“The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” 

The above sentence appears in California Civil Code section 2860(c); it limits a defending insurer’s obligation to provide independent counsel of the insured’s own choosing in cases where the insurer’s reservation of rights gives rise to a potential conflict of interest between the insurer and the insured. 

In California, insurers routinely insist that they pay no more than $225 per hour (or even less) to their retained defense counsel, and refuse to pay higher hourly rates to independent counsel. Clearly, the statutory language itself can be used to create leverage points in a negotiation with insurers about “2860 rates,” as it places the burden on the insurer to demonstrate that it routinely pays those rates to defend similar actions in that community. 

But before the insurer even announces its intent to impose 2860 rate caps, there are things an insured can do to place itself in a strong bargaining position regarding defense costs issues. By drafting a thoughtful and thorough notice letter, an insured can lay the groundwork (and create leverage) for future negotiations. 

A case we recently handled provides an excellent illustration. It was a matter for which the client initially believed that it had no coverage, and had already retained its preferred defense counsel. We drafted a notice letter to the insurer, explaining the current procedural status and the anticipated case activity over the next three months. The letter also discussed some third-party vendor costs that the insured would soon need to incur.  

It took the insurer nearly three months to respond to the notice letter. The insurer accepted coverage subject to a reservation of rights, and acknowledged the insured was entitled to independent counsel. However, the insurer initially balked at the third-party vendor costs (which by then had already been incurred), and also sought to impose its 2860 rates. The hourly rate of the lead defense counsel who had been handling the case was nearly double the insurer’s proposed rate. 

Negotiations ensued. We argued that the insured should not have to pay the price for a problem that was entirely of the insurer’s own making, given that it had been on notice of all the relevant facts for months. To do so would allow the insurer’s own delay to unfairly prejudice the insured.  

The negotiations were complex, but we ultimately prevailed. The insurer agreed to pay for the third-party vendor costs, 100% of defense counsel’s prior billings, and 90% of her rates going forward. 

This was a case where the claim was clearly covered under the insured’s policy, so it would have been easy to provide notice by simply enclosing the complaint under a short cover letter. But by anticipating future disputes about 2860 rates and coverage for other defense costs, we laid the groundwork for successful negotiations on those issues.