In Compulink Managements Center, Inc. v. St. Paul Fire and Marine Ins. Co., et al California’s Second District ruled that, regardless of Compulink’s claims for bad-faith, the parties’ dispute over the reasonableness of independent counsel’s fees must be arbitrated pursuant to Cal. Civil Code Section 2860.
Not a very glamorous subject, I know, but an important decision for many litigators wanting to get paid by their client’s insurers.
Civil Code Section 2860 mandates arbitration of any dispute over the reasonableness of independent counsel’s attorney’s fees that must be paid by an insurer. Here, the court clarifies whether, when a coverage action is brought alleging numerous and various claims against the carrier, only one of which happens to be a dispute over the reasonable of independent counsel’s fees, the arbitration of the fee issue is still required. Their answer was “yes”.
The trial court had denied St. Paul’s petition to compel arbitration, stating that Compulink’s bad faith claims took the action beyond the purview of Section 2860. The Second District disagreed, finding that the plain language of the statute required arbitration of any fee dispute and did not provide for an exception in cases where bad-faith allegations were made by the insured.
The opinion is pretty straightforward. What the opinion fails to address, however, are the practical implications of such a ruling. For instance, what about where the insured claims that not only is he owed fees paid to independent counsel, which haven’t been paid by the insurer at all, but that the insurer is also liable for bad-faith.
Can you try such a case without bifurcating the duty to defend and the bad-faith claims? Can the arbitrator determine the reasonableness of the fees before the court determines whether the insurer had a duty to defend in the first place? Why would you want him/her to? And to throw another kink into the process, the court made clear that the mandatory arbitration of Section 2860 applies only to attorney’s fees, not all defense fees and costs (e.g. expert fees).
The legislature intended the mandatory arbitration provision of Civil Code 2860 to prevent the state’s judicial system from bearing the cost of fights over the reasonable of attorneys’ fees -- An understandable and prudent motive. Yet, as in many things, the practical implications may achieve quite the opposite effect.