FAILURE TO PROMPTLY AND FULLY DEFEND PRECLUDES INSURER’S RIGHT TO STATUTORY FEE CAPS

FAILURE TO PROMPTLY AND FULLY DEFEND PRECLUDES INSURER'S RIGHT TO STATUTORY FEE CAPS

In Housing Group v. PMA Capital Insurance Company, 193 Cal. App. 1150 (2011), a California Court of Appeals Court recently held an insurer’s prolonged “investigation” and delay in making a coverage determination effectively constituted a failure to defend that precluded the insurer from invoking the statutory fee caps available under Section 2860 of the California Civil Code.

Section 2680 provides that if an insurance policy imposes a duty to defend and a conflict of interest arises, the insurer shall provide independent counsel selected by the insured, unless such right is waived by the insured. Thereafter, the insurer’s obligation to pay fees to independent counsel, also dubbed Cumis counsel, 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.”

In Housing Group, the court held that the Section 2680 fee cap did not apply where the insurer’s reservation of rights letter merely stated that the insurer would “investigate the duty to defend.” The court rejected the insurer’s argument that it had fulfilled its defense obligation by sending two reservation of rights letters acknowledging receipt of the insured’s tender of defense and stating that it would “investigate” coverage. The court noted that the insurer withheld payment of defense fees until the end of the litigation, which was “the equivalent of a defense denial.”

The Housing Group case demonstrates the importance of prompt and unequivocal acceptance of the duty to defend by an insurer. Failure to pay defense costs in a timely manner after issuing a reservation of rights letter may preclude an insurer from relying on statutory fee caps provided by Section 2680.