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Insurer’s Duty To Pay Independent Counsel Fees Is Limited To Fees That Are “Reasonably Necessary And Reasonable In Amount,” And Court Applies “Genuine Dispute” Doctrine To Fee Dispute

08.05.2011

In Behnke v. State Farm General Ins. Co., __ Cal.Rptr.3d __, 2011 WL 2162894 [filed 5/31/11; certified for publication 6/29/11], the California Court of Appeal held that an insured could not pursue his insurer for “bad faith” for refusing to pay all the fees charged by his counsel of choice when the insurer had paid the amount of the award as determined in fee arbitration. The Court reasoned the insurer was obligated to pay only those independent counsel fees that were “reasonably necessary and reasonable in amount” and the arbitrator’s reduction of the fees reflected there was a “genuine dispute” as to what was reasonable.

The insured sued his homeowners liability insurer for attorneys’ fees charged by his independent, Cumis counsel to defend him in a third-party lawsuit. In his fee agreement with counsel, the insured agreed to be personally liable for the firm's fees at certain identified rates if the insurer failed to pay. After objecting that the fees were excessive and attempting to replace the firm, the insurer allowed the firm to continue representing the insured and allegedly promised to pay “all” of the firm's fees as of a certain date. The insurer eventually paid $50,000 to settle the underlying suit and paid $140,000 of $199,000 charged by the firm. The insured signed a promissory note for the balance owed secured by a deed of trust on his home.
 
When the fee dispute could not be resolved, the insurer sought mandatory binding fee arbitration under California Civil Code §2860(c). The arbitrator issued an award in favor of the firm but reduced the disputed $59,000 attorneys’ fees claim by $16,000, finding the fees to be “excessive.” The insurer paid the award amount to the firm, which thereafter, foreclosed on the deed of trust given by the insured for the unpaid balance.
 
The trial court ruled in favor of the insurer on demurrer and summary judgment motion. The Court of Appeal affirmed both rulings.

The Court held that the fee dispute fell within the scope of Section 2860’s mandatory arbitration provision and thus fell outside the jurisdiction of the Superior Court. The Court stated that “[i]t is well established that an insurer that retains Cumis counsel to defend its insured is legally obligated to pay only reasonable and necessary defense costs.” Thus, the Court held, any agreement by the insurer to pay counsel was only an agreement to pay fees billed “that were both reasonably necessary and reasonable in amount as determined by an arbitrator in the event a fee dispute arose, as occurred here.” Since that amount was determined by an arbitrator and was paid by the insurer, the Court held that no claim outside of arbitration could be pursued.

With respect to the insured's breach of contract claim, the Court held that because the insurer paid all policy benefits that the insured was entitled to receive, specifically, the settlement and reasonable attorneys’ fees and other defense costs owed under the arbitration award, the insured suffered no contract damages. The Court found “unavailing” the insured’s claims that he suffered uncompensated damages when the insurer failed to pay the full amount billed because he became personally obligated to pay under his own retainer agreement.

The Court also affirmed judgment on the insured’s bad faith claim, citing the “judicially recognized ‘genuine dispute’ rule.”[FN1]  The Court held that the insurer's decision to dispute the firm’s excessive billings was objectively reasonable as a matter of law and the insurer thus could not be liable for bad faith.
 
Citing to Wilson v. 21st Century Ins. Co., 42 Cal.4th 713, 723 (2007), the Court stated:
The California Supreme Court has explained that "an insurer's denial of or delay in paying benefits gives rise to tort damages only if the insured shows the denial or delay was unreasonable. [Citation.]  As a close corollary of that principle, it has been said that 'an insurer denying or delaying the payment of policy benefits due to the existence of a genuine dispute with its insured as to the existence of coverage liability or the amount of the insured's coverage claim is not liable in bad faith even though it might be liable for breach of contract.' [Citation.] This 'genuine dispute' or 'genuine issue' rule was originally invoked in cases involving disputes over policy interpretation, but in recent years courts have applied it to factual disputes as well."

 Behnke provides much-needed guidance to insureds, insurers and courts on fee disputes, which frequently arise.

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FN1  This is interesting, since at least one appellate court recently limited the “genuine dispute” doctrine. See, Howard v. American Nat. Fire Ins. Co., 187 Cal.App.4th 498 ( 2010), discussed in Musick Peeler’s September 2010 Insurance Notes.


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