Hartford Casualty Insurance v. J.R. Marketing, L.L.C., 61 Cal. 4th 988

Background

Hartford issued CGL policies to J.R. Marketing and Noble Locks; third-party suits (Marin County, Nevada, Virginia) followed alleging business-related claims including defamation and other torts.
Hartford initially denied a defense, then (after a coverage suit) was ordered to fund independent Cumis counsel (Squire Sanders) under a reservation of rights and to pay invoices promptly, subject to reasonableness and a later right to seek reimbursement for unreasonable charges.
The trial court’s September 2006 enforcement order (drafted by Squire Sanders) required Hartford to pay submitted bills but preserved Hartford’s right to seek reimbursement for fees later found unreasonable or unnecessary; that order was affirmed on appeal and became final.
After underlying litigation concluded, Hartford paid roughly $15 million in defense fees (about $13.5M to Squire Sanders) and sued Squire Sanders and certain insureds seeking reimbursement for allegedly excessive, unnecessary, or noncovered defense fees.
The trial court dismissed Squire Sanders from the reimbursement claim; the Court of Appeal affirmed. The California Supreme Court reviewed whether, under these facts, an insurer may pursue reimbursement directly from Cumis counsel.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
May an insurer recover allegedly excessive Cumis fees directly from independent counsel when a court order preserved the insurer’s post-litigation reimbursement right?	Hartford: Yes — counsel were unjustly enriched by unreasonable, unnecessary, or fraudulent billings and must reimburse insurer directly.	Squire Sanders: No — reimbursement must run against insureds; allowing direct suit harms Cumis independence, invades privilege, and conflicts with §2860/Cumis policies.	Yes. Under these facts, insurer may sue Cumis counsel directly for objectively unreasonable/unnecessary fees not incurred for the insured’s benefit.
Does public policy (Cumis independence, §2860) bar direct reimbursement suits against Cumis counsel?	Hartford: No — §2860 contemplates fee challenges and does not preclude direct dispute with counsel; counsel can justify fees later.	Squire Sanders: Yes — direct suits chill counsel independence and undermine statutory scheme.	No. Policy concerns do not absolutely bar a direct restitution claim here; counsel may have to justify fees post hoc and insurer bears burden to prove unreasonableness.
Is restitution unavailable because counsel’s benefit was incidental or because contracts between insurer and insured govern?	Hartford: No — payments were not incidental; counsel obtained payment under an order that reserved reimbursement rights.	Squire Sanders: Yes — counsel were incidental beneficiaries of insurer-insured contract; unjust enrichment unavailable.	No. The incidental-benefit and contract arguments fail given the enforcement order and the specific reservation of reimbursement rights.
Do attorney-client privilege and malpractice-assignment doctrine preclude insurer’s direct recovery?	Hartford: No — insurer seeks reimbursement of payments it made, not to stand in insured’s shoes for malpractice claims; privilege issues can be managed by redaction and court supervision.	Squire Sanders: Yes — suit would impinge privilege and improperly commercialize attorney-client claims.	No. Privilege and anti-assignment policy do not categorically bar the limited restitution claim; courts can address privilege on remand.

Key Cases Cited

Horace Mann Ins. Co. v. Barbara B., 4 Cal.4th 1076 (1993) (insurer must defend all potentially covered claims)
Buss v. Superior Court, 16 Cal.4th 35 (1997) (insurer may seek reimbursement from insured for defense costs solely attributable to clearly noncovered claims)
San Diego Federal Credit Union v. Cumis Ins. Society, Inc., 162 Cal.App.3d 358 (1984) (insurer must pay for independent counsel when conflict of interest exists)
Montrose Chemical Corp. v. Superior Court, 6 Cal.4th 287 (1993) (insurer’s duty to defend extends to any potentially covered claim)
Gray v. Zurich Ins. Co., 65 Cal.2d 263 (1966) (foundational rule on insurer’s duty to defend)
Musser v. Provencher, 28 Cal.4th 274 (2002) (Cumis counsel must be independent and represents solely the insured)