Opinion ID: 2824887
Heading Depth: 3
Heading Rank: 1

Heading: Objections based on principles of contract law

Text: First, Squire Sanders invokes the principle that one need not make quasicontractual restitution for a benefit “incidentally” conferred by another while the other was performing a pre-existing duty or protecting his own interests. (E.g., California Medical Assn. v. Aetna U.S. Healthcare of California, Inc. (2001) 94 Cal.App.4th 151, 174 [health care service plan provider was not “unjustly” enriched when physicians, who had service contracts with “middlemen” and not with plan provider itself, furnished medical services at discounted rates to plan provider’s enrollees, thus incidentally relieving provider of duty to pay for such services from noncontract physicians at undiscounted rates]; Major-Blakeney Corp. v. Jenkins (1953) 121 Cal.App.2d 325, 340-341 [absent agreement for 13 compensation, defendant landowner was not liable in restitution to developer of adjacent property insofar as developer’s improvements to neighborhood streets and utilities resulted in “incidental” enhancement of value of defendant’s property]; see 1 Witkin, Summary of Cal. Law, supra, Contracts, § 1020, p. 1109.) Here, Squire Sanders posits, Hartford contracted with its insureds to pay the cost of defending potentially covered third party claims against them, and Squire Sanders is merely the “incidental” beneficiary of Hartford’s performance of this obligation. We are not persuaded that the incidental benefits principle applies to the facts Hartford has alleged. The logic underlying this principle is straightforward: equity does not create a duty to pay for a benefit one neither sought nor had the opportunity to decline, and over which one had no control. (See Rest.3d Restitution and Unjust Enrichment, supra, § 30, com. b, pp. 465-466.) When a person acts simply as she would have done in any event, out of duty or selfinterest, she cannot equitably claim compensation from anyone who merely happens to benefit as a result. (Ibid.) Neither duty nor self-interest of the kind implicated in the incidental benefits principle accurately explains Hartford’s payments to Squire Sanders. Hartford’s obligation to pay for independent Cumis counsel was not unlimited. Pursuant to the 2006 enforcement order — as well as under the ethical rules that govern attorney conduct generally (see Rules Prof. Conduct, rule 4-200(A)) — its obligation to finance its insureds’ defense in the Marin County, Nevada, and Virginia actions did not ultimately extend beyond the duty to pay the reasonable costs of the defense. Nor did Hartford voluntarily pay the alleged “unreasonable and unnecessary” overcharges submitted by Squire Sanders out of some selfinterest extraneous to the benefit conferred on those counsel. Moreover, any such overpayments were not merely an “incidental” benefit to Squire Sanders, 14 fortuitously received by the firm and beyond its power to refuse. On the contrary, Squire Sanders, under the terms of a court order it obtained (and indeed, drafted), submitted bills to Hartford and obtained payment subject to the express provision that counsel’s bills must be reasonable, and that Hartford could later obtain reimbursement of excessive charges. Under these circumstances, there is no basis for the conclusion that Squire Sanders merely received an incidental benefit it has no equitable obligation to repay. Squire Sanders next suggests that relief for unjust enrichment is unavailable here because Hartford’s claim is already addressed by an on-point, express contract between Hartford and its insureds. (See, e.g., Hedging Concepts, Inc. v. First Alliance Mortgage Co. (1996) 41 Cal.App.4th 1410, 1419; Lance Camper Manufacturing Corp. v. Republic Indemnity Co. (1996) 44 Cal.App.4th 194, 203.) We disagree. Hartford did not accept a bargain binding it to absorb whatever defense fees and expenses the insureds’ independent counsel might choose to bill, no matter how excessive. As such, Hartford’s claim against Squire Sanders for reimbursement of alleged overcharges does not contravene or alter any term of the contracts between Hartford and its insureds. 2. Objections based on public policy and procedure Like the Court of Appeal, Squire Sanders and its amici curiae invoke the premise that restitution on a theory of unjust enrichment is not available when it would frustrate public policy. (E.g., Peterson v. Cellco Partnership (2008) 164 Cal.App.4th 1583, 1595; California Emergency Physicians Medical Group v. PacifiCare of California (2003) 111 Cal.App.4th 1127, 1136.) They urge, on various grounds, that to allow a “breaching insurer” such as Hartford to assert a direct right of action against its insureds’ independent counsel would contravene the purposes of the Cumis rule and section 2860. They further assert that such a direct claim would interfere unduly with the insureds’ attorney-client privilege and 15 with their absolute right to dictate and control the defense presented by independent counsel. We are unpersuaded that public policy precludes a direct action against Squire Sanders in this case. Squire Sanders points to the general principle that when an insured is entitled to Cumis counsel, that counsel must be “ ‘ “complete[ly] independen[t].” ’ ” (Musser v. Provencher (2002) 28 Cal.4th 274, 283 (Musser).) Squire Sanders asserts that Cumis counsel are answerable to “ ‘ “solely the insured” ’ ” (ibid.) and have no attorney-client relationship with the insurer (Assurance Co. of America v. Haven (1995) 32 Cal.App.4th 78, 87-88, 90). Squire Sanders further avers that where, as here, the insurer wrongfully refused to defend the insured or to afford Cumis counsel, the insured may proceed as he or she deems appropriate, and the insurer forfeits all right to control the insured’s defense, including the right to determine litigation strategy. (See, e.g., Stalberg v. Western Title Ins. Co. (1991) 230 Cal.App.3d 1223, 1233; cf. James 3 Corp. v. Truck Ins. Exch. (2001) 91 Cal.App.4th 1093, 1103, fn. 3 [holding, in inadequate defense suit by insured against insurer, that insurer’s right to control non-Cumis defense “necessarily encompasses the right to determine what measures are cost effective”].) Squire Sanders insists that Cumis counsel’s independence, zeal, and undivided loyalty to the insureds would be unduly compromised if, while conducting their clients’ defense, counsel faced the chilling prospect of the insurer’s lawsuit challenging, in hindsight, the reasonableness of counsel’s efforts. This argument is not convincing. Although Cumis counsel must indeed retain the necessary independence to make reasonable choices when representing their clients, such independence is not inconsistent with an obligation of counsel to justify their fees. In numerous settings in our legal system, the attorneys representing their clients know they will later have to justify their fees to a third party — including cases brought under fee-shifting statutes, class action 16 settlements, probate, and bankruptcy. (Chavez v. City of Los Angeles (2010) 47 Cal.4th 970, 975-976 (Chavez); Concepcion v. Amscan Holdings, Inc. (2014) 223 Cal.App.4th 1309, 1314-1315 (Concepcion); Estate of Trynin (1989) 49 Cal.3d 868, 873; 11 U.S.C. § 330, subd. (a).) Squire Sanders offers no convincing explanation for why attorney independence is possible in these settings, but not here. What is more, the very statute codifying the Cumis doctrine already contemplates that counsel will be called upon to justify their fees. Section 2860 specifically addresses the possibility of disputes about Cumis counsel’s fees and provides for resolution of those disputes. By its terms, the statute limits neither the potential “parties to the dispute” (§ 2860, subd. (c)) nor the billing issues that may be raised. Because counsel are billing the insurer, and the insurer is sending its checks to counsel, such a dispute may well arise directly between the insurer and counsel. (See Croskey et al., Cal. Practice Guide: Insurance Litigation (The Rutter Group 2013) ¶ 7:809, p. 7B-106.11 [“ ‘Parties to the dispute’ presumably includes the Cumis counsel, in addition to the insurer and insured”].) Thus, under the Cumis statutory scheme itself, counsel face the prospect that insurers may question and resist their bills, and insurers are not precluded from doing so in a proceeding directly against counsel. Squire Sanders counters by suggesting that fee disputes under section 2860 “usually” stand in stark contrast to the circumstances of this case. Those disputes, Squire Sanders claims, tend to involve insureds’ attempts to secure payment by their insurers of Cumis counsel’s bills. And disputes are limited to the hourly fee rate cap set forth in the statute. But nothing in the statute itself limits the parties or the issues in a section 2860 fee dispute in this manner. Indeed, cases involving arbitration under section 2860 suggest both that Cumis counsel are sometimes a party to the arbitration and that the issues to be arbitrated sometimes include 17 whether Cumis counsel’s fees are reasonable and necessary. (Cf., e.g., Janopaul + Block Companies, LLC v. Superior Court (2011) 200 Cal.App.4th 1239, 1244 [upholding, on unrelated grounds, denial of insurer’s motion to compel insured and Cumis counsel to arbitrate insurer’s claims that insurer was entitled to reimbursement of fees above those “reasonable and necessary” for insured’s defense]; Long v. Century Indemnity Co. (2008) 163 Cal.App.4th 1460, 1465-1466 [finding arbitrable a fee dispute between Cumis counsel and insurer regarding counsel’s right to receive a higher fee than that provided for in § 2860, subd. (c)].) Squire Sanders also suggests that the process in place when Cumis counsel’s representation is governed by section 2860 is preferable to a rule allowing the insurer to obtain reimbursement of unreasonable fees under principles of restitution. The “more collaborative” system established by section 2860, Squire Sanders contends, mitigates the risk that an insurer’s questioning of counsel’s fees will undermine counsel’s independence. But it is far from selfevident that section 2860 codifies a “more collaborative process” among the insurer, insured, and counsel. By its terms, section 2860 comes into play only when the interests of the insurer and the insured are so at odds that “the outcome of [a disputed] coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.” (§ 2860, subd. (b).) Section 2860 is not triggered simply because an insurer defends under a reservation of rights, the underlying litigation alleges facts under which the insurer would deny coverage, or the litigation includes claims for punitive damages or damages in excess of policy limits. (Ibid.; see also Gafcon, Inc. v. Ponsor & Associates (2002) 98 Cal.App.4th 1388, 1421 [“[C]ourts of appeal, including ours, repeatedly recognize a conflict of interest does not arise every time the insurer proposes to provide a defense under a reservation of rights. There must also be evidence that ‘the outcome of [the] coverage issue can be controlled by counsel first retained by the insurer for the 18 defense of the [underlying] claim’ ”].) Given that section 2860 comes into play only when there exists a real and significant disjuncture between the interests of an insurer and its insured, we fail to see how the degree of tension in the relationship between Hartford and the insureds in this case — even if purportedly higher than in cases where section 2860 is triggered — meaningfully heightens any threat to Cumis counsel’s independence. Section 2860 is preferable as well, Squire Sanders claims, because it provides for contemporaneous resolution of fee disputes as they arise during the course of the underlying lawsuit against the insureds. Squire Sanders asserts that contemporaneous proceedings intrude less on counsel’s independence than afterthe-fact litigation, because a contemporaneous proceeding provides “real-time guidance to counsel about which activities [they] may undertake,” without raising the concern that counsel will “hav[e] the rug pulled out from under [them] years after the fact by the insurer.” These concerns about timing are speculative at best. For one thing, although nothing in the language of section 2860 forecloses the contemporaneous resolution of fee disputes, nothing requires it. In any event, there is no obvious reason why, if Cumis counsel can be required to defend their bills while simultaneously representing their clients, counsel should not equally be able to defend their bills after the third party litigation has concluded. Indeed, Cumis counsel might even prefer to defend their bills only after the third party litigation has ended insofar as this would allow counsel to devote their full attention to the insureds’ defense while the third party suit is in progress, rather than becoming embroiled in side arguments with the insurer over fees. But we need express no final views on the relative merits of contemporaneous versus after-the-fact resolution of fee disputes. As noted previously, the 2006 enforcement order, drafted by Squire Sanders, upheld on 19 appeal, and now final, specifically reserved Hartford’s right to seek reimbursement of unreasonable legal charges after the third party litigation had concluded. This final order is dispositive, for purposes of the instant case, of the timing of Hartford’s claim for reimbursement.9 Squire Sanders next argues that, because of the exclusive attorney-client relationship between Cumis counsel and the insureds, the insureds alone have the authority and responsibility to monitor and control counsel’s expenditures on their behalf. Thus, if the insureds fail to prevent Cumis counsel from submitting unreasonable and excessive bills to the insurer, Squire Sanders reasons that the insureds should bear the consequences of this failure — subject to a right of crossindemnity against counsel. This argument all but ignores the realities of cases like the one before us. Squire Sanders acknowledges that the insureds in this case were not sophisticated, frequent litigators accustomed to monitoring their counsel’s day-to-day litigation decisions. Having contracted with Hartford, and having paid premiums, to be spared the fees and expenses of their defense, there is no indication that the insureds had reasonable cause to expect that they would nonetheless face exposure 9 Squire Sanders makes a related argument that allowing Hartford’s suit will create a perverse incentive for insurers to breach their duties to defend their insureds. Squire Sanders reasons that, having forfeited, as a “breaching insurer,” the protections of section 2860, Hartford would now be placed in a better position than under the statute by a rule permitting it to evaluate the worth of counsel’s efforts in hindsight. Hartford responds that it would not be tempted to deliberately breach its obligations, expose itself to claims of tortious bad faith, and forfeit the protections of section 2860 merely to gain an opportunity to contest counsel’s bills in an after-the-fact reimbursement action. As explained above (see ante p. 13 & fn. 7), we are not here deciding when, and in what forum, a breaching insurer may challenge the legal bills presented by Cumis counsel. The sole issue before us is whether, assuming the insurer may seek reimbursement of allegedly excessive, unreasonable, and unnecessary charges from a court after the underlying litigation has concluded, the insurer may seek such reimbursement directly from counsel. 20 if Squire Sanders submitted unreasonable and excessive bills to Hartford. Nor is there any indication the insureds expected that they would have to mount and finance a separate litigation against their own counsel in order to have any hope of recovering the funds they were ordered to pay to the insurer as a result of counsel’s unreasonable billing. Such a circuitous, complex, and expensive procedure serves neither fairness nor any other policy interest. We see no persuasive ground to hold that any direct liability to Hartford for bill padding by Squire Sanders must fall solely on the insureds. Also unavailing is Squire Sanders’s contention that its due process rights would be affected by allowing Hartford to recover directly from Cumis counsel. Such rights would be violated, Squire Sanders asserts, if the insureds’ refusal to waive attorney-client privilege prevents counsel from effectively defending against an insurer’s claims for reimbursement. This concern appears to be hypothetical, as Squire Sanders does not contend that the defense of its bills in this litigation hinges on any issue that implicates attorney-client privilege.10 In any case, an objective assessment of the litigation as a whole to determine whether counsel’s bills appear fundamentally reasonable is unlikely to involve an examination of individual attorney-client communications or the minute details of every litigation decision. If privileged information on these subjects is included in counsel’s billing records, it can be redacted for purposes of assessing whether counsel’s bills are reasonable. (See, e.g., Concepcion, supra, 223 Cal.App.4th at p. 1327 [party’s claim of attorney-client privilege with respect to billing records 10 On a related front, Squire Sanders does not argue, and the record does not suggest, that any of the allegedly excessive fees it incurred in defending the Marin County, Nevada, and Virginia actions were incurred on the insureds’ explicit direction or undertaken in order to benefit the insured in some way unrelated to avoiding or minimizing liability in the underlying litigation. 21 did not justify failing to provide records to defendant in dispute over attorney’s fees; bills could simply be redacted to delete confidential information]; Banning v. Newdow (2004) 119 Cal.App.4th 438, 454 [rejecting father’s claim in child custody dispute that bills submitted by mother’s counsel, redacted to protect attorney-client and work product privileges, “left him unable to challenge the reasonableness of the fees”].) Trial courts are accustomed to dealing with claims of attorney-client privilege in a manner that balances the competing interests of the parties, and can thus presumably address any privilege issues that arise on a caseby-case basis. Finally, Squire Sanders insists that allowing an insurer to seek direct reimbursement from Cumis counsel would contravene California’s established prohibition on the assignment of legal malpractice claims. (See generally, e.g., Musser, supra, 28 Cal.4th at p. 287.) This prohibition “ ‘protect[s] the integrity of the uniquely personal and confidential attorney-client relationship.’ ” (Ibid.) It also guards against the unseemly and burdensome commercialization of claims arising from professional duties owed by an attorney exclusively to his or her client. (See Fireman’s Fund Ins. Co. v. McDonald, Hecht & Solberg (1994) 30 Cal.App.4th 1373, 1379; Kracht v. Perrin, Gartland & Doyle (1990) 219 Cal.App.3d 1019, 1023-1024.) As Hartford points out, however, this case is quite different. Hartford does not seek to stand in the insureds’ shoes in order to assert a claim that counsel violated a duty to the insureds by performing deficiently on their behalf. Nor does Hartford seek commercial gain by trading in a claim that, by its nature, belongs uniquely and personally to the insureds. On the contrary, Hartford is attempting to recover legal charges it paid, under court order, to counsel for their services to the insureds — fees Hartford now contends were excessive for the work that was done. 22 And as Hartford asserts in response to the concerns Squire Sanders raises about a direct action against Cumis counsel, after-the-fact scrutiny of Cumis counsel’s charges should indeed be quite limited. Hartford agrees that counsel must be “free to represent the insured as [they] see[ ] fit, subject only to generally applicable legal provisions and professional standards.” (Buss, supra, 16 Cal.4th at p. 58.) Hence, Hartford argues, the proper test for any hindsight claim of excessive billing is the same as for a contemporaneous challenge — i.e., whether the charges were objectively reasonable at the time they were incurred, under the circumstances then known to counsel. (Cf., e.g., Chavez, supra, 47 Cal.4th at pp. 990-991 [in determining if fee award is unduly inflated, court may consider whether, viewing the scope of the litigation as a whole, the award exceeds “the time an attorney might reasonably [have been] expect[ed] to spend” thereon]; Aerojet-General Corp. v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 62-63 [insured’s investigation costs are payable by insurer as part of insurer’s duty to defend if, “assessed under an objective standard,” the investigation would have been conducted, and the expenses incurred, by a “reasonable insured under the same circumstances” in an effort to avoid or minimize liability].) We agree that Hartford sets forth the appropriate standard for fee disputes of the kind at issue here. We add that the burden to prove that Cumis counsel’s fees were in fact unreasonable and unnecessary falls entirely on the insurer. When the insurer seeks to carry that burden in a case such as this one, however, the insurer may proceed directly against Cumis counsel in its reimbursement action. We emphasize that this conclusion is a limited one, and a particularly apposite one given the history of this litigation. The trial court’s 2006 enforcement order plainly permits Hartford to pursue someone for reimbursement of allegedly excessive legal charges. The clarity and finality of this order removes from our consideration the question whether Hartford, as a “breaching” insurer 23 that was arguably caught shirking its defense duties, ought to be able to pursue anyone for alleged overpayments. Similarly off the table is the question of whether the trial court ought to have cut Hartford off from section 2860’s arbitration provisions, even as a sanction for its breach. Thus, to the extent Squire Sanders or its amici curiae perceive unfairness in the conclusion that a breaching insurer cut off from the protections of section 2860 should nevertheless retain the right to recoup allegedly excessive legal charges in a later court proceeding, any such unfairness stems from the 2006 enforcement order and not from our holding here. Taking the 2006 enforcement order as we find it, we conclude that equitable principles of restitution and unjust enrichment dictate that Hartford may seek reimbursement for the allegedly unreasonable and unnecessary defense fees directly from Squire Sanders. Squire Sanders’s own conduct in the course of this litigation further supports our conclusion that it is not unjust to allow Hartford to pursue its reimbursement action directly against Squire Sanders. Squire Sanders drafted the very order that expressly preserved Hartford’s right to pursue reimbursement for excessive fees and grounded that reimbursement right in principles of restitution and unjust enrichment. Our holding that Hartford may pursue its claim for reimbursement against Squire Sanders stems directly from — and is wholly consistent with — that order. Squire Sanders now attempts to avoid the effects of this order by encouraging us to foist all responsibility for reimbursement onto its erstwhile clients, but we see no reason to accept that invitation. Under the circumstances, allowing Hartford to pursue a narrow claim for reimbursement against Squire Sanders under the terms of the 2006 enforcement order neither rewards an undeserving insurer nor penalizes unsuspecting Cumis counsel. 24