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By Erica Villanueva
A recent unpublished decision from California’s Second Appellate Division highlights one of the most common mistakes lawyers make when obtaining insurance coverage for the defense of a lawsuit: accepting the insurer’s ultra-low hourly rate caps for charges incurred before the date on which the insurer actually acknowledged its defense obligation and began defending.
The case is City Art, Inc. v. Superior Court (Travelers Property Casualty Company of America), B256132, 2014 Cal. App. Unpub. LEXIS 8741 (issued Dec. 9, 2014), [enhanced version available to lexis.com subscribers]. There, Travelers agreed that its obligation to defend an underlying lawsuit against City Art was triggered no later than April 2009. However, Travelers did not actually agree to begin reimbursing defense costs until February 2010. (In the intervening 10 months, Travelers and City Art exchanged a series of letters arguing about whether Travelers had a duty to defend, before Travelers finally relented in February 2010.) Nevertheless, Travelers claimed that it could impose its hourly rate caps on all charges incurred from April 2009 forward.
The Court of Appeals disagreed. As I’ve noted in prior blog posts, California Civil Code section 2860(c), [enhanced version available to lexis.com subscribers], limits a defending insurer’s obligation to provide independent counsel, capping the hourly rate the insurer is required to pay at “the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” But when can the insurer begin to impose this rate cap? In the City Art case, the Second Appellate Division emphatically stated that the insurer cannot impose the rate caps until it actually begins paying for the defense:
An insurer that breached the duty to defend must make its insured whole with respect to defense costs reasonably incurred; an insured should not be left with partial recovery simply because the insurer would have had a conflict of interest requiring it to provide independent counsel, had the insurer accepted its duty to defend.
We therefore conclude that section 2860 does not apply retroactively to attorney fees incurred prior to the time Travelers began paying defense costs.
The significance of this rule should not be understated. Even if the underlying complaint is unquestionably covered, it often takes insurers a month or more to evaluate the claim and confirm that they will provide a defense. Very commonly, the tender process doesn’t go as smoothly. As in the City Art case, the insurer and the insured may first exchange a series of letters, arguing about whether the insurer has a duty to defend the claim. Finally, the insurer begrudgingly agrees to defend. But in the interim, months have gone by and the insured has spent thousands of dollars defending the case.
The City Arts case affirms that Insureds should not give up their right to full reimbursement of these “pre-acceptance” defense costs. Unless and until the insurer accepts the defense, the insured has the right to expect reimbursement of its defense costs at the full hourly rates it has paid its outside counsel.
By Erica Villanueva, Partner, Farella Braun + Martel LLP
Read additional articles on legal developments that affect policyholders at the Policyholder Perspective blog.
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