Buss Defense Cost Reimbursement Response Options – PP

INTRODUCTION

When a liability insurer learns that its policyholder has been sued, it must make a series of decisions, the first of which is Yes, No, or Maybe.[1] The policyholder, the plaintiff and their respective counsel have many options how to respond to each decision the insurer makes. This Practice Pointer briefly reviews response options when the insurer decides to assert a Buss reimbursement reservation?

SITUATION

A plaintiff sued a policyholder, who in turn notified a liability insurer, which in turn agreed to defend under a reservation of rights letter,[2] and reserve the right to sue its own policyholder to recovery defense fees and costs allocable to claims that were never even potentially covered.

GOAL

Encourage a prompt and reasonable resolution of how to equitably allocate ultimate responsibility to pay for the costs of defense while developing an evidentiary record to correctly determine whether the insurer or the policyholder must ultimately pay.

SUBSTANTIVE LAW[3]

“In a ‘mixed’ action, for what specific defense costs may the insurer obtain reimbursement from the insured? ¶ The answer is: Defense costs that can be allocated solely to the claims that are not even potentially covered. ¶ The reason is this. [A]s to [such] defense costs the insurer has not been paid premiums by the insured.”[4] “[A] ‘mixed’ action, [is one] in which some of the claims are at least potentially covered and the others are not.”[5]

“[A]n insurer may be estopped from seeking reimbursement from its insured for the defense costs of uncovered claims when it insists upon appointed counsel rather than allowing the insured to control the defense.”[6]

“A [lawyer] shall not accept compensation for representing a [policyholder] from [an insurer] unless [the lawyer] obtains the [policyholder’s] informed written consent.”[7]

METHODOLOGY

Since the insurer has taken steps to protect its interests, the policyholder must make a few decisions including whether to: 1) yield or resist;[8] 2) cooperate with the plaintiff;[9] 3) support or resist evidence of covered liability;[10] and welcome a policy limit settlement offer.[11]

Policyholders who seek to resist a Buss defense cost reimbursement claim by the insurer should do so promptly upon the insurer’s assertion of the claim. Response options include asking the insurer to withdraw or limits its reservation, asking independent counsel to allocate monthly, and a seeking a court order ruling that dependent counsel has unresolved, disqualifying conflicts of interest and te terminating the representation due to ethical violations of Rule 3-310.

POLICYHOLDER’S PERSPECTIVE

Quick Fixes include polite letters to the insurer, dependent counsel, and a non-privileged, open letter to independent counsel. The policyholder, not independent counsel should sign all initial letters.[12]

1.   Options to Respond to the Insurer

The policyholder may send a polite letter to the insurer requesting that it: 1) withdraw the reservation; 2) waive any defense cost reimbursement claim as to dependent counsel; and 3) requesting the independent counsel allocate defense costs on each monthly invoice. Independent counsel should use a “but for” analysis to do the allocation. The insurer is likely to object to independent counsel doing a coverage analysis and charging the insurer for it, but independent counsel may politely explain that it is not coverage work, per se, but is instead an expanded scope of defense work necessitated by the insurer’s assertion of a Buss claim.[13]

2.   Options to Respond to Dependent Counsel

The policyholder may send a polite letter to dependent counsel requesting that it comply with Rule 3-310 and expressly withholding consent for dependent counsel to represent, bind, appear in court for, or receive compensation pending compliance.[14]

3.   Options to Respond to Independent Counsel

The insurer has a unilateral[15] right to assert a Buss reservation that is not likely to be entirely thwarted by the foregoing letters. Thus from the outset, the policyholder and independent counsel should plan for and develop the evidentiary record they would like to present to a jury in a bad faith case.[16] The policyholder may send a polite letter to independent counsel with a copy to the insurer (not confidential, not protected by the attorney-client privilege, and does not waive the privilege as to any other communication[17]) seeking to accomplish several things:

• First, the letter should come from the policyholder, not independent counsel to emphasize that the policyholder and independent counsel have an attorney client-relationship, that the policyholder is obligated to pay independent counsel, and that the insurer’s obligation to pay runs to the policyholder, not independent counsel. In this fashion, it will be less likely that independent counsel may be perceived as greedy in what usually turns out to be nasty disputes over fees.

• Second, it expressly gives the policyholder’s consent to independent counsel to send invoices directly to the insurer and to receive and cash insurer’s checks, thus addressing ethical concerns.[18]

• Third, it provides that interest is payable on overdue invoices.[19]

• Fourth, it directs independent counsel to do an allocation in each monthly invoice to that the Buss issue has transparency from the outset.[20]

• Fifth, it requests that independent counsel do a coverage analysis and charge the insurer for it – not for the purpose of suing the insurer (clearly not a defense effort), but as a necessary and proper extension of the scope of independent counsel’s defense work, necessitate by the insurer’s assertion of a Buss reimbursement claim.

• Sixth, it will exemplify highly ethical behavior by independent counsel – that may stand in stark contrast to the conduct of dependent counsel.[21]

4.   Follow-Up Letters

Options 1, 2, and 3 above are quick, easy, and cheap. They are likely to lead to a conversation[22] among dependent counsel and its two clients, the insurer and the policyholder seeking to resolve conflict of interest issues. During such a process, the policyholder may consider sending one or more of a series of polite letters to the insurer[23] and to dependent counsel.[24] The policyholder may be satisfied by an adequate conflict waiver letter from dependent counsel.[25] If dependent counsel honestly and adequately analyzes potential conflicts of interest, the policyholder may develop confidence that dependent counsel will faithfully protect the policyholder from the insurer.[26]

5.   Litigation Options to Establish Disqualifying Conflicts

If negotiation is not successful, more time consuming, difficult and expensive litigation options are available. These include: 1) resisting dependent counsel’s motion to withdraw, 2) filing a motion to disqualify dependent counsel, 3) filing a declaratory relief action and a motion to stay, 4) filing a motion for summary adjudication in a declaratory relief action; filing a complaint against the insurer for damages limited to breach of the duty to defend, and 5) suing dependent counsel for breach of fiduciary duty.[27]

Sooner or later, the policyholder, independent counsel, the insurer, and dependent counsel have an option of judicially resolving the issue of whether dependent counsel has any disqualifying conflict of interest.[28] As a practical matter, the timing of this effort usually has a significant impact on the substantive outcome. Conflict resolution should be prophylactic.[29] Reported California opinion that find a disqualifying conflict tend to examine the issue while the plaintiff’s liability action is still pending. In contrast, reported California opinion that find no disqualifying conflict tend to examine the issue with the benefit of hindsight long after the plaintiff’s liability action has been resolved and on an record devoid admissible evidence

DEPENDENT COUNSEL’S PERSPECTIVE

Dependent counsel is vulnerable to ethical challenges.[30] Rule 3-310 requires dependent counsel, who represents two clients,[31] to analyze potential conflicts of interest, make written disclosure and obtain informed written consent.[32] “We conclude the Canons of Ethics impose upon lawyers hired by the insurer an obligation to explain to the insured and the insurer the full implications of joint representation in situations where the insurer has reserved its rights to deny coverage. If the insured does not give an informed consent to continued representation, counsel must cease to represent both.”[33] Dependent counsel owes numerous duties to the policyholder.[34] The Policyholder may fire dependent counsel at any time, with or without cause.[35] In order to earn the policyholders informed written consent, dependent counsel should consider sending to the insurer and the policyholder an adequate conflict waiver letter.[36]

INSURER’S PERSPECTIVE

Because insurers have a right to assert a Buss reservation unilaterally (see, fn. 15), many insurers do so routinely, without necessarily understanding the complex conflict of interest issues it raises. The insurer must respond in writing to inquiry by the policyholder[37] that is likely to contribute to the development of admissible evidence. In responding to a policyholder’s challenges to a Buss reservation, some insurers would be well advised to do what they do best – underwriting. Insurers well understand how to evaluate costs and benefits through the underwriting process to determine premiums commensurate to the anticipated cost of claims. The same skills may be applied to claims processing. An insurer may balance the monetary value of its expectation of actually collecting defense costs from its policyholder with its expectation of added costs of claims administration to decide whether it pays to assert or maintain a Buss reservation in any given case.

PLAINTIFF’S PERSPECTIVE

While a dispute among the insurer, dependent counsel, the policyholder and independent counsel is likely to be negotiated out of the presence of the plaintiff, the plaintiff may still have role to play by pleading into or out of coverage.[38]



[1] “[E]very insurer shall immediately accept [Yes] or deny the claim, in whole [No] or in part [Maybe].” (Cd. Reg. §2695.7(b).)

[2] See, Article: Reservation of Rights Changes Traditional Relationships.

[3] See, Article: Buss Reservation.

[4] Buss v. Superior Court (1997) 16 Cal.4th 35, 52-53 (Buss).

[5] Id. at 47.

[6] Dynamic Concepts, Inc. v. Truck Ins. Exchange (1998) 61 Cal.App.4th 999, 1007, fn. 6.

[7] Rule 3-310(F) (ellipses omitted).

[8] See, Practice Pointer: Acquiescence Is Dangerous.

[9] See, Practice Pointer: Cooperation: A Strategic Choice.

[10] See, Practice Pointer: Incentives to Confess Covered Liability.

[11] See, Practice Pointer: How to Make a Policy Limit Settlement Offer Properly.

[12] See, Practice Pointer: Policyholder Should Sign Correspondence.

[13] See, Model Letter: Please Waive or Limit Buss Reimbursement Claim.

[14] See, Model Letter: No Consent Without Ethical Compliance.

[15] “Because the right is the insurer’s alone, it may be reserved by it unilaterally.” (Buss, supra, 16 Cal.4th at 61, fn. 27.)

[16] See, Practice Pointer: Best Way to Avoid Costly Coverage Litigation: Plan on It.

[17] See, Article: Attorney-Client Privilege Waiver.

[18] “(B) [Independent counsel] shall not accept or continue representation of a [policyholder] without providing written disclosure to the [policyholder] where [independent counsel] has a business [or] financial relationship with another entity [that] would be affected substantially by resolution of the matter [ie. the insurer]. [Independent counsel] shall not accept compensation for representing a [policyholder] from [an insurer] unless [independent counsel] obtains the [policyholder]’s informed written consent.” (Rule 3-310(B)(F) (ellipses omitted).)

[19] See, Article: How Often Must an Insurer Pay Independent Counsel?

[20] Independent counsel should use a “but for” analysis in determining what work is properly allocable to claims that are never even potentially covered. Thus, only work that is performed on not even potentially covered claims should be identified. All work performed on covered and potentially covered claims should not be allocated out even the though never even potentially covered claims are affected. Also, independent counsel should actively and faithfully identify time that is properly allocable to claims that are never even potentially covered. If no time is allocated to this category, a trier of fact may not believe that independent counsel is sincere.

[21] See, Model Letter: Please Allocate for Buss Claim.

[22] See, Practice Pointer: Pitches and Fallacies of Dependent Counsel.

[23] See, Model Letters: Please provide details of basis for reservation of rights, Please provide investigation, Please clarify if insurer agrees unqualifiedly to defend and pay for independent counsel, and Insurance company evidence development.

[24] See, Model Letters: Dependent counsel please disclose conflicts of interest, Withhold CCP §283 authority to bind , No Rule 3-310(F) consent to compensation, Withhold B&P §6104 authority to appear, Ethical compliance questionnaire and Ethical compliance questionnaire cover letter, Dependent counsel evidence development, Dependent counsel presigned verification forms.

[25]See, Model Letter: Dependent counsel 3-310 disclosure.

[26] “[C]onflict obligates the insurer to handle all claims with the interest of the insured uppermost.” (Gruenberg v. Aetna Ins. Co. (1973) 9 Cal.3d 566, 582.) “The attorney’s primary duty has been said to be to further the best interests of the insured.” (Purdy v. Pacific Auto. Ins. Co. (1984) 157 Cal.App.3d 59, 76.)

[27] See, Practice Pointer: Procedural Alternatives to Determine Disqualifying Conflicts.

[28] See, Article: Disqualifying Conflicts of Interest.

[29] “The primary purpose of this prophylactic rule [3-310] is to prevent situations in which an attorney might compromise his or her representation of the client in order to advance the attorney’s own financial or personal interests.” (Santa Clara County Counsel Attorneys Assn. v. Woodside (1994) 7 Cal.4th 525, 546); “Since the purpose of a disqualification order must be prophylactic, not punitive, the significant question is whether there exists a genuine likelihood that the status or misconduct of the attorney in question will affect the outcome of the proceedings before the court.” (Gregori v. Bank of America (1989) 207 Cal. App. 3d 291, 308-309.)

[30] “An attorney’s duty, the breach of which amounts to negligence, is a wider obligation to exercise due care to protect a client’s best interests in all ethical ways and in all circumstances. ¶ The standards governing an attorney’s ethical duties are conclusively established by the Rules of Professional Conduct.” (Day v. Rosenthal (1985) 170 Cal.App.3d 1125, 1147.)

[31] See, Article: Dependent Counsel Always Represents the Insurer.

[32] See, Article: Summary of Rule 3-310.

[33] San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358, 375 (citations omitted).

[34] See, Article: Compendium of Attorney Duties.

[35] See, Article: Client May Fire Attorney.

[36]See, Model Letter: Dependent counsel 3-310 disclosure.

[37] “Upon receiving any communication from a [policyholder], regarding a claim, that reasonably suggests that a response is expected, every [insurer] shall immediately, but in no event more than fifteen (15) calendar days after receipt of that communication, furnish the [policyholder] with a complete response based on the facts as then known by the [insurer]. (Cd. Reg. §2695.5(b).)

[38]See, Article: Plead Into Coverage Properly.

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