurer has a duty to defend, and [B] a disqualifying conflict of interest exists, whereupon [C] the insurer must provide independent counsel to defend the policyholder. This language simply recites the Cumis rule. The A and B elements of this formula may be established by a final court order, a binding stipulation or an irrevocable agreement of the insurer and the policyholder.
As a practical matter, securing an irrevocable agreement that 2860 applies is completely in the insurer’s control. The policyholder will almost always assert that [A] the liability insurer has a duty to defend. If the policyholder contended that the insurer had no duty to defend, the insurer would have no obligation to pay independent counsel! Similarly, the policyholder will almost always assert that [B] a disqualifying conflict of interest exists. Again, if the policyholder contended that no disqualifying conflict of interest existed, the insurer would have no obligation to pay independent counsel! Therefore, if the insurer irrevocably agrees that it has a duty to defend and that a disqualifying conflict exists satisfying the A and B elements of the A + B = C formula. Having done so, then the insurer must provide independent counsel and may pay a reduced hourly rate.
“Any dispute concerning attorney’s fees not resolved by these methods shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute.” “[T]he California Legislature has spoken. It has decided that within the California courts these Cumis fee issues are to be decided in an arbitration forum, not the state’s judicial forum.” This remedy may not easily be waived.
This ruling is sound insofar as it concludes that an insurer that reserves its rights does not waive its reservation by voluntarily submitting to arbitration of attorney fee disputes. However, this ruling should not be misinterpreted to mean that the protections of 2860 apply absent a conclusively determination that the insurer has a duty to defend and that a disqualifying conflict of interest exists. After all, the results of the 2860 arbitration to which the parties agreed would be come a nullity if a later declaratory relief judgment ruled that the insurer either had to duty to defend or that no disqualifying conflict existed.
An insurer that breaches its duty to defend risks losing any of the benefits of the Civil Code. “Breach of duty to defend also results in the insurer’s forfeiture of the right to control defense of the action or settlement, including the ability to take advantage of the protections and limitations set forth in section 2860.
Pursuant to the Cumis rule, a liability insurer that has a duty to defend and whose reservation of rights creates a disqualifying conflict of interest must pay independent counsel to provide a defense to its policyholder. The amount that it must pay may be established by the retainer agreement between the policyholder and independent counsel that are “incurred in good faith, and in the exercise of a reasonable discretion.” The policyholder, independent counsel, and the insurer may agree to other terms and other methods of resolving fee and cost disputes. The insurer may qualify to pay to independent counsel only what it pays to dependent counsel pursuant to Civil Code §2860. However, first there must be a final determination that the insurer has (A) a duty to defend; (B) a disqualifying conflict of interest exists; and (C) the insurer must then faithfully provide independent counsel to represent the insured.
 Defaulting Insurer Forfeits Control of the Defense.
 Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.
 Buss v. Superior Court (1997) 16 Cal.4th 35, 48 (Buss) (citation omitted).
 Cal. Code Regs. § 2695.7(h).
 See, San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358.
 Handy v. First Interstate Bank (1993) 13 Cal.App.4th 917, 926.
 Caiafa Prof. Law Corp. v. State Farm Fire & Cas. Co. (1993) 15 Cal.App.4th 800, 803.
 Gray Cary Ware & Freidenrich v. Vigilant Insurance Company (2004) 114 Cal App 4th 1185, 1188.
 Truck Ins. Exchange v. Superior Court (1996) 51 Cal.App.4th 985, 998.
 Hogan v. Midland National Ins. Co. (1970) 3 Cal.3d 553, 558.
 Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 59 (Aerojet).
 Buss, supra, 16 Cal.4th at 55.
 Aerojet, supra, 17 Cal.4th at 64.
 Arenson v. National Auto. & Cas. Ins. Co. (1957) 48 Cal.2d 528, 537.
 Safeco Ins. Co. of America v. Superior Court (2006) 140 Cal. App. 4th 874, 878-79.
 Housing Group v. PMA Capital Ins. Co. (2011) 193 Cal.App.4th 1150, 1156-1157.
 Intergulf Development LLC v. Superior Court (2010)183 Cal.App.4th 16, 20; See also, Fuller-Austin Insulation Co. v. Highlands Ins. Co. (2006) 135 Cal.App.4th 958, 984; Atmel Corp. v. St. Paul Fire & Marine Ins. Co. (N.D.Cal. 2005) 426 F.Supp.2d 1039, 1047.
 State of California v. Pacific Indemnity Co. (1998) 63 Cal. App. 4th 1535, (citations, quotation marks, and ellipses omitted).
 Aerojet, supra, 17 Cal.4th at 64 (citations, quotation marks and ellipses omitted); see also, State of Calif. v. Pacific Indem. Co. (1998) 63 Cal.App.4th 1535, 1548-49 (Pacific Indem).
 Pacific Indem, supra, 63 Cal.App.4th at 1549.

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