It is a settled principle of insurance law that a liability insurer’s duty to defend is broader than its duty to indemnify. In most jurisdictions, if any portion of a complaint against a policyholder is even potentially covered, the insurer must defend the entire action.
Moreover, it is also well-settled that if an insurer agrees to defend but reserves its right to deny coverage, this creates a conflict of interest between itself and its policyholder that entitles the policyholder to select independent defense counsel funded by the insurer. For policyholders, the essence of this conflict is their concern that an insurer exerts control over and instills loyalty from counsel it selects (who receive large amounts of work from the insurer) and that such counsel has a strong financial incentive to defend the policyholder in a manner that relieves the insurer of any coverage obligations. For example, defense counsel can strip the policyholder of its coverage and provide a windfall to the insurer who selected them by obtaining dismissal of all of the covered claims, leaving intact solely the non-covered claims that the insurer has no duty to defend or cover.
Due to these concerns, the duty to defend is sweeping. But this sweeping duty to defend forces insurers to defend policyholders in many cases using counsel not selected by the insurers. Generally, when insurers choose defense counsel, they use “panel counsel”—their pre-selected list of preferred counsel who charge often dramatically lower than market rates in exchange for a steady stream of work from the insurer. Stated differently, a common business model of panel counsel is to sacrifice market hourly rates in favor of a high volume of cases from the insurer.
An insurer’s ability to provide legal work to a law firm in quantities far greater than what virtually any other client could ever give that firm affords the insurer tremendous leverage to lower the law firm’s hourly rates to levels far below market rates. Indeed, some insurers drive panel counsel hourly rates to the very bottom by holding “reverse auctions” where want-to-be panel counsel firms compete to offer the lowest hourly rate.
Accordingly, when the insurance law forces insurers to defend a policyholder using independent, non-panel counsel that the insurers must fund, many insurers refuse to pay independent counsel more than panel counsel rates. While this tactic can save an insurer millions of dollars, it can compromise a policyholder’s defense and eviscerate a policyholder’s right to independent counsel because many law firms will not (and cannot) accept panel counsel rates. This, in turn, forces some policyholders that cannot afford to pay the difference between panel counsel rates and independent counsel’s rates to accept panel counsel.
Insurers’ refusal to pay independent defense counsel more than panel counsel rates has sparked litigation between insurers and their policyholders focused on whether panel counsel rates are reasonable. Several decisions by the U.S. District Court for the Southern District of New York—notably Columbus McKinnon Corp. v. Travelers Indem. Co. and Danaher Corp. v. Travelers Indem. Co. (adopted)—have rejected insurers’ refusal to pay no more than panel counsel rates, holding that those rates are no measure of reasonableness.
In Danaher, Magistrate Judge Francis ruled on the policyholders’ entitlement to their defense counsel fees for underlying bodily injury actions in courts around the country for asbestos and silica-related liabilities, after the district judge ruled the insurer breached its duty to defend those actions. The insurer, Travelers, argued that the hourly rates charged by defense counsel were unreasonably high and that they should be limited to the insurer’s approved rates. Judge Francis rejected that argument, holding that just because the insurer negotiated a lower rate than that charged by the policyholder’s defense counsel does not make that insurer-approved rate the maximum reasonable rate defense counsel can charge. Judge Francis held that, instead, the court will, in all cases, apply the traditional method of analyzing the reasonableness of defense counsel rates:
Travelers complains that rates charged by certain firms defending Danaher against the underlying claims are unreasonably high. It identifies fourteen firms, litigating in eleven states, whose hourly rates purportedly “exceed Travelers[’] approved rates for those specific firms and/or the rates charged by similar firms defending bodily injury claims within their respective legal communities.” According to Travelers, its approved rates are reasonable because they “are consistent with and, in some cases, exceed the hourly rates awarded by courts for cases involving bodily injury claims and non-bodily injury claims.” … .
Travelers appears to misunderstand the standard here. A “presumptively reasonable fee” must be based on “a reasonable hourly rate.” Sandoval, 2013 WL 1767748, at *3. It need not be the lowest possible rate, but, rather, must merely fall within a range of reasonableness. Thus, contrary to the thrust of Travelers’ argument, the fact that certain counsel charged more than Travelers’ approved rates is not dispositive.
(Emphasis added.)
Judge Oetken confirmed the Magistrate Judge’s findings:
Part of the foundation for Travelers’ objection is that several of the firms retained in the underlying cases charge rates that exceed Travelers’ own approved rates for those legal markets. On this basis, Travelers asserts that Danaher and Atlas Copco “had the opportunity and ability to obtain counsel at more reasonable billing rates.” But the fact that Travelers’ own approved rates are lower has little impact on the determination of whether the rates charged by the firms acting for Danaher and Atlas Copco were reasonable. … [A]s Judge Francis correctly points out, a reasonable rate “need not be the lowest possible rate”; it must simply be reasonable.
(Citations omitted; italics in original; other emphases added.)
Similarly in Columbus McKinnon Corp., the insurers, Travelers and Liberty Mutual, challenged the reasonableness of the hourly rates charged by the policyholder’s defense counsel, DLA Piper, in the defense of the policyholder against nationwide asbestos bodily injury litigation and cross-moved for summary judgment seeking a declaration that the hourly rates charged by DLA Piper were unreasonable. Magistrate Judge Freeman denied that branch of the insurers’ motion and Judge Marrero adopted the report and recommendation in its entirety.
In attacking DLA Piper’s rates as unreasonable, the insurers’ experts cited the dramatically lower rates charged by insurer panel counsel for defense of asbestos claims and even rates charged by insurer coverage counsel. Judge Freeman rejected that argument, holding that this comparison was not apt because:
insurance companies, due to the volume of work they offer, may well be able to negotiate for lower attorney billing rates than could be obtained by other types of clients in the marketplace. Thus, the attorney rates that are customarily paid by insurers may fall at the lower end of a reasonable range for like services … and should not be used as a standard by which the upper limit of that range is measured.
(Emphases added.)
These Southern District of New York cases establish that insurer panel rates are not a measure of reasonableness for the hourly rates of independent defense counsel. To the contrary, the often very low hourly rates charged by panel counsel are simply a result of insurers’ leverage created by the bountiful supply of work they can offer panel counsel. But even in the face of such large volumes of work, some law firms will not accept panel counsel rates—particularly those firms best equipped to handle larger and more complex cases.
As such, an insurer’s refusal to pay independent defense counsel a reasonable market rate may end up prejudicing the policyholder’s defense and could coerce the policyholder into accepting counsel of the insurer’s choice—panel counsel. This defeats the public policy behind affording policyholders independent counsel when the insurer reserves its rights: avoiding conflicts of interest in the policyholder’s defense. And, it is avoidable. Most insurance policies do not require policyholders to accept counsel billing at sub-market rates.
Accordingly, when policyholders face refusals by their insurers to pay more than their panel counsel rates for independent defense counsel, they should not agree. Rather, policyholders should consult experienced policyholder counsel. Pillsbury’s insurance recovery attorneys have litigated many duty to defend cases across the country—in state and federal courts—ensuring that insurers did not compromise their policyholders’ defense and their right to independent counsel.
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