Insurance carriers have burden of proving attorney's fees unreasonable.

When an insurance carrier has a duty and agrees to defend its insured under its liability policy, the carrier often will reserve its rights with respect to several issues. In L.A. County, when this reservation of rights creates a conflict of interest between the insured's defense of the underlying lawsuit and potentially applicable coverage defenses, the carrier is obligated to appoint and pay for independent counsel to represent the insured. The carrier must relinquish control of the insured's defense to independent counsel hired by the insured and paid by the carrier. Despite the carrier's obligation to pay independent counsel for the insured's defense, the carrier often will refuse to pay a significant portion of the attorneys' fees.

When reviewing bills from the insured's counsel, the carrier often will refuse to pay a portion of the rates charged by independent counsel, will refuse to pay for certain services, and/or reduce certain fees claiming the fees incurred were unreasonable or unnecessary to defend the action. Typical excuses for the carrier's nonpayment of fees include claims that: (1) the rates charged by attorneys and paralegals are excessive; (2) some services duplicate work done by other timekeepers; (3) billing entries allegedly lack sufficient detail or are grouped into a single "block"; (4) paralegals, secretaries or clerks should have performed some services handled by attorneys; (5) attorneys and paralegals should not be billing for inter-office conferences; and (6) some services are unnecessary and excessive.

When the carrier refuses to pay for independent counsel's fees, thereby requiring that the insured incur these charges, a dispute arises between the carrier and its insured. California Civil Code section 2860 addresses the method by which the carrier and its insured, in certain circumstances, are to resolve this dispute. Section 2860 provides that "[a]ny dispute concerning attorneys' fees ... shall be resolved by final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute." While Section 2860 has been the subject of debate and litigation, no California appellate decision has squarely addressed in the context of section 2860 the issue of which party has the burden of proving that the disputed attorneys' fees are unreasonable or unnecessary.

However, California case law outside the context of section 2860 demonstrates that the carrier has the burden of proving that the attorneys' rates or the fees incurred are unreasonable or unnecessary. Indeed, courts have recognized that once insureds pay fees and costs, there is a presumption that they are reasonable. Thus, once an insured pays independent counsel's fees, the presumption is that these fees are reasonable. Furthermore, in California, any uncertainties about the reasonableness or necessity of fees must be resolved against a carrier. In one California Supreme Court case, after the carrier had breached its duty to defend the insured, it challenged the trial court's award of attorney's fees, asserting that the attorney's services were not reasonable. The court disagreed and upheld the fee award.

Even in cases where it has not been determined yet that the carrier breached its duty to defend the insured or when a carrier has not breached its duty to defend, the carrier still bears the burden of proving that the fees and expenses incurred by its insured are not reasonable. In one leading case, the carrier defended its insured and then sought reimbursement of part of the defense fees, claiming that the policy did not cover some of the claims. The court only allowed the carrier to obtain reimbursement of defense costs, "that can be allocated solely to the claims that are not even potentially covered." However, the court ruled that the carrier must carry the burden of proof.

Another California case also addressed the burden of proof a carrier must bear when it seeks reimbursement for part of the defense fees that a court orders it to pay after finding that the carrier owed a duty to defend. In that case, the court rejected the carrier's argument that the insured had the burden to prove that its fees and costs were reasonable.

When an insured has been required to pay its attorneys' fees to independent counsel, a presumption is raised that they are reasonable. The burden solely rests on the carrier to prove that these unreimbursed fees and costs were unreasonable and unnecessary. This is a burden that an insurance carrier often will not be able to meet.

Susan Page White is a partner in the Insurance Recovery and Commercial Trial Practice Groups in the Los Angeles office of Howrey Simon Arnold & White.