Introduction

Independent counsel often take great interest in exactly how much[1] and how often a policyholder’s liability insurer must pay for independent counsel to defend. When independent counsel submits an invoice for legal services to an insurer for the defense of a policyholder, the invoice constitutes a first party claim for policy benefits. Standard liability policies do not articulate how often the insurer must pay, merely that it has the right and the duty to defend. Insurance regulations require insurers to pay each invoice for legal services “immediately, but in no event more than thirty (30) calendar days.”[2] The common law measure requires an insurer to pay “immediately and entirely.”[3]

An Attorney Fee Invoice Is a First Party Claim

When a policyholder notifies a liability insurer of a plaintiff’s lawsuit, the policyholder is making a claim for policy benefits, specifically the promise to defend and the promise to indemnify. Insurance regulations state that “[u]pon receiving [a] claim, every insurer . . . shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part.”[4] While the insurer may obtain additional time for good cause, liability insurer are usually very quick to respond to notice of a claim.[5]

If the insurer accepts the claim in whole, it says “yes” and the policyholder has little to worry about.[6] If the insurer denies the claim in whole, it says “no” and the policyholder has strategic choices to make.[7] But if the insurer accepts the claim in part and denies the claim in part by a reservation of rights and if the reservation creates a disqualifying conflict of interest,[8] the insurer must provide independent counsel selected and directed by the policyholder to conduct the defense.[9]

An Insurer Has a Duty to Pay Immediately

The California Supreme Court is clear that a liability insurer must discharge its duty to defend immediately. “[W]e can, and do, justify the insurer’s duty to defend the entire ‘mixed’ action prophylactically, as an obligation imposed by law in support of the policy. To defend meaningfully, the insurer must defend immediately. To defend immediately, it must defend entirely. It cannot parse the claims, dividing those that are at least potentially covered from those that are not.”[10] Insurance regulations require that: “Upon acceptance of the claim in whole or in part . . . every insurer . . . shall immediately, but in no event more than thirty (30) calendar days later, tender payment.”[11]

An Insurer Must Investigate Fees Before Denial of a Claim

A liability insurer that denies any portion of an invoice from independent counsel must diligently investigate. “Every insurer shall conduct and diligently pursue a thorough, fair and objective investigation and shall not persist in seeking information not reasonably required for or material to the resolution of a claim dispute.”[12] “No insurer shall deny a claim based upon information obtained in a telephone conversation or personal interview with any source unless the telephone conversation or personal interview is documented in the claim file.[13]

An Insurer Must Justify Its Denial of Defense Costs

A liability insurer that denies any portion of an invoice from independent counsel must explain in writing all legal and factual bases for rejecting any portion of the invoice. “The amounts [of an invoice] accepted or denied shall be clearly documented in the claim file unless the claim has been denied in its entirety. (1) Where an insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given for such rejection or denial which is then within the insurer’s knowledge. . . . [T]he written denial shall . . . provide an explanation.”[14]

An Insurer May Not Compromise Invoices Without Cause

A liability insurer may not offer unreasonably low compromises of invoices from independent counsel. “No insurer shall attempt to settle a claim by making a settlement offer that is unreasonably low [based upon the following factors]. . . . (1) the extent to which the insurer considered evidence submitted by the claimant to support the value of the claim; (2) the extent to which the insurer considered legal authority or evidence made known to it or reasonably available; (3) the extent to which the insurer considered the advice of its claims adjuster as to the amount of damages; (4) the extent to which the insurer considered the advice of its counsel that there was a substantial likelihood of recovery in excess of policy limits; (5) the procedures used by the insurer in determining the dollar amount of property damage; (6) the extent to which the insurer considered the probable liability of the insured and the likely jury verdict or other final determination of the matter; (7) any other credible evidence.”[15]

An Insurer Has a Duty to Pay Accepted Charges

A liability insurer that denies any portion of an invoice from independent counsel must nonetheless pay those portions of an invoice for which has not investigated, analyzed and documented its challenge. “The amount of the claim to be tendered is the amount that has been accepted by the insurer. . . . [A]mounts that have been accepted by the insurer shall be paid immediately, but in no event more than thirty (30) calendar days. . . .[16]

No Insurer May Deny Costs of Defense Simply Because Another Insurer Also Owes

A liability insurer may not refuse to pay an invoice from independent counsel on the ground that others should pay instead. If multiple insurers have a duty to defend a policyholder, no one of them may decline to pay for the costs of defense claiming that some other insurer should pay instead or pay first. “No insurer shall delay or deny settlement of a first party claim on the basis that responsibility for payment should be assumed by others.”[17]