Coverage for Defense Fees: What Are Reasonable and Necessary – Two Views

By Joe Monteleone, Esq. of Tressler LLP.
 
It is not often that we see case law addressing what are “reasonable and necessary” defense expenses, a concept addressed in the definition of claim expenses or similar terms in almost all D&O and E&O policies. In recent months, however, we have seen two such decisions in Philadelphia Indemnity Ins. Co. v. Chicago Title Ins. Co., 2012 U.S. Dist. LEXIS 82751 (N.D. Ill., decided June 10, 2012) [See here for a copy of the decision] and in Vicor Corp. v. Vigilant Ins. Co., C.A. No. 07-10517, (USDC, D. Mass., decided September 28, 2012). [See here for a copy of the decision]
 
Neither of these decisions provides much background information on the nature of the underlying dispute, but they are each noteworthy for their treatment of what may be considered reasonable attorney fees.
 
The Chicago Title case involved a dispute among an insured and two of its insurers. The focus of the decision, which is now on appeal to the Seventh Circuit, was on the application of defense counsel guidelines and the coverage position of one of the insurers, Chicago Title Insurance Company.
 
Chicago Title had denied coverage and contended that defense counsel’s fees were otherwise unreasonable. A key component of the insurer’s argument regarding unreasonableness rested upon a failure to comply with its defense billing guidelines.[1]
 
The Court here noted that the defense costs were incurred in the face of a denial of coverage by both of the insurers in this litigation. As such, the Court found that the insured had every incentive to keep the costs low, as they might ultimately be the payor of those bills. Thus, the Court never reached the issue of whether the guidelines had any legally binding application, but rather held that the uncertainty of insurance coverage was sufficient to keep the insured honest and vigilant in monitoring and controlling defense expenditures.
 
In Vicor, however, the insurers prevailed on a defense cost issue.
 
Vicor involved commercial litigation between the insured and one of its customers. The insured, which is headquartered in Massachusetts, chose to defend the litigation, venued in California, using its long-time Massachusetts counsel and a relatively high-powered California litigation firm. The Massachusetts firm did most of the work at rates ranging from $160 per hour for associates to $325 per hour for the most senior partner. The rate range for the California firm was $275 to $690 per hour.
 
Defense bills totaled $7,428,670.46 and the insurers offered to reimburse them at a blended rate[2] of $250 per hour for a total of $5,234,430.57. The insured contended that the insurers’ imposition of a blended rate was arbitrary and did not consider the complexity of the litigation.
 
The Court disagreed, noting that the insureds had the burden of proof that its fees were reasonable and necessary. The Court essentially found the Massachusetts firm’s rates to be reasonable and pretty much equivalent to the blended rate offered by the insurers, and that the local California litigation rates were very much out of line. Thus, the insurers were able to prevail with an almost 30 percent reduction in the total fees billed.

[1] For the reader unfamiliar with this practice, defense billing guidelines are utilized by a number of insurers to supplement the typical policy limitation that the insurer is obliged only to pay reasonable and necessary defense costs. Insurers often contend that these guidelines are an aid to the parties in determining what are and what are not reasonable and necessary charges. On the other hand, insureds will often contend that the guidelines are not referenced in or a part of the insurance policy and, hence, pose no obligation on the insured or its defense counsel.
[2] When a blended hourly rate is used there are no separate rates for partners, associates or other lawyers in the firm. Rather, all lawyers are paid at the same blended rate. The only deviation from that in this case was a separate $75 per hour rate for paralegal time.
 
Joseph P. Monteleone is a partner in the New York office of Tressler LLP and has more than thirty years of experience in the insurance arena, both in the private practice of law and as an insurance company claims executive. He is a frequent author and speaker on topics within his practice areas. He practices primarily in the areas of professional liability, errors and omissions (E&O), directors and officers (D&O), employment practices liability (EPL) and other claims-made insurance products. Joe provides coverage advice and monitoring of underlying litigation in these areas, as well as policy and endorsement drafting services, expert witness and arbitration and mediation services.
Joe has been cited for excellence in Chambers USA America’s Leading Lawyers for Business. He has also been selected for inclusion continuously on an annual basis since 2006 in New York - Metro Super Lawyers®. He can be reached at jmonteleone@tresslerllp.com. Telephone: (646) 833-0888.
 
 

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