J.R. Marketing v. Hartford Casualty ( 2013 )

Filed 5/17/13 Certified for publication 6/11/13 (order attached)
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
J.R. MARKETING, L.L.C. et al.,
Plaintiffs, Cross-Defendants and
Respondents, A133750
v. (San Francisco County
HARTFORD CASUALTY INSURANCE Super. Ct. No. CGC-06-449220)
COMPANY,
Defendant, Cross-Complainant and
Appellant.
This is an appeal from an order sustaining the demurrers of respondents/cross-
defendants Squire Sanders L.L.P. (Squire) and Scott Harrington in a cross-action by
appellant Hartford Casualty Insurance Company (Hartford) for reimbursement of
allegedly excessive or otherwise inappropriate legal fees and costs billed by Squire to
Hartford. Squire served as independent counsel for cross-defendants J.R. Marketing,
L.L.C., Noble Locks Enterprises, Inc., Jane and Robert Ratto, Lenore and Germain
DeMartinis, and Penelope Kane (collectively, insured cross-defendants) in a California
tort action after Hartford disclaimed coverage for the action under the relevant insurance
policy. Squire also served as counsel for certain of the insured cross-defendants in two
non-California actions, and as counsel for the non-insured cross-defendants – to wit,
Harrington, Wheatland Baking Inc., and Kane Processing, L.L.C. – in the California
action or one or more of the non-California actions (collectively, uninsured cross-
defendants). According to Hartford, some portion of the fees and costs billed by Squire
1
and paid by Hartford were for legal services provided to cross-defendants outside the
scope of Hartford‟s contractual obligations as insurer under the relevant policy. For
reasons discussed below, we affirm the order.
FACTUAL AND PROCEDURAL BACKGROUND
This is not the first time this court been called upon to review trial court rulings in
this insurance coverage lawsuit. We have twice before decided appeals in this matter.
(See J.R. Marketing, L.L.C. v. Hartford Cas. Ins. Co., A115472 (Oct. 30, 2007) (nonpub);
J.R. Marketing, L.L.C. v. Hartford Cas. Ins. Co., A115846 (Nov. 30, 2007) (nonpub).)1
As such, we have already set forth in detail much of the relevant factual and procedural
background of this coverage dispute, allowing us, in the name of judicial efficiency, to
borrow extensively from our previous opinions for purposes of this appeal. With respect
to more recent events, however, we abide by well-established principles requiring us,
when reviewing an order on demurrer, to accept as true all factual allegations set forth in
the operative complaint. (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 664, fn.
2.) We thus turn to the relevant facts.
In Summer 2005, Hartford issued two commercial general liability policies, the
first policy to cross-defendant Noble Locks Enterprises, Inc., effective July 28, 2005 to
July 28, 2006, and the second policy to cross-defendant J.R. Marketing, L.L.C., effective
August 18, 2005 to August 18, 2006 (collectively, the J.R. Marketing and Noble Locks
policies). Under these policies, Hartford promised to defend and indemnify claims
against the named insureds for certain business-related damages subject to various
exclusions of coverage.
In September 2005, several individuals, including Meir Avganim, sued cross-
defendants (except Wheatland Baking, Inc.) and others for intentional misrepresentation,
1
In the first appeal, we upheld a trial court order requiring Hartford to immediately
pay Squire‟s outstanding legal fees and costs and declining to permit Hartford to avail
itself of the protections provided to insurers pursuant to Civil Code section 2860,
subdivision (c). This order will be discussed in greater detail herein. In the second
appeal, we upheld a trial court order denying Hartford‟s motion to disqualify Squire as
counsel.
2
breach of fiduciary duty, unfair competition, restraint of trade, defamation, interference
with business relationships, conversion, accounting, mismanagement and conspiracy in
Marin Superior Court (Marin or Avganim matter). Cross-complaints were subsequently
filed by J.R. Marketing, L.L.C., the Rattos, Kane and Kane Processing, L.L.C. The
Marin matter was immediately tendered to Hartford for defense and indemnity under the
J.R. Marketing and Noble Locks policies.
Around the same time, two actions were brought against various of the cross-
defendants in non-California courts (non-California matters). The complaints in the non-
California matters were likewise tendered to Hartford for defense and indemnity under
the J.R. Marketing and/or Noble Locks policies.
In the Marin matter, Hartford refused to defend or indemnify the named cross-
defendants on the ground, among others, that the acts complained of appeared to have
occurred before the relevant insurance policy‟s inception date. Hartford nonetheless
invited them to provide more information should they believe its position to be erroneous.
In February 2006, cross-defendants J.R. Marketing, L.L.C., Noble Locks Enterprises,
Inc., the Rattos, and Kane, represented by Squire, filed this coverage lawsuit, after which
Hartford reconsidered its position and, based on newly provided information, agreed in
March 2006 to provide a defense in the Marin matter under the J.R. Marketing policy
subject to a reservation of rights. In doing so, Hartford continued to refuse to pay defense
costs incurred before January 19, 2006, or to provide the named cross-defendants
independent counsel in place of its panel counsel. The named cross-defendants thus
moved for summary adjudication on the issue of whether Hartford owed them a duty to
defend, including a duty to provide independent counsel, from the initial tender of the
Marin matter in September 2005. The trial court granted their motion on July 26, 2006,
finding a legal duty to defend and to fund independent (“Cumis”) counsel under the J.R.
Marketing policy.2
2
See San Diego Fed. Credit Union v. Cumis Ins. Society Inc. (1984) 162
Cal.App.3d 358. For purposes of this appeal, we use the terms “Cumis counsel” and
“independent counsel” interchangeably.
3
The trial court also granted a subsequent motion by cross-defendants J.R.
Marketing, L.L.C., Noble Locks Enterprises, Inc., the Rattos, and Kane to enforce
Hartford‟s duty to defend and fund independent counsel under the J.R. Marketing policy
(hereinafter, enforcement order). Specifically, on September 27, 2006, the trial court
ordered Hartford to pay the insured cross-defendants‟ outstanding invoices within 15
days and to pay “all future reasonable and necessary defense costs within 30 days of
receipt.” Acknowledging a right of reimbursement, the enforcement order provided, “[t]o
the extent Hartford seeks to challenge fees and costs as unreasonable or unnecessary, it
may do so by way of reimbursement after resolution of the Avganim matter. American
Motorists Insurance Co. v. Superior Court (“AMICO”) (1998) 68 Cal.App.4th 864, 874;
Buss v. Superior Court (1997) 16 Cal.4th 35, 50 et seq.”3
Finally, the order provided that, while Squire‟s bills had to be reasonable and
necessary, Hartford was barred from invoking the protective provisions afforded insurers
under Civil Code section 2860 because it “has breached and continues to breach its
defense obligations by (1) failing to pay all reasonable and necessary defense costs
incurred by the insured and by (2) failing to provide Cumis counsel.”4 (See, e.g.,
3
Hartford subsequently agreed to defend and fund independent counsel for Germain
and Lenore DeMartinis in the Marin matter based upon their status as J.R. Marketing
employees. They were also added as plaintiffs in this coverage action.
4
Civil Code section 2860, discussed in much greater detail below, provides in full:
“(a) If the provisions of a policy of insurance impose a duty to defend upon an insurer
and a conflict of interest arises which creates a duty on the part of the insurer to provide
independent counsel to the insured, the insurer shall provide independent counsel to
represent the insured unless, at the time the insured is informed that a possible conflict
may arise or does exist, the insured expressly waives, in writing, the right to independent
counsel. An insurance contract may contain a provision which sets forth the method of
selecting that counsel consistent with this section.
“(b) For purposes of this section, a conflict of interest does not exist as to allegations or
facts in the litigation for which the insurer denies coverage; however, when an insurer
reserves its rights on a given issue and the outcome of that coverage issue can be
controlled by counsel first retained by the insurer for the defense of the claim, a conflict
of interest may exist. No conflict of interest shall be deemed to exist as to allegations of
punitive damages or be deemed to exist solely because an insured is sued for an amount
in excess of the insurance policy limits.
4
Stalberg v. Western Title Ins. Co. (1991) 230 Cal.App.3d 1223, 1233.) In so ordering,
the trial court expressly reasoned there was “no authority for the proposition that once an
insurer breaches its duty to defend by refusing to provide Cumis counsel, when that
insurer is later ordered to provide Cumis counsel, and continues to refuse the order, but
later agrees to provide that counsel, it can unilaterally take advantage of the rate
limitation provision of Section 2860. Indeed, such an outcome would encourage insurers
to reject their Cumis obligation for as long as they chose, safe in the notion that they
“(c) When the insured has selected independent counsel to represent him or her, the
insurer may exercise its right to require that the counsel selected by the insured possess
certain minimum qualifications which may include that the selected counsel have (1) at
least five years of civil litigation practice which includes substantial defense experience
in the subject at issue in the litigation, and (2) errors and omissions coverage. The
insurer‟s obligation to pay fees to the independent counsel selected by the insured is
limited to 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. This subdivision does not invalidate other different or
additional policy provisions pertaining to attorney‟s fees or providing for methods of
settlement of disputes concerning those fees. Any dispute concerning attorney‟s fees not
resolved by these methods shall be resolved by final and binding arbitration by a single
neutral arbitrator selected by the parties to the dispute.
“(d) When independent counsel has been selected by the insured, it shall be the duty of
that counsel and the insured to disclose to the insurer all information concerning the
action except privileged materials relevant to coverage disputes, and timely to inform and
consult with the insurer on all matters relating to the action. Any claim of privilege
asserted is subject to in camera review in the appropriate law and motion department of
the superior court. Any information disclosed by the insured or by independent counsel is
not a waiver of the privilege as to any other party.
“(e) The insured may waive its right to select independent counsel by signing the
following statement: „I have been advised and informed of my right to select independent
counsel to represent me in this lawsuit. I have considered this matter fully and freely
waive my right to select independent counsel at this time. I authorize my insurer to select
a defense attorney to represent me in this lawsuit.‟
“(f) Where the insured selects independent counsel pursuant to the provisions of this
section, both the counsel provided by the insurer and independent counsel selected by the
insured shall be allowed to participate in all aspects of the litigation. Counsel shall
cooperate fully in the exchange of information that is consistent with each counsel‟s
ethical and legal obligation to the insured. Nothing in this section shall relieve the insured
of his or her duty to cooperate with the insurer under the terms of the insurance contract.”
5
could, at any point, invoke the protection of the statute, effectively forcing their
policyholder to transfer the file to yet another law firm whose rates are lower.” In this
case, the court added, “such a result would work an injustice, since Hartford has already
forced its policyholders to transfer the defense of the Avganim matter from [Squire] to
Hartford‟s panel counsel, only to have it come back again.” Finally, the court concluded:
“[T]he province of the Court is not to continually monitor the conduct of a breaching
insurer to determine at what point it is no longer in „breach‟ so that it may benefit from a
statute whose protection it previously waived.”
This court affirmed both the enforcement order and the underlying summary
adjudication order in the aforementioned nonpublished opinion dated November 30,
2007.5
On or about October 2009, the Marin matter was resolved. Cross-defendants,
including the insured and uninsured, submitted bills to Hartford for defense fees and costs
totaling over $15 million, which Hartford subsequently paid. According to Hartford,
these defense fees and costs were charged by Squire for its legal services as independent
counsel for the insured cross-defendants in the Marin matter, as well as for its services as
counsel for the insured and uninsured cross-defendants in the Marin and/or non-
California actions. Hartford further alleges cross-defendants authorized and ratified each
act of legal service rendered by Squire on their behalf as counsel in those actions, and did
so under the auspices of the enforcement order.
After paying Squire‟s invoices, on July 15, 2011, Hartford filed the operative
cross-complaint in this action, asserting causes of action for reimbursement of monies
5
After cross-defendants J.R. Marketing, L.L.C., Noble Locks Enterprises, Inc., the
Rattos, and Kane filed their motion to enforce the duty to defend but before the motion
was heard, Hartford filed its motion to disqualify Squire for reasons not relevant herein.
We affirmed the trial court‟s decision to deny this motion in the appeal mentioned above
filed in October 2007. (J.R. Marketing, L.L.C. v. Hartford Cas. Ins. Co., A115472
(Oct. 30, 2007) (nonpub).)
6
paid pursuant to the enforcement order, unjust enrichment, accounting and rescission.6 In
this cross-complaint, Hartford alleges Squire submitted improper invoices to Hartford
“under the auspices of the enforcement order,” which caused it to pay in excess of $15
million in defense fees and costs. As such, Hartford claims a right under the enforcement
order to obtain reimbursement of “all unreasonable or unnecessary fees and costs billed
to and paid by Hartford,” including those amounts outside the scope of the enforcement
order for services rendered: (a) for individuals and entities not insured under the
underlying policies; (b) prior to any proper tender to Hartford by any individual or entity;
(c) for any individual or entity in one of the non-California actions; (d) for prosecution of
any affirmative cross-complaints in the Marin action; and/or (e) for any individual or
entity to the extent such fees or costs are abusive, excessive, unreasonable or
unnecessary.
Respondents Squire and Harrington, as well as cross-defendants J.R. Marketing,
L.L.C., the Rattos, the DeMartinis, and Kane, thereafter demurred to the operative cross-
complaint on the ground that each cause of action fails to allege facts sufficient to state a
valid legal claim against any of the named cross-defendants. Following a hearing on
September 1, 2011, the trial court sustained the demurrer to the unjust enrichment and
accounting causes of action without leave to amend as to all cross-defendants and to the
reimbursement and rescission causes of action without leave to amend as to respondents
Squire and Harrington. The trial court overruled the demurrer to the reimbursement and
rescission causes of action as to cross-defendants J.R. Marketing, L.L.C., the Rattos, the
DeMartinis, and Kane.
On December 21, 2011, a judgment of dismissal was thus entered in favor of
Squire and Harrington and against Hartford. Hartford appeals.
DISCUSSION
Hartford raises one primary issue for our review in seeking to overturn the trial
court‟s order sustaining without leave to amend the demurrer of respondents Squire and
6
The rescission cause of action was asserted against all cross-defendants except
Squire. The remaining causes of action were asserted against all cross-defendants.
7
Harrington: Does Hartford have a quasi-contractual right rooted in common law to
maintain a direct suit against Squire, independent counsel for certain cross-defendants in
the Marin action, or Harrington, an uninsured defendant in the Marin action, for
reimbursement of excessive or otherwise improperly-invoiced defense fees and costs? 7
For reasons set forth below, we conclude the answer with respect to both respondents is
“No.”
I. Standard of Review
“In evaluating a trial court‟s order sustaining a demurrer, we review the complaint
de novo to determine whether it contains sufficient facts to state a cause of action. (Blank
v. Kirwan (1985) 39 Cal.3d 311, 318 [216 Cal.Rptr. 718, 703 P.2d 58].) In doing so, we
accept as true all properly pleaded material facts, as well as facts that may be implied
from the properly pleaded facts [citation], and we also consider matters that may be
judicially noticed [citation]. We do not assume the truth of contentions, deductions or
conclusions of fact or law. (Ibid.)” (Peterson v. Cellco Partnership (2008) 164
Cal.App.4th 1583, 1589.)
“When a demurrer has been sustained . . . without leave to amend, we decide
whether there is a reasonable possibility that the defect can be cured by amendment: if it
can be, . . . we reverse; if not, . . . we affirm.” (Blank v. Kirwan (1985) 39 Cal.3d 311,
318.) “The plaintiff „bears the burden of demonstrating that the trial court erroneously
sustained the demurrer as a matter of law‟ and „must show the complaint alleges facts
sufficient to establish every element of [the] cause of action.‟ [Citation.]” (Peterson v.
Cellco Partnership, supra, 164 Cal.App.4th at p. 1589.)
II. The Law Governing the Relationship Among Insurer, Insured and
Independent Counsel.
Under well-established California insurance law, an insurer has the right to control
defense and settlement of a third party action against its insured, and to otherwise directly
participate in the litigation on the insured‟s behalf, so long as no conflict of interest arises
7
Hartford does not challenge on appeal the trial courts ruling on its cause of action
for rescission.
8
between the insurer and the insured. (Gafcon, Inc. v. Ponsor & Associates (2002) 98
Cal.App.4th 1388, 1406-1407 (Gafcon) [recognizing a fiduciary relationship between an
attorney retained by an insurer, on the one hand, and both the insurer and insured, on the
other hand, where no conflict of interest exists]; see also National Union Fire Ins. Co. v.
Stites Prof. Law Corp. (1991) 235 Cal.App.3d 1718, 1727 [“[s]o long as the interests of
the insurer and the insured coincide, they are both the clients of the defense attorney and
the defense attorney‟s fiduciary duty runs to both the insurer and the insured”].)
In this case, however, it is undisputed a conflict of interest between Hartford and
the insured cross-defendants did in fact arise. As such, a different rule was triggered.
Specifically, where, as here, the interests of the insurer and the insured no longer align,
the insured is entitled under Civil Code section 2860 (section 2860) to independent
counsel at the insurer‟s expense. (§ 2860 [codifying and clarifying the Cumis doctrine];
e.g., Gafcon, supra, 98 Cal.App.4th at pp. 1421-1422.) Although independent counsel
owes certain limited duties to the insurer under these circumstances (mainly related to
sharing nonprivileged information), independent counsel represents the insured alone.
(§ 2860, subds. (d), (f).) Otherwise stated, “there is no attorney-client relationship
between Cumis counsel and the insurer.” (Assurance Co. of America v. Haven (1995) 32
Cal.App.4th 78, 87-88, 90 [Assurance].)
Section 2860 also provides certain protections for the insurer. These protections
include provisions governing the amount of fees payable to independent counsel, the
subject matter of this dispute. For example, the statute limits the rate of fees an insurer
may be obligated to pay to “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.” In addition, the statute
mandates that fee disputes “shall be resolved by final and binding arbitration by a single
neutral arbitrator selected by the parties to the dispute.” (§ 2860, subd. (c).)
Yet these protective rules come with an important caveat. “ „To take advantage of
the provisions of [section] 2860, an insurer must meet its duty to defend and accept
tender of the insured‟s defense, subject to a reservation of rights.‟ ” (Atmel Corp. v. St.
9
Paul Fire & Marine (N.D. Cal. 2005) 426 F.Supp.2d 1039, 1047; see also Truck Ins.
Exchange v. Superior Court (1996) 51 Cal.App.4th 985, 998.) When, to the contrary, the
insurer fails to meet its duty to defend and accept tender, the insurer forfeits the
protections of section 2860, including its statutory limitations on independent counsel‟s
fee rates and resolution of fee disputes. More generally, “[w]hen an insurer wrongfully
refuses to defend, the insured is relieved of his or her obligation to allow the insurer to
manage the litigation and may proceed in whatever manner is deemed appropriate.”
(Eigner v. Worthington (1997) 57 Cal.App.4th 188, 196. See also Stalberg v. Western
Title Ins. Co., supra, 230 Cal.App.3d at p. 1233 [an insurer that wrongfully refuses to
defend the insured forfeits its right to control the defense, including its rights to select
defense counsel and litigation strategy].)
Here, undisputedly, Hartford failed to meet its duty to defend and accept tender of
the defense in the Marin matter, thereby, as this court recognized in 2007, forfeiting its
right to rely on the statutory protections of section 2860 and to otherwise control the
defense. (See J.R. Marketing, L.L.C. v. Hartford Cas. Ins. Co., A115846 (Nov. 30,
2007), at pp. 18-19.)
III. The Right of an Insurer to Seek Reimbursement for Defense Fees and Costs.
A. Does Hartford have a right to seek reimbursement from Squire?
It is within this context that we are left to consider Hartford‟s asserted right to seek
reimbursement in a direct suit against Squire. In doing so, we first identify two well-
established legal principles relevant to any claimed right of reimbursement by an insurer.
First, with respect to claims that are at least partially covered under the relevant policy,
an insurer‟s duty to defend extends to the insured‟s entire defense cost. (Buss v. Superior
Court, supra, 16 Cal.4th at pp. 47-48 [recognizing that insurers contract to pay the entire
cost of defending at-least-potentially-covered claims] [Buss]). And second, with respect
to claims not even potentially covered under the relevant policy, an insurer, like Hartford,
does indeed have a right to seek reimbursement of its cost to defend such claims once the
underlying suit has been resolved. (E.g., Buss, supra, 16 Cal.4th at p. 50 [“As to the
claims that are not even potentially covered, however, the insurer may indeed seek
10
reimbursement for defense costs”]; Reliance Ins. Co. v. Alan (1990) 222 Cal.App.3d 702,
710.) However, having acknowledged this right to seek reimbursement as to not-even-
potentially-covered claims, the question remains against whom may the insurer assert this
right.
Hartford, in arguing its right to seek reimbursement extends against independent
counsel, looks to language in the California case law, including the high court‟s decision
in Buss, describing the nature of this right as both contractual and quasi-contractual:
“Under the policy, the insurer does not have a duty to defend the insured as to the claims
that are not even potentially covered. With regard to defense costs for these claims, the
insurer has not been paid premiums by the insured. It did not bargain to bear these costs.
To attempt to shift them would not upset the arrangement. [Citation.] The insurer
therefore has a right of reimbursement that is implied in law as quasi-contractual,
whether or not it has one that is implied in fact in the policy as contractual. [Fn. omitted.]
As stated, under the law of restitution such a right runs against the person who benefits
from „unjust enrichment‟ and in favor of the person who suffers loss thereby. The
„enrichment‟ of the insured by the insurer through the insurer‟s bearing of unbargained-
for defense costs is inconsistent with the insurer‟s freedom under the policy and therefore
must be deemed „unjust.‟ ”8 (Buss, supra, 16 Cal.4th at pp. 51-52 [italics added]; see also
Durell v. Sharp Healthcare (2010) 183 Cal.App.4th 1350, 1370 [Durell] [“ „where
appropriate [in cases involving fraud, duress, conversion, or similar conduct], the law will
imply a contract (or rather, a quasi-contract), without regard to the parties‟ intent, in order
to avoid unjust enrichment‟ ”].)
8
The California Supreme Court justified its conclusion as follows: “Not only is it
good law that the insurer may seek reimbursement for defense costs as to the claims that
are not even potentially covered, but it also makes good sense. Without a right of
reimbursement, an insurer might be tempted to refuse to defend an action in any part--
especially an action with many claims that are not even potentially covered and only a
few that are--lest the insurer give, and the insured get, more than they agreed. With such
a right, the insurer would not be so tempted, knowing that, if defense of the claims that
are not even potentially covered should necessitate any additional costs, it would be able
to seek reimbursement.” (Buss, supra, 16 Cal.4th at pp. 52-53.)
11
According to Hartford, Buss and Durell stand for the proposition that a right of
restitution lies, independent of a contractual relationship, between any person who has
suffered loss and the person who has been unjustly enriched thereby. Thus, relying on
the above-identified language, and in particular the language in Buss relating to an
insurer‟s right to reimbursement for unbargained-for defense costs, Hartford argues one
step further that insurers are entitled to reimbursement from independent counsel of those
costs to prevent counsel‟s unjust enrichment by the insurer. As we will explain, the
relevant law and policy both suggest otherwise.
With respect to the law, Hartford‟s argument ignores several implications of the
important caveat governing restitution claims identified in both Buss and Durell.
According to this caveat, “ „ “[t]he fact that one person benefits another is not, by itself,
sufficient to require restitution. The person receiving the benefit is required to make
restitution only if the circumstances are such that, as between the two individuals, it is
unjust for the person to retain it. [Citation.]” ‟ [Citation.]” (Durell, supra, 183
Cal.App.4th at p. 1370; see also Buss, supra, 16 Cal.4th at pp. 50-52.)9 Or, as other
courts have expressed, “restitution should be required only when it „ “ „involves no
violation or frustration of law or opposition to public policy, either directly or
indirectly.” ‟ ” ([County of San Bernardino v. Walsh (2007)] 158 Cal.App.4th [533,]
542.)” (Peterson v. Cellco Partnership, supra, 164 Cal.App.4th at p. 1595.)
In this case, important policies – to wit, those underlying the enactment of section
2860 – would indeed be frustrated by allowing Hartford to directly sue Squire for
reimbursement. As explained in great detail above, Hartford‟s and Squire‟s relationship
9
Thus, as the California Supreme Court explained in Buss, while “[a]ny
„enrichment‟ of the insured by the insurer through the insurer‟s bearing of bargained-for
defense costs is consistent with the insurer‟s obligation under the policy and therefore
cannot be deemed „unjust,‟ ” the same cannot be said of unbargained-for defense costs
(i.e., those not even potentially covered under the policy). As to the latter costs only, an
implied quasi-contractual right to reimbursement would be appropriate because “[t]he
„enrichment‟ of the insured by the insurer through the insurer‟s bearing of unbargained-
for defense costs is inconsistent with the insurer‟s freedom under the policy and therefore
must be deemed „unjust.‟ ” (Buss, supra, 16 Cal.4th at pp. 50-51.)
12
is governed by the Cumis scheme, which “envisions an attorney pursing an insured‟s
defense independently of the insurer rather than intertwined with it.” (Assurance, supra,
32 Cal.App.4th at p. 91, fn. 8.) Thus, under this scheme, where, as here, the insurer
breaches its duty to defend the insured, the insurer loses all right to control the defense,
including, necessarily, the right to control financial decisions such as the rate paid to
independent counsel or the cost-effectiveness of any particular defense tactic or approach.
(James 3 Corp. v. Truck Ins. Exchange (2001) 91 Cal.App.4th 1093,1103, fn.3 [“Th[e]
right to control the defense necessarily encompasses the right to determine what measures
are cost effective, bearing in mind liability and indemnity exposure” ]; Dynamic
Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1009, fn. 9 [insurers
are barred from imposing on the insured‟s counsel discovery or research limitations that
would impede counsel‟s professional judgment or otherwise unreasonably interfere with
the insured‟s defense].)10 Retroactively imposing the insurer‟s choice of fee arrangement
for the defense of the insured by means of a post-resolution quasi-contractual suit for
reimbursement against the insured‟s separate counsel, such as Hartford seeks to pursue
here against Squire, runs counter to these Cumis-scheme principles for several reasons
well-illustrated by the facts at hand.
Recall Hartford, an insurer in breach of its duty to defend, chose not to align its
interests with the insured cross-defendants for purposes of the Marin defense and thereby
10
Indeed, even where the insurer is not in breach of its duty to defend, independent
counsel still owes very few duties directly to the insurer given the lack of an attorney-
client relationship between them and the consequent “compelling need for Cumis counsel
to remain free from the oftentimes subtle ethical dilemmas and temptations that arise
along with conflict in joint representations.” (Assurance, supra, 32 Cal.App.4th at
pp. 87-88 [insurer may sue Cumis counsel for breach of section 2860-specified duties to
disclose, inform, consult or cooperate regarding information known to Cumis counsel, but
may not sue Cumis counsel for negligent failure “to investigate, prepare, assert, establish,
or perform similar functions regarding a defense or position in [the insurer‟s] favor”]; see
also § 2860, subds. (d), (f) [identifying only the following duties of Cumis counsel to the
insurer: To “disclose . . . all information concerning the action except privileged materials
relevant to coverage disputes,” to timely “inform and consult with the insurer on all
matters relating to the action,” and to “cooperate fully in the exchange of information that
is consistent with . . . counsel‟s ethical and legal obligation to the insured”].)
13
forfeited all right to control that defense. Placed in this position, cross-defendants, not
Hartford, hired Squire as independent counsel to represent their interests in the defense,
negotiated the relevant fee arrangement with Squire, and oversaw all matters of defense
strategy including, presumably, deciding with Squire the cost/benefit of various litigation
pursuits. It is within this context that Hartford claims the legal right to bring a
reimbursement action against Squire for allegedly charging excessive, unreasonable or
unnecessary fees for their provision of legal services in the name of cross-defendants‟
defense. We think not. As set forth above, it is clear California law bars an insurer, like
Hartford, in breach of its duty to defend from thereafter imposing on its insured its own
choice of defense counsel, fee arrangement or strategy. This court now takes the law one
slight step further by holding Hartford likewise barred from later maintaining a direct suit
against independent counsel for reimbursement of fees and costs charged by such counsel
for crafting and mounting the insureds‟ defense where Hartford considers those fees
unreasonable or unnecessary.
To hold otherwise would effectively afford the insurer that has waived the
protections of section 2860 through its own wrongdoing more rights in a fee dispute with
independent counsel than the insurer that has not waived such protections. Specifically,
while the insurer in compliance with its duty to defend would be limited under section
2860 to arbitrating a fee dispute, the insurer in breach of its duty could bring the fee
dispute to court.11 The law does not sanction this inequitable result. (See Comunale v.
Traders & General Ins. Co. (1958) 50 Cal.2d 654, 660 [“Certainly an insurer who . . .
wrongfully refused to defend should be in no better position than if it had assumed the
defense”]; The Housing Group v. PMA Capital Ins. Co. (2011) 193 Cal.App.4th 1150,
1157 [rejecting the position that “ „insurers always can take advantage of [§2860] despite
immediately failing to meet their burden to defend‟ ” because it “would encourage
11
As Squire also points outs, had Hartford met its duty to defend in the Marin
matter, the issue of its right to directly sue Squire for reimbursement would not have
arisen. Under section 2860, subdivision (c), Hartford would not only have had the right
to pay a specific hourly rate, it would have had the right to arbitrate any fee dispute.
14
insurers to reject their Cumis obligations for as long as they chose because they knew
they could invoke the limitations and remedies of section 2860 at any time”].)
Indeed, by providing legal services to cross-defendants, Squire did not confer any
benefit upon Hartford. Rather, Squire conferred a benefit on its clients – to wit, cross-
defendants. That Hartford paid Squire for those services does not change this fact. There
simply is no legal basis here for the restitution claim that Hartford has asserted against
Squire. Here, it is the insured cross defendants – rather than independent counsel – that
the insurer should look to for reimbursement if it believes the fees were incurred to
defend claims that were not covered by the insurer‟s policies or that the insured agreed to
pay Squire more than was reasonable for the services that Squire performed.
Finally, we add that our holding in this regard is actually quite limited. Given the
precise issue raised by the parties to this appeal, we have no reason to, and do not, take a
position as to whether an insurer would have the right to maintain a direct suit against
independent counsel for fraudulent billing practices in connection with the underlying
defense of its insured. (Cf. Caiafa Prof. Law Corp. v. State Farm Fire & Cas. Co. (1993)
15 Cal.App.4th 800, 803 [pointing out that if “the only issue in dispute truly was the
amount of Cumis counsel fees the insurance company owed, it would be improper, in
most circumstances at least, for a trial court to stay the arbitration proceeding mandated
under section 2860 in order to allow a judicial proceeding in the California courts to
decide that issue and that issue alone”]; Fireman’s Fund Ins. Companies v. Younesi
(1996) 48 Cal.App.4th 451, 455-459 [where an insurer sued its insured‟s Cumis counsel
for fraudulent billing practices, the appellate court affirmed an order denying counsel‟s
motion to compel arbitration under section 2860, subd. (c), holding “the language of
[section 2860, subd. (c)] can only be interpreted to limit the scope of arbitrable disputes
to those in which only the amount of legal fees or the hourly billing rates are at issue”].)
Thus, for all the reasons stated, we conclude that, where a conflict arises with
respect to defense fees or costs paid by an insurer in breach of its duty to defend to the
15
independent counsel hired by its insured following this breach, the insurer must look to
the insured, not independent counsel, to resolve the conflict.12
B. Does Hartford have a right to seek reimbursement from Harrington?
Finally, we address Hartford‟s contention the trial court erred by sustaining the
demurrer to its reimbursement cause of action as to respondent Harrington, an individual
named as a defendant in the Marin matter but not insured by Hartford.13 In seeking
reimbursement from Harrington, Hartford raises one argument in its opening brief
without any citation to legal authority or to the factual record: Hartford claims simply that
it has a right to restitution from Harrington because he was unjustly enriched by receiving
a Hartford-financed defense in the Marin matter.14 As respondents point out, however, in
addition to failing in its opening brief to cite to relevant legal authority or to the record,
Hartford also failed in the operative complaint to allege that any fees or costs were
incurred or legal services provided solely for Harrington‟s defense (as opposed to for one
or more of the insured cross-defendants). Moreover, Hartford offered no explanation in
its opening brief as to how this failure to allege could be remedied.
12
Hartford‟s accounting cause of action against Squire, which Hartford
acknowledges is simply an extension of its reimbursement cause of action, fails for the
same reason: It is based on the nonexistent right of an insurer in breach of its duty to
defend to directly sue independent counsel for reimbursement of monies paid for the
insured‟s defense. As reflected in the operative complaint, this cause of action, by which
Hartford “seeks an accounting from [Squire] as to all monies paid to, or for the benefit of,
each of the Cross-defendants” in the Marin and non-California actions, serves no purpose
other than to permit an accurate calculation of the amount subject to reimbursement.
Because we hold there is no right to reimbursement from Squire in this case, there is no
amount subject to reimbursement.
13
The trial court sustained the demurrer to the reimbursement cause of action as to
respondents Squire and Harrington without leave to amend. In doing so, the court noted
the need to protect the attorney-client relationship between the insured and their counsel.
However, the court did not specifically state why the demurrer was sustained as to
Harrington, as distinguished from Squire.
14
Hartford‟s entire argument on this point is as follows: “Had Hartford not provided
Harrington a defense, he would have had to pay for his own defense. Accordingly, he
was unjustly enriched and should be subject to a restitution action. Hartford should be
entitled to recover the value of the legal services provided to Harrington.”
16
We conclude based on this record that Hartford has failed its burden to prove the
trial court abused its discretion by sustaining the demurrer as to Harrington without leave
to amend. This court is not obligated to research the relevant law or to develop an
appellant‟s otherwise conclusory legal assertions. (Dills v. Redwoods Associates, Ltd.
(1994) 28 Cal.App.4th 888, 890, fn. 1; HFH, Ltd. v. Superior Court (1975) 15 Cal.3d
508, 513, fn. 3.) To the contrary, this court is entitled to disregard legal assertions not
supported by meaningful argument, particularly where the proponent of such assertions
has the burden to prove grounds for reversal. (McComber v. Wells (1999) 72 Cal.App.4th
512, 522; Sehulster Tunnels/Pre-Con v. Traylor Brothers, Inc./Obayashi Corp. (2003)
111 Cal.App.4th 1328, 1345, fn. 16.)
While Hartford may have provided additional argument in its reply brief, its
argument did no more than respond to points raised by respondents in their appellate
brief.15 This backward approach, particularly where Hartford carried the burden of
demonstrating the trial court‟s error, runs contrary to our well-established rules of
appellate litigation. (Scott v. CIBA Vision Corp. (1995) 38 Cal.App.4th 307, 322 [“[w]e
do not entertain issues raised for the first time in a reply brief, in the absence of a
showing of good cause why such issues were not raised in the opening brief. [Citations.]
No good cause appearing here, we will disregard these issues”].) Moreover, to condone
this approach for purposes of the present appeal would be unfair to respondents, who
15
After pointing out the above-mentioned deficiencies in Hartford‟s opening brief
with respect to its challenge to the order sustaining Harrington‟s demurrer, respondents
set forth two legally supported arguments for affirming: (1) Harrington, as an uninsured,
was not subject to the enforcement order upon which Hartford relies in seeking
reimbursement; and (2) because there was no contractual relationship between Hartford
and Harrington, Hartford has no remedy against Harrington for reimbursement. In its
reply brief, Hartford briefly responds to each of these arguments, claiming for the first
time that the lack of a contractual relationship or binding order between Hartford and
Harrington is irrelevant because its right to reimbursement is “implied in law as quasi-
contractual.” (See Buss, supra, 16 Cal.4th at p. 51.) Further, Hartford claims for the first
time that it was not required to plead specific fees incurred on behalf of Harrington
“given that Squire Sanders was in possession of that information, not Hartford. (See Doe
v. City of Los Angeles (2007) 42 Cal.4th 531, 549-550 . . . .)”
17
have been deprived by Hartford‟s tactic of any opportunity to counter its reply arguments.
(Reichardt v. Hoffman (1997) 52 Cal.App.4th 754, 764.) As our appellate colleagues in
the Third District have aptly noted: “ „Obvious considerations of fairness in argument
demand that the appellant present all of his points in the opening brief. To withhold a
point until the closing brief would deprive the respondent of his opportunity to answer it
or require the effort and delay of an additional brief by permission. Hence the rule is that
points raised in the reply brief for the first time will not be considered, unless good
reason is shown for failure to present them before.‟ ” (Neighbors v. Buzz Oates
Enterprises (1990) 217 Cal.App.3d 325, 335, fn. 8.)
Thus, we conclude that, given Hartford‟s failure to state facts supporting its
reimbursement cause of action against Harrington, and to present timely and legally-
supported arguments as to how the trial court erred or how the operative complaint could
be amended to remove any defect, there are no grounds for reversing this order.
DISPOSITION
The judgment of dismissal in favor of respondents and against Hartford is
affirmed. Respondents are entitled to recover costs on appeal.
_________________________
Jenkins, J.
We concur:
_________________________
Pollak, Acting P. J.
_________________________
Siggins, J.
18
6/11/13
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIRST APPELLATE DISTRICT
DIVISION THREE
J.R. MARKETING, L.L.C. et al.,
Plaintiffs, Cross-defendants and
Respondents, A133750
v. (San Francisco County
HARTFORD CASUALTY INSURANCE Super. Ct. No. CGC-06-449220)
COMPANY,
ORDER CERTIFYING OPINION
Defendant, Cross-complainant and FOR PUBLICATION
Appellant.
THE COURT:
The opinion filed in the above-entitled matter on May 17, 2013, was not certified
for publication in the Official Reports. For good cause it now appears that the opinion
should be published in the Official Reports and it is so ordered.
DATE: ______________________________
Pollak, Acting P.J.
1
Trial Court: San Francisco County Superior Court
Trial Judge: Hon. Loretta Giorgi
Counsel for Cross-complainant and Appellant: David M. Axelrad, Andrea A.
Hartford Casualty Insurance Company Ambrose
HORVITZ & LEVY
Dean B. Herman
Catherine L. Rivard
MENDES & MOUNT
Ira G. Greenberg
EDWARDS WILDMAN PALMER
Counsel for Respondent: Ethan A. Miller
J.R. Marketing L.L.C. et al. Barry D. Brown, Jr.
Michelle M. Full
SQUIRE SANDERS (US) LLP
Pierre H. Bergeron
2