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Vol. 3, Iss. 13
September 10, 2014

Court’s Solution To Determining The Hourly Rate For Independent Counsel:
Put It In The Policy

 

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.

While there is certainly case law addressing this rate disparity issue, there’s not as much as you would think, given how commonly occurring the dispute is. Presumably that’s because many are resolved through negotiation.

A Minnesota District Court just weighed in on the question of the rate to be paid to independent counsel. While the court’s decision is not some sort of breakthrough, it did make two interesting observations about the issue that are worth noting.

In Select Comfort Corp. v. Arrowood Indemnity Co., No. 13-2975 (D. Minn. Aug. 26, 2014) a Minnesota federal court addressed whether Select Comfort was entitled to independent counsel on account of being defended by its insurer under a reservation of rights. Specifically, 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.

Arrowood retained counsel and stated in its reservation of rights letter that none of the issues identified therein created a conflict of interest for the counsel retained by it. Select Comfort disagreed and responded that it intended to have its own firm litigate the action. Coverage litigation ensued. The court, applying Minnesota law, held that the reservation of rights created a conflict that justified independent counsel. Putting aside a lot of discussion and other related issues, the court held that “Arrowood reserved its right to challenge coverage on the issue of the intentionality of Select Comfort’s conduct and the Minnesota cases confirm that such a reservation creates a qualifying conflict of interest.”

Now to the rate issue. Arrowood argued that there was a “potential for abuse of allowing for separate counsel when a conflict of interest arises from a reservation of rights . . . because such counsel often charge more than panel counsel regularly retained by the insurer.” However, the court dismissed this, noting that “the potential for abuse would be better managed through the determination of the reasonableness of costs of alternative counsel—a determination that could account for rates paid to panel counsel.” Interestingly, the court (although applying Minnesota law) cited to California’s Cumis statute -- which pegs independent counsel’s rate at the insurer’s panel rate -- when stating that reasonableness of independent counsel’s rate “could account for rates paid to panel counsel.” So panel counsel’s rate cannot be ignored when deciding the rate to be paid to independent counsel.

Second, and this is even more noteworthy, the court observed that the potential for rate abuse could also 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.”

What about that? Why not address the rate to be paid to independent counsel (and other related issues) – if the insured is so entitled – in the policy itself? The insurer can essentially borrow the language from the Cumis statute and state in its policy (or an endorsement) as follows: “The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.”

I’ve certainly seen policies that do this – but not often. Given the frequency of the 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, is a simple solution to a complex problem out there for the taking?

 
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