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Vol. 8 - Issue 7
August 21, 2019


Court Provides Rate Warning To Independent Counsel


We've all seen this in a reservation of rights letter. And, if you are on the insurer-side of things, you've probably written it yourself.

An insurer receives a new claim, the clock is ticking for the defendant-insured to respond, but the insurer has not yet determined if it owes a defense. So it sends a letter to the insured saying something along the lines – although perhaps not exactly (as discussed below) -- of what Hartford did as described in Hartford Casualty Ins. v. Swapp Law, PLLC, No. 17-1130 (D. Utah Aug. 1, 2019).

The insurer stated: "At this time . . . Hartford has not yet made a determination as to whether [Swapp Law] is entitled to coverage in connection with the [Underlying Action]. In the interim, we suggest that you retain your own attorney to protect your interests in this matter. In the event we determine that coverage may exist and we agree to defend this suit, we will reimburse you only for those reasonable legal costs and fees incurred by you for the defense of this action . . . While the issue of what constitutes 'reasonable legal costs and fees' may not be apparent to you, the legal community doing defense work in this area is well aware of the acceptable scale. You may wish to contact the undersigned prior to hiring an attorney since charges considered to be above the acceptable scale could result in our not covering your legal costs and fees in their entirety."

The Swapp Law firm was seeking coverage for a claim that it violated the federal Driver's Privacy Protection Act (18 U.S.C. § 2721 et seq.) "by purchasing accident reports from the Washington State Patrol and using the personal information gleaned from the reports to mail motorists unsolicited Swapp Law advertisements."

Two days after getting Hartford's letter, Swapp retained the Lane Powell law firm to defend the action. Swapp's coverage counsel provided Hartford with the hourly rates for the Lane Powell lawyers: Barbara Duffy ($645), Ryan McBride ($540) and Aaron Schaer ($310).

A representative of Hartford responded that the company would make "an accommodation on this one case only to accept" the rates charged by Duffy and McBride. Hartford advised that all other timekeepers would be paid at $195 per hour for associates and $100 for paralegals.

One week after agreeing to defend, under a reservation of rights, Hartford filed an action seeking a declaration that it had no duty to defend or indemnify Swapp Law in the Underlying Action. The court granted Hartford's motion for judgment on the pleadings, finding that the claims against Swapp Law were excluded from coverage and Hartford had no duty to defend.

At issue before the court now -- Swapp Law seeking payment for the full amounts billed by Lane Powell.

The court's decision did not require it to address the extent of Hartford's obligation for any Lane Powell fees over $195 per hour for associates and $100 for paralegals. The court held that, because Hartford had no duty to defend, it had no obligation to pay Swapp's legal fees – even those incurred up until the court's no duty to defend decision was made. This gets to a separate issue in the case of Hartford's right to reimbursement of defense costs.

However, the court also explained that, even if Hartford did have a duty to pay Swapp Law's legal fees prior to the determination that it had no duty to defend, "Swapp Law acted unreasonably by hiring Lane Powell and failing to confirm with Hartford that Lane Powell's rates would be reimbursed."

I'll let the court describe it from here. It is worth hearing it in full as well as with the court's tone:

"In Hartford's August 15, 2017 letter to Swapp Law acknowledging Hartford's notice of the Underlying Action, Hartford stated that Swapp Law would be reimbursed only for 'reasonable' legal costs and fees. That letter further stated that 'the legal community doing defense work in this area is well aware of the acceptable scale' of legal costs and fees. Finally, the letter warned Swapp Law that, in order to ensure reimbursement, Swapp Law may wish to confirm before hiring an attorney what rates Hartford will consider to be reasonable. And, as evidenced by attorney Humphery's February 2, 2018 email, Swapp Law was clearly aware of the precise rates Hartford considered to be reasonable.

On the basis of Hartford's August 15, 2017 letter, and Swapp Law's knowledge of Hartford-approved rates, Swapp Law knew, or should have known, it would not be reimbursed for any and all attorneys' fees it incurred. In its August 15, 2017 letter, Hartford indicated that it considered a particular spectrum of legal fees and costs to be reasonable and therefore, eligible for reimbursement. Thus, Swapp Law was on notice that, to ensure it would not be saddled with unreimbursable attorneys' fees, it had an obligation to determine that range, whether by contacting Hartford directly or seeking the opinion of lawyers who perform this kind of defense work in the relevant area. Even without Hartford's warning about reimbursable attorneys' fees, Swapp Law—no stranger to the mechanics of insurance defense—would have been well aware that insurance companies don't merely write blank checks to fund the defense of potentially covered claims.

Only two days after receiving Hartford's letter, Swapp Law hired Lane Powell, under an engagement letter agreeing to pay multiple lawyers more than $500 per hour. Swapp Law may well have concluded that its potential liability flowing from the Underlying Action was so great that it needed lawyers who charged nearly three times what Hartford deemed reasonable, and further that it was willing to assume the difference between Lane Powell's rates and Hartford's reimbursement. Or Swapp Law may have merely overlooked Hartford's clear warnings about the rates it would reimburse. In any event, in light of these facts, Swapp Law incurred these attorneys' fees at its own risk, knowing that Hartford would not merely rubber stamp any attorneys' invoice it received. In sum, Hartford had no duty under the Policy to defend against the Underlying Action and Swapp Law incurred exorbitant attorneys' fees at its own risk. Thus, Hartford has no obligation to reimburse Swapp Law for the difference between the rates charged by Lane Powell and those approved by Hartford."

It is easy to see how policyholders would likely respond to this: Simply because Hartford stated that the "reasonable legal costs and fees" are $195 per hour for associates and $100 for paralegals does not make it so. Policyholders would likely say, as they invariably do in cases of this type, that the fees paid by insurers, to panel counsel, are not "market rates," but, rather, are agreed to by lawyers in exchange for a steady flow of work from an insurer, etc. You know the drill. And some courts have said that panel counsel rates are not market rates when determining the rate to be paid to independent counsel.

But putting that aside, what makes the situation here unique is the explicit warning that was included in Hartford's reservation of rights letter when addressing the fact that Harford's rates may be lower than the rates of the lawyers retained by Swapp Law. Granted, it may not have mattered if Swapp Law addressed the rate issue with Hartford, as it seems that Hartford had already told the law firm what its maximum rates were. But if Swapp Law had addressed the rate issue with Hartford, and been refused anything higher than $195, perhaps the court would have been more sympathetic to Swapp.

It's all a little confusing. Nonetheless, the take-away is that, by having this explicit warning, Hartford won over the court and may have kept the court from concluding that the reasonable rate is somewhere between $195 per hour and the Lane Powell rates. Of course, this is all a non-issue, as the court held that Hartford had no obligation to pay Swapp's legal fees, even those incurred up until the court's no duty to defend decision was made.

Again, it's confusing. But there is little doubt that Hartford, with the strong warning in its reservation of rights letter, put itself in the catbird seat for dealing with an insured that paid no heed to the Stag's warning.    


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