Opinion ID: 2824887
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Heading: Restitution and the Duty to Defend

Text: 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. (E.g., Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295-296; Gray v. Zurich Ins. Co. (1966) 65 Cal.2d 263, 276-277.) Moreover, when the third party suit includes some claims that are potentially covered, and some that are clearly outside the policy’s coverage, the law nonetheless implies the insurer’s duty to defend the entire action. (Buss, supra, 16 Cal.4th at p. 48.) And unless the insured agrees otherwise, in a case where — because of the insurer’s reservation of rights based on possible noncoverage under the policy — the interests of the insurer and the insured diverge, the insurer must pay reasonable costs for retaining independent counsel by the insured. (Cumis, supra, 162 Cal.App.3d at p. 375; see § 2860, subds. (a), (b).) This was such a case. Hartford reserved its right to dispute coverage for some or all of the defendants or claims in the Marin County, Nevada, and Virginia actions. Accordingly, Squire Sanders acted as the insureds’ independent counsel in those suits. It did so pursuant to a court order specifying that Hartford must promptly pay Squire Sanders’s bills as and when submitted, but that the firm’s 8 Amicus curiae briefs generally supporting Hartford’s right to recover excessive billings directly from Squire Sanders in this proceeding have been filed by (1) Complex Insurance Claims Litigation Association and American Insurance Association; and (2) J.R. Marketing, Jane Ratto, and Robert Ratto. Amicus curiae briefs generally opposing Hartford’s right to recover excessive billings directly from Squire Sanders in this proceeding have been filed by (1) Centex Homes, a Nevada partnership; (2) Attorney Steven W. Murray; (3) California Building Industry Association; (4) California Insureds Counsel; and (5) Montrose Chemical Corporation. 10 charges must be “reasonable and necessary,” and that, after conclusion of the underlying litigation, Hartford could seek reimbursement of amounts it deemed excessive by this standard. The order did not specify from whom Hartford might obtain any such reimbursement. Hartford now seeks reimbursement from Squire Sanders based on equitable principles of restitution and unjust enrichment. By charging Hartford for fees and expenses that were unreasonable and unnecessary for the insureds’ defense, Hartford asserts, Squire Sanders unjustly enriched itself at Hartford’s expense and thus owes Hartford restitution for the overbilled amounts. An individual who has been unjustly enriched at the expense of another may be required to make restitution. (See Ghirardo v. Antonioli (1996) 14 Cal.4th 39, 51; see Rest.3d Restitution and Unjust Enrichment, § 1; 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 1013, p. 1102.) Where the doctrine applies, the law implies a restitutionary obligation, even if no contract between the parties itself expresses or implies such a duty. (See Buss, supra, 16 Cal.4th at p. 51.) Though this restitutionary obligation is often described as quasi-contractual, a privity of relationship between the parties is not necessarily required. (Ibid.; see CTC Real Estate Services v. Lepe (2006) 140 Cal.App.4th 856, 860-861.) Restitution is not mandated merely because one person has realized a gain at another’s expense. Rather, the obligation arises when the enrichment obtained lacks any adequate legal basis and thus “cannot conscientiously be retained.” (Rest.3d Restitution and Unjust Enrichment, supra, § 1, com. b, p. 6.) We addressed whether such an obligation arises for the insured to pay restitution in Buss. When the issuer of a CGL policy has met its obligation to completely defend a “mixed” action against its insured, we held that the insurer is entitled to restitution from the insured for those fees and costs that were solely attributable to defending claims that clearly were not covered by the policy. We 11 explained that the insurer never bargained to bear the costs of defending those claims that were manifestly outside the policy’s coverage, and that the insured never paid premiums, or reasonably expected, to receive a defense of clearly noncovered claims. Under these circumstances, we concluded, it would be unjust for the insured to retain the benefit of the insurer paying for defense costs that are beyond the scope of the insurance contract. (Buss, supra, 16 Cal.4th at p. 51.) As we concluded in Buss, if an insurer were required to absorb the costs of defending claims it clearly never agreed to defend, it is the insured who would gain a direct and unjust enrichment at the insurer’s expense. But in Buss, we did not confront the question presented here — i.e., who is “unjustly” enriched if independent counsel representing the insured, but compensated by the insurer, are allowed to retain payments that were unreasonable and unnecessary for the insureds’ defense against any claim. In the present situation, Hartford alleges that it is counsel who are the unjust beneficiaries of the insurer’s overpayments. Thus, the question in this instance is premised on the assumption that counsel’s fees were excessive and unnecessary and were not incurred for the benefit of the insured. In such a case, it is counsel who should owe restitution of the excess payments received. As applied here, accepting for the sake of argument that Squire Sanders’s bills were objectively unreasonable and unnecessary to the insured’s defense in the underlying litigation and that they were not incurred for the benefit of the insured, principles of restitution and unjust enrichment dictate that Squire Sanders should be directly responsible for reimbursing Hartford for counsel’s excessive legal bills. We emphasize that our conclusion hinges on the particular facts and procedural history of this litigation. As noted, the trial court’s September 2006 enforcement order foreclosed Hartford from “invok[ing] the rate provisions of [s]ection 2860,” but nevertheless admonished that counsel’s bills must be 12 “reasonable and necessary,” and, citing cases that allow reimbursement actions based on restitution principles, expressly provided that Hartford could challenge Squire Sanders’s bills in a subsequent reimbursement action. This enforcement order was upheld on appeal and is now final. We thus assume its propriety for purposes of the question presented here. Our task is to determine only whether, taking as given that Hartford is entitled to challenge the reasonableness and necessity of counsel’s fees in a reimbursement action, Hartford may seek reimbursement directly from Squire Sanders. We conclude that it may, but express no view as to what rights an insurer that breaches its defense obligations might have to seek reimbursement directly from Cumis counsel in situations other than the rather unusual one before us in this case.