Here’s a common situation: a corporate policyholder gets sued, gives notice to its liability insurer, and the insurer denies coverage. Subsequently, after the policyholder defends the litigation on its own, the policyholder pursues coverage, and litigation with the insurance carrier ensues. In that litigation, the insurer re-asserts its initial claim denial and also contends, even if the claim is covered, that it does not have to pay the full amount of defense costs because these defense costs incurred and paid by the policyholder were not, according to the insurer, “reasonable.” See Insurer Must Pay Counsel Rates In Excess of $700 Per Hour
If successful, that strategy is a great deal for an insurer because it either avoids coverage completely or significantly limits the amount it has to pay. That “nitpicking” strategy after an insurer has refused to defend, however, is way out of line—and a federal district court judge recently slammed the door on an insurer who tried it. Fleet and Farm of Green Bay, Inc. v. United Fire and Cas. Co., 2015 WL 5839056 (E.D. Wisc. Oct. 7, 2015) (“Fleet and Farm”).
Court Rejects Insurer’s Reasonableness Challenge To Defense Costs Incurred
In Fleet and Farm, the court had previously held that the insurer had breached its duty to defend when it denied coverage under a general liability policy for bodily injury that occurred at the additional insured’s (Mills) retail store. Fleet and Farm of Green Bay, Inc. v. United Fire and Cas. Co., 2015 WL 2453110 (E.D. Wis. May 22, 2015). After that ruling, Mills sought to recover all defense fees incurred in the bodily injury suit. In support of its fee claim, Mills provided redacted copies of its legal bills, in order to protect its attorney-client and work product privileges. The insurer claimed the redacted bills were insufficient, and moved to compel unredacted copies of the bills so that it could determine whether the fees sought were reasonable.
The court soundly rejected the insurer’s argument, holding that “since it refused to provide a defense that it owed, the insurer is in no position to nitpick the fees that its insured actually incurred.” 2015 WL 5839056 at *1. The court stated that a detailed “reasonableness” inquiry after denying coverage is inappropriate:
Having refused to provide a duty to defend, the insurer also gave up its right to control the defense, as well as the “reasonableness” of its attendant costs. The Plaintiff is therefore correct that United Fire is not entitled to take a fine-toothed comb over its legal bills, which, after all, it paid in the normal course of business.
Id. at *2. Therefore, the court denied the motion to compel the production of the unredacted legal bills.
Conclusion
If a liability insurer wants input and some control of its policyholder’s defense, it needs to step up and accept its duty to defend. If it denies coverage, it does so at its peril, and cannot later criticize defense counsel bills. Rather, the insurer must pay for all of the policyholder’s defense costs incurred. Policyholders should fight any attempt by an insurer to have its cake and to eat it too.
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