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By William T. Barker, Partner, SNR Denton
In Richards v. Sequoia Insurance Co., insured attorneys, who were instructed to arrange for their own defense pending Sequoia's coverage decision, retained counsel on the basis that the insureds would do most of the investigation, legal research, and pleadings necessary. After Sequoia undertook the defense and settled the case, it was held not obliged to compensate the insureds for the work done in their own defense. This comment questions that result.
Linda and Thomas Richards, licensed attorneys, also owned the Jack London Lodge, which was insured by Sequoia under a general liability policy including liquor coverage. They and the Lodge were sued for wrongful death of a patron fatally injured in a single-car accident after leaving the bar. On February 29, 2006, they tendered the suit to Sequoia for defense. By letter dated March 8, Sequoia advised that it was seeking a coverage opinion, did not expect to reach a coverage decision before a responsive pleading was required (and possibly not for 45 days after its letter), and recommended that the Richardses, at their own expense, retain counsel to defend them, subject to reimbursement if Sequoia agreed to defend. The Richardses had no funds available to hire an attorney, but Brian Charter agreed to represent them if they would do most of the investigation, legal research, and pleadings necessary. They each spent 60 hours working on the case. By letter of March 17 (received by the Richardses on March 21 or 22), Sequoia agreed to defend (subject to a reservation of rights). It then defended and settled the suit, paying the fees of counsel it retained as well as those of Charter. But it refused to compensate the Richardses for their work in their own defense.
They sued Sequoia for breach of contract and bad faith. The superior court granted summary judgment to Sequoia on the ground that, even if Sequoia had wrongfully delayed in providing a defense, the Richardses had suffered no cognizable damages, because they had not incurred any expense for their own work. The court of appeal affirmed.
Sequoia relied on Trope v. Katz, in which the California Supreme Court held that attorneys suing under a contract providing for award of attorneys' fees could not recover for the value of their own services in prosecuting a successful suit. Relying in part on California Civil Code § 1717, the court concluded that such a contract authorizes recovery only of fees and costs "incurred" to enforce the contract, and that attorneys who represent themselves do not incur any liability for fees.
Sequoia's policy agreed, inter alia, to pay "[a]ll reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or suit, including actual loss of earnings up to $100 dollars per day for time off work." The court reasoned that "the measure of damages for any breach of Sequoia's contractual duty to defend are the 'costs and attorneys' fees expended by the insured in defending the underlying action.'" Accordingly, it found no reason to depart from Trope's analysis, and concluded that "[t]he measure of attorney fees possibly owed by Sequoia for its delay in accepting the Richards's tender of defense were those expended by the Richards, not those based upon the time or value of their services." Because they had not expended anything for their own services, the court held that they had no cognizable damages, for either breach of contract or bad faith.
While the insurance policy promised only to pay for expenses the Richardses incurred and to provide very limited compensation for their own time, the performance due under a contract is not the measure of damages for its breach. Sequoia apparently conceded that it was obliged to defend. Given timely notice, the duty to defend requires that necessary defense services be provided immediately. Had the Richardses been in a position to hire defense counsel, Sequoia's offer to pay if it found a duty to defend might have avoided any breach. But the court accepted the claim that they were not in a position to hire defense counsel without agreeing to perform most of the work themselves. So, Sequoia appears to have breached its duty to defend, and the issue is one of damages for breach, not of what compensation Sequoia had promised to pay.
While the court acknowledged that "'[c]ontract damages serve to put the [nonbreaching] party in as good a position as it would have been had performance been rendered as promised,'" it did not properly apply that principle to the facts before it. Had Sequoia provided the promised defense, the Richardses would not have had to devote their own efforts to defending themselves. But, because they were not in a position to hire counsel without undertaking such efforts, they had no alternative to doing that. The only way to place them in as good a position as if Sequoia had provided a defense was to compensate them for the services its breach required them to provide.
Moreover, unlike Trope, this was not a situation where Sequoia was being asked to pay for an adversary's legal fees. Because Sequoia was (or at least may have been) obliged to pay any judgment, the services rendered by the Richardses benefitted Sequoia by preventing a default judgment. Because Sequoia had promised to save the Richardses from having to defend such an action, it would be unjustly enriched if not required to compensate them for the benefit they provided to it.
Accordingly, denial of all compensation for the Richardses' services seems wrong. Of course, that does not imply that the Richardses were entitled to all the compensation they sought. Sequoia's actions seemingly did not require them to do more than was necessary to formulate a responsive pleading. It is very doubtful that this required 120 hours of work. The Richardses were not required to plan the full defense, and any effort to do more than formulate a responsive pleading may not have been beneficial to Sequoia. And, especially if the Richardses did not forego other income in order to do the work necessary for their own defense, the benefit to Sequoia might be less than what they would customarily have charged a client for similar services. Certainly it would be limited to what Sequoia would have had to pay to obtain similar services.
 Richards v. Sequoia Insurance Co., 195 Cal. App. 4th 431 (2011). 195 Cal. App. 4th at 433-34. Trope v. Katz, 11 Cal. 4th 274 (1995). 11 Cal. 4th at 292. 195 Cal. App. 4th at 437. 195 Cal. App. 4th at 438. See Archdale v. Am. Int'l Specialty Lines Ins. Co., 154 Cal. App. 4th 449, 469-70 (2007) (insurer that has breached contractual duty to settle within policy limits liable for judgment in excess of policy limits). Jeffrey E. Thomas, New Appleman on Insurance Law, Library Edition, § 16.06[a] (chapter by Paul E.B. Glad, William T. Barker & Michael Barnes). But see Jeffrey E. Thomas, New Appleman on Insurance Law, Library Edition, § 16.06[b]. 195 Cal. App. 4th at 437.
William T. Barker is a partner in the Chicago office of SNR Denton, L.L.P., with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is a member of the Editorial Board of the New Appleman on Insurance Law Library Edition and a Consulting Author of the New Appleman Insurance Law Practice Guide. He has published over 100 articles and speaks frequently on insurance and litigation subjects. He was a Contributing Editor and then Editor of Bad Faith Law Report until that publication merged with Insurance Litigation Reporter, where he is currently Senior Contributing Editor and Editorial Board Director. He has been described as the leading lawyer commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995). Mr. Barker is a member of the American Law Institute. Mr. Barker is the co- author of New Appleman Insurance Bad Faith Litigation, Second Edition.
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