PRACTICE TIP: RECOVERY OF ATTORNEY FEES IN INSURANCE BAD FAITH, By David Laufer

Here are the facts of your case: Your clients, a property management company, have successfully defended and resolved a lawsuit that should have been defended by your clients’ insurer. The costs of defense are $376,000. Your clients’ CEO was named as a defendant. He suffered emotional distress, resumed smoking, gained weight and used his daughters’ college money to pay defense costs. The CEO operated the company at a loss during the litigation. He consults you: If the company and I sue the insurer and win the lawsuit, can we recover all legal fees from the insurer?

Practice Tip

Before advising the clients to file a breach of contract and bad faith action, review the law and discuss the following:

1. Will the client fund the costs of experts to establish the unreasonable denial of a defense, emotional distress and economic damages?

2. With the diversity of citizenship present, and removal favored by insurers, does federal practice and procedure create any challenges that need to be addressed?

3. Does the client understand that contingency attorney fees increase with any appeal, and will not be limited to the amount awarded against the insurer for the recovery of policy benefits?

4. Do the client’s business records and its accounting procedures used to account for income and expenses create any challenges in evidence available to prove damages?

5. The content of the receipted demand letter sent to a senior executive of the insurer requesting payment of policy benefits, without prejudice, to establish clear and convincing evidence of insurer’s intentional disregard of the insured’s rights under the policy, bad faith and ratification of the wrongful conduct engaged in by the Insurer’s employees?

Right to Recover

Brandt v. Superior Court (1985) 37 Cal.3d 813, 817. The insured’s reasonable attorney fees incurred to compel payment of benefits due under an insurance policy are recoverable as damages in a bad faith action against the insurer and presented to the trier of fact. Only those attorney fees attributable to the insured’s efforts to recover contract benefits may be awarded, and recoverable as fees and may not exceed the amount attributable to the attorney’s efforts to obtain the rejected payment due under the insurance contract. (Brandt, 37 Cal.3d at 819.)

Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252, 1258. The tort of bad faith committed by the insurer entitles the insured to recover policy benefits in full, undiminished by attorney fees.

Allocation of Legal Fees

Cassim v. Allstate Ins.Co. (2004) 33 Cal.4th 780, 806-807. Attorney fees attributable to obtaining any portion of plaintiff ’s award for emotional distress, economic damages or punitive damages which exceeds the amount due under the policy (defense costs) are not recoverable from the insurer.

A stipulation by the parties for a post judgment hearing to allocate attorney fees as “recoverable as damages” is preferable because it permits the court to take account of all services in setting the amount of the legal fees and costs. (Brandt, supra, 37 Cal.3d at 819-820.)

Campbell v. Cal-Gard Surety Services, Inc. (1998) 62 Cal.App.4th 563, 571-572. A stipulation to have Brandt fees determined by the court was approved and necessary because Brandt fees are damages that otherwise would have to be presented to the trier of fact.

Attorney Fees on Appeal

Baron v. Fire. Ins. Exchange (2007) 154 Cal. App.4th 1184, 1197-1198. Brandt fees incurred on appeal are recoverable to defend a judgment against an insurer’s appeal of an  award of insurance policy benefits to the insured. The collection of benefits due the insured is not complete when the insurer resists the judgment by challenging the judgment on appeal.

Track Mortgage Group, Inc. (2002) 98 Cal. App.4th 857, 871. The insured is entitled to legal fees on appeal only to the extent that the insurer attacked the judgment in favor of the insured on the insurance contract cause of action for the payment of policy benefits due the insured.

McGregor v. Paul Revere Life Ins. Co. (9th Cir. 2004) 369 F.3d 1099. Where policy benefits awarded to the insured could not be obtained until the judgment was affirmed on appeal, the logic of Brandt necessarily implies that fees on appeal should be recoverable. Does this logic extend to the legal fees incurred in post trial motion to protect the judgment for the payment of policy benefits?

David Laufer is the former VP and GC of a public company. At Burke, Williams & Sorensen LLP his practice focuses on  class actions, insurance coverage, franchise,distribution, Prop 65, complex business disputes and risk management for the businessenterprise.

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