Policyholders must challenge the use of Section 2860 by insurers to limit their coverage obligations
Policyholders and their counsel should challenge insurance company decisions to pay reduced hourly rates based upon '2860. First, the insurance policy in question should be examined. If it was issued prior to January 1, 1988, the statute does not apply at all. Even if issued after January 1, 1988, the policy may contain provisions regarding the payment of legal fees. Section 2860(c) states that the fee limitation provisions do not "invalidate other different or additional policy provisions pertaining to attorney's fees." Some policies contain specific provisions regarding the insurer's obligations in the event of a conflict of interest. Those provisions often provide for the payment of "reasonable" fees. Further, most liability insurance policies contain provisions which state that the insurer will pay "[a]ll reasonable expenses incurred by the insured . . . to assist . . . in the investigation or defense of the claim or `suit.'" Arguably, this provision obligates the insurer to pay "reasonable" rates for the insured's independent counsel. Next, if the insurer has not appointed its own counsel to provide a defense, the fee limitation provisions of '2860 should not apply.
In each of the above situations, the policyholder must immediately challenge the insurer's decision to pay reduced rates, and demand that the insurer pay the full amount of the reasonable rates charged by counsel. Undoubtedly, the insurer will not agree to pay the full rates charged by the insured's chosen counsel, but may be willing to negotiate a higher rate with the policyholder. If the insurer is not willing to increase the hourly rate to an acceptable amount, the insurer can seek arbitration pursuant to '2860, which provides for final and binding arbitration of fee disputes, or even file a lawsuit for breach of contract under the theory that '2860 does not apply at all. If the court determines that the statute applies, the matter will then be referred to binding arbitration. In many cases, the amount in controversy may not warrant the expense of filing a civil action. In those situations, the policyholder and the insurer can agree to submit to arbitration the threshold question '2860's applicability. If the arbitrator determines that the statute applies, the arbitrator can then decide the hourly rate issue.
The bottom line is that insurer's will attempt to get away with paying as little as possible to defend their policyholders. Insurers are aware that many policyholders, happy to obtain any defense at all, will not challenge the insurer's decision to reimburse defense costs at reduced hourly rates. Insurers also know that their position on the hourly rate issue is dubious, and that they are likely to lose if the issue is litigated. Accordingly, when challenged by aggressive policyholders, many insurers will voluntarily agree to increase the hourly rate that they will pay. In many cases insurers do not respond favorably, and policyholders may have to consider litigation. Nevertheless, confronting insurers on this issue is necessary, because by simply accepting an insurer's initial response to a claim, policyholders guaranty that they will receive far less from the insurer than what is required under the policy.
- Introduction
- The obligation to provide independent counsel
- Insurers improperly use Section 2860 to limit their defense obligations