In personal lines insurance as well as other lines of insurance, this conflict
of interest may arise when the insurance company denies coverage or reserves
its right to later deny coverage. While the insured will wish to establish coverage,
the insurance company will wish to deny it. Whether an insurer has the right
to control the defense, which involves the right to select counsel, is a matter
of contract. See North
County Mut. Ins. Co. v. Davalos, 140 S.W.3d 658, 688 (Tex. 2004); also State Farm Mut. Auto. Ins. Co. v. Traver, 980
S.W.2d 625 at 627 (Tex. 1998).
Most policies vest this right in insurers. Under certain circumstances, however,
an insurer may not insist on its contractual right to control the defense. San Diego Navy Fed. Credit Union v. Cumis Ins. Soc'y,
Inc., 162 Cal. App. 3d 358 (1984); Davalos,
140 S.W.3d at 688; see also R. Brent Cooper, Coverage Disputes
Give Rise to Independent Counsel, IRMI June 2005). Once it is determined
that the insured is entitled to independent counsel of his or her choice, may
he or she choose any attorney at any price?
Reasonable Fee
Conflicts will escalate with respect to what constitutes a "reasonable" fee
for independent counsel. A policyholder who is not funding the defense may be
motivated to choose the most skilled (and expensive) attorney to establish coverage
and will want this attorney to spend the maximum number of hours on his or her
claim. Further, an attorney who is aware that he is being paid by an insurance
company with "deep pockets" may not attempt to control costs or may use the
case as an opportunity to train inexperienced associates or allow partners to
learn a new area of law. See Elaynne B.
Cothran, Can Carriers Legitimately Evaluate Independent
Counsel Fees without Impeding Counsel's Independent Legal Judgment, Brief,
Spring 2000, at 38, 40.
On the other hand, an insurer who is required to pay for such counsel will
contend that a reasonable attorney's fee rate would be the rate that would have
been charged by captive counsel or panel counsel.
In Louisiana The Louisiana Supreme Court has established a 10-factor test to determine
the reasonableness of attorney's fees in independent counsel situations. These
factors are:
- the ultimate result obtained;
- the responsibility incurred;
- the importance of the litigation;
- the amount of money involved;
- the extent and character of the work performed;
- the legal knowledge, attainment, and skill of the attorneys;
- the number of appearances involved;
- the intricacies of the facts involved;
- the diligence and skill of counsel; and
- the court's own knowledge.
Rivet v. State, 680 So. 2d 1154, 1161 (La.
1996) (citing State v. Williamson, 597 So. 2d
439, 441-42 (La. 1992)
In California Several states have enacted statutes declaring that in independent counsel
situations, the reasonableness of defense costs must be measured from the insurer's
perspective based on what the insurer typically pays defense counsel. California
Civil Code Section 2860 provides that the insurer may require that the independent
counsel have 5 years of litigation experience in the relevant field of law and
that the rates are limited to those actually paid by the insurer in the ordinary
course of business in the community. Cal. Civ. Code § 2860(c) (Deering 2005).
Furthermore, Section 2860(c) provides that disputes regarding attorney's
fees shall be resolved by arbitration. Id. This statute was applied in Truck Ins. Exch. v. Superior
Court, in which the court held that arbitration prior to the legal determination
of the coverage issues is appropriate to resolve disputes over the independent
counsel's fees. 59 Cal. Rptr. 2d 529, 537 (Cal. Ct. App. 1996); but see Caiafa Prof'l Law Corp. v. State Farm Fire & Cas. Co.,
19 Cal. Rptr. 2d 138, 142-43 (Cal. Ct. App. 1993) (holding that the trial court
did not abuse its discretion by staying the state court Section 2860 arbitration
proceedings pending the outcome of the federal fraud action).
In Alaska Similar to the California statute, the Alaska statute provides that the insurer
may require a minimum number of years of experience that the fees are limited
to those paid by the insurer in the ordinary course of business, and that disputes
about attorney's fees not solved by the statute or the insurance policy will
be resolved by arbitration. Alaska Stat. §21.89.100(d) (2004). The Alaska statute
also provides that the insurer is not responsible for fees incurred in defending
coverage that has been properly denied and that the attorney shall keep detailed
records. Id.
Section 21.89.100(d) provides as follows:
If the insured selects independent counsel at the insurer's expense, the insurer
may require that the independent counsel have at least four years of experience
in civil litigation, including defense experience in the general subject
area at issue in the civil action, and malpractice insurance. Unless otherwise
provided in the insurance policy, the obligation of the insurer to pay the
fee charged by the independent counsel is limited to the rate that is actually
paid by the insurer to an attorney in the ordinary course of business in
the defense of a similar civil action in the community in which the claim
arose or is being defended. In providing independent counsel, the insurer
is not responsible for the fees and costs of defending an allegation for
which coverage is properly denied and shall be responsible only for the
fees and costs to defend those allegations for which the insurer either
reserves its position as to coverage or accepts coverage. The independent
counsel shall keep detailed records allocating fees and costs accordingly.
A dispute between the insurer and insured regarding attorney fees that is
not resolved by the insurance policy or this section shall be resolved by
arbitration….
The statute also provides:
An insurance policy may contain a provision that provides a method of selecting
independent counsel if the provision complies with this section." §21.89.100(a).
In Florida Florida briefly addresses the problem through legislation providing that
the independent counsel should be mutually agreeable to the parties and should
be paid reasonable fees agreed on by the parties or set by the court. Fla. Stat.
Ann. §627.426 (West 2004) (provides that the insurer must "retain independent
counsel which is mutually agreeable to the parties"). Reasonable fees for the
counsel may be agreed on between the parties or, if no agreement is reached,
shall be set by the court." Fla. Stat. Ann. §627.426(2)(b)(3) (West 2004).
This statutory requirement of a mutually agreeable attorney was not satisfied
when the insurer retained the independent counsel but did not inform the insured
of its right to mutually agreeable counsel, did not ask the insured whether
the counsel was acceptable, and did not consult with the insured when selecting
the attorney. American Empire Surplus Lines Ins. Co.
v. Gold Coast Elevator, Inc., 701 So. 2d 904, 906 (Fla. Dist. Ct. App.
1997).
In Texas and Other Jurisdictions Some jurisdictions do not agree with the legislatures of Alaska and California,
finding that these legislatures ignore the fact that defense counsel who receive
a large volume of work from a particular insurer oftentimes discount their rates
and thus their fees usually are significantly lower than those charged by independent
counsel selected by insureds in conflict-of-interest situations. It is estimated
that defense attorneys who serve as "panel counsel" are paid 15-50 percent less
than the hourly rate of outside counsel selected by the insured. See Charles Silver, Does Insurance Defense Counsel Represent the
Company or the Insured?, 72 Tex. L. Rev. 1583, 1597-98 (1994). Should
independent counsel, who may or may not ever have another case involving the
insurer, be forced to accept the discounted rate?
Texas is one of the jurisdictions in disagreement with the legislatures of
Alaska and California. In Housing Auth. of City of Dallas
v. Northland Ins. Co., 333 F. Supp. 2d 595 (N.D. Tex. 2004), after deciding
that the insurer had breached its duty to defend, Judge Lindsay issued a subsequent
opinion in which he concluded that the fees charged by the lawyers whom the
insured had retained to represent it after the insured refused to accept the
insurer's qualified defense were "on the low end of reasonableness," despite
the fact that they were significantly higher than the rates that would have
been charged by the insurer's selected counsel. In determining the amount of
fees to be awarded, Judge Lindsay relied on the factors set out in Johnson v. Georgia Hwy. Express, Inc., 488 F.2d
714 (5th Cir. 1974).
The Johnson factors are virtually identical to the factors the Texas Supreme
Court set out as a guide when awarding attorneys' fees. SeeArthur Anderson
& Co. v. Perry Equip. Corp., 945 S.W.2d 812,818 (Tex. 1997). The factors
that the court stated should be considered when determining the reasonableness
of a fee included:
-
the time and labor required, the novelty and difficulty of the questions
involved, and the skill required to perform the legal service properly;
-
the likelihood . . . that the acceptance of the particular employment
will preclude other employment by the lawyer;
-
the fee customarily charged in the locality for similar legal services;
-
the amount involved and the results obtained;
-
the time limitations imposed by the client or by the circumstances;
-
the nature and length of the professional relationship with the client;
-
the experience, reputation, and ability of the lawyer or lawyers performing
the services; and
-
whether the fee is fixed or contingent on results obtained or uncertainty
of collection before the legal services have been rendered.
Johnson at 717-18. However, it should be noted
that there is no published Texas caselaw at this time that applies the Johnson (Arthur Anderson) factors in the independent
counsel context.
The caselaw from other jurisdictions varies as to what constitutes a reasonable
fee for independent counsel. See, e.g.:
-
Golotrade Shipping & Chartering, Inc. v. Travelers
Indent. Co., 706 F. Supp. 214, 219 (S.D.N.Y. 1989) (stating that
once a conflict of interest arises, "the duty to defend includes a duty
to provide independent defense counsel to the insured, whose reasonable
fee is to be paid by the insurer but who is to be appointed by the insured").
-
U.S. Fid. & Guar. Co. v. Louis A. Roser Co.,
585 F.2d 932, 941 (8th Cir. 1978) ("USF&G must now reimburse appellant for
the fair and reasonable value of the services rendered by appellant's independent
counsel in defending the Kemp action.")
-
Armstrong Cleaners, Inc. v. Erie Ins. Exch.,
364 F. Supp 2d 797, 801 (S.D. Ind, 2005) ("[T]he policyholders are entitled
to select their own counsel to defend the underlying claim, subject to reasonable
approval by the insurer, with reasonable fees and expenses paid by the insurer.")
-
HK Sys. Inc. v Admiral Ins. Co., 2005
WL 1563.340, at *18 (E.D. Wis. June 27, 2005) (opining that the Wisconsin
Supreme Court "would find that the insurer's responsibility for defense
costs extends only to a reasonable charge").
-
Aquino v. State Farm Ins. Co., 793 A.2d
824, 832 (N.J. Super. 2002) ("It does not follow, however, that he is entitled
to be compensated by the insurers for that defense work on the same basis
that he is entitled to be compensated for work performed in connection with
the declaratory judgment action. While [the insured] may have been entitled
to an attorney of his selection to handle the claim of intentional conduct,
he does not have the right to dictate to the insurers the hourly rate they
must pay. The trial court here should have determined a reasonable hourly
rate for defense work of this nature and set a fee accordingly.")
Conclusion
Insurers need a means by which to measure their risk under the insurance
policies they issue, to forecast and budget for the outlay of defense costs
for that risk, and to thereby establish a means by which to set policy premiums
for the benefit of all insureds. To expose insurers to costs for which they
did not bargain and cannot control could create disruptions and uncertainty
for the insurance industry and for every policyholder. This would be poor public
policy. A shift in the right to control the defense, and to select defense counsel,
should not increase the financial obligations the insurer bargained for under
the insurance contract nor afford the insured a more expensive defense than
for which it paid. It therefore makes sense to measure the "reasonableness"
of the defense costs incurred directly by an insured from the insurer's perspective
as set forth in the independent counsel statutes of California and Alaska. No
other rule more closely adheres to the bargain struck by the parties or offers
a more manageable and predictable rule for the parties and the courts. Thus,
an insured with a right to select its own counsel should be provided the same
defense, in terms of cost, as other similarly situated insureds.
Dana Harbin is an attorney in the Dallas office of Cooper & Scully, P.C. where she specializes
in insurance coverage and bad faith involving all types of insurance policies,
both first and third party. Ms. Harbin earned her BA degree from the University
of Texas in Arlington and her JD degree from the University of Texas at Austin.
She can be reached at