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Vol. 3, Iss. 16
December 3, 2014

National Union Fire Ins. Co. v. Coinstar, Inc., 2014 WL 3891275 (W.D. Wash. Aug. 7, 2014)

Solving The Dispute Over The Rate To Pay Independent Counsel


It is an issue that has confronted us all and one with no easy answers. An insurer determines that, on account of a defense being provided under a reservation of rights, the insured is entitled to independent counsel, to be paid for by the insurer (or a court makes this decision for the insurer). Now the question turns to determining the hourly rate to be paid to the insured’s selected counsel. The insurer usually maintains that it will pay independent counsel the same rates it would have paid its panel counsel, who is well-qualified to handle the case. Not so fast says the insured, countering that panel counsel’s hourly rates are lower than market rates (i.e., the rates sought to be charged by independent counsel) because panel counsel is willing to work at a discount—in exchange for the volume of work that is receives on account of serving in such role. As we all know, the difference between these two rates can be substantial--and the disputes quite heated.

But is a simple solution to this complex problem staring insurers in the face? Since the duty to defend is based on contract, why not simply put the rate to be paid to independent counsel--if the insured is so entitled--in the contract (policy) itself? As for any concern that rates vary by jurisdiction or if an older policy is triggered the rate may be out of date, this can be easily addressed by insurers borrowing the language from California’s Cumis statute--which essentially says that independent counsel will be paid the same rate as panel counsel in the relevant jurisdiction.

Surely policyholders can’t complain about this, given how fond they are of the argument that, “If this is what the insurer wanted, it should have written it in the policy.”

Two decisions this year, that I know of, made this suggestion. The first one was from a Washington federal court in National Union Fire Ins. Co. v. Coinstar, Inc. I’ll skip the details of what Coinstar is about since that’s not necessary to address the rate issue. Briefly, the case involved coverage for claims that Redbox, an operator of automated DVD-vending machines, acted inappropriately with respect to its customers’ personally identifiable information.

An issue arose over the rates to be paid to counsel retained to defend Redbox under a reservation of rights. National Union argued that, based on certain policy provisions, it had unlimited discretion to determine that amounts that it will pay to defend Redbox.

The court disagreed: “[B]arring a contract term to the contrary, National Union does not have unbounded discretion to unilaterally limit the rates it will pay. Here, there were no provisions in the policy that explicitly limited the rates National Union would pay. It is true that generally insureds may not freely conduct their own litigation and then seek reimbursement where the policy obligates the insurer only to ‘defend through counsel of its own choosing. But here, National Union explicitly “agree[d] to [the attorneys’] continued retention as Redbox’s defense counsel.’ In doing so, it relinquished its right to choose an attorney to defend the underlying suits. And while National Union did say that the rates it would pay were limited by the terms and conditions of the insurance policies, no attorney fee rates were set out in the policies. Nor did National Union alert Redbox to the relevant attorney fee rates in its reservation of rights letters. In the absence of a policy provision limiting the rates National Union agreed to pay, it is responsible for the reasonable defense costs incurred by its insured.”

Note that in two separate places the court indicated that its decision would have seemingly been different if National Union had set out the rates to be paid to defense counsel in its policies.

As an aside, in case you are wondering, the court did not specify what rates should be paid to Redbox’s defense counsel. It held that this was a question of fact that should not be decided on a motion for summary judgment. “There is a genuine issue of material fact as to whether National Union was allowed to limit the rates paid to attorneys to defend the underlying suits to $240 for senior partners, $220 for junior partners, $183 for senior associates, $173 for junior associates, and $80 for paralegals.”

When I first saw the decision in Coinstar I knew it was important. It presented a novel solution to a complex problem. But I was ambivalent about whether it had top ten potential. It was still just an unpublished federal trial court decision – even if it were from Washington, which many say is the worst state on the planet for insurers. But the hemming and hawing that I had, about whether Coinstar would earn a spot here, was eliminated a few weeks later when a Minnesota District Court made the same observation as Coinstar.

In the Minnesota case -- Select Comfort Corp. v. Arrowood Indemnity Co., No. 13-2975 (D. Minn. Aug. 26, 2014) – a federal court addressed whether Select Comfort was entitled to independent counsel on account of being defended by its insurer under a reservation of rights. Select Comfort was named as a defendant, in a putative class action in California, brought by certain purchasers of the company’s Sleep Number beds, alleging that the beds had a propensity to develop and incubate mold, leading to adverse health consequences.

The court held that the reservation of rights created a conflict that justified independent counsel. Turning to the insurer’s concern about the “potential for abuse” because independent counsel “often charge more than panel counsel regularly retained by the insurer,” the court had this to say: any such abuse could be better managed “by the parties through contract, i.e. by setting out the parameters for the insured’s hiring of independent counsel, in the event the insured believes a conflict of interest exists, as part of the insurance agreement.” I’ve certainly seen policies that do this – but not often.

Given the frequency of the independent counsel rate issue, the challenge to resolve it and policyholders’ fondness of the argument that, if this is what the insurer wanted it should have written it in the policy, I selected Coinstar as one of the year’s ten most significant coverage decisions -- after the issue and same solution was reprised in Select Comfort -- because it raised this important question: Is a simple solution to a complex problem out there for the taking?

 
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