Many of us – on both sides -- deal with this issue regularly: the rate to be paid by an insurer to counsel chosen by the policyholder.  The gap, between the amount that the insurer and insured each believe is reasonable, can be quite wide.  Simply put, there are no easy answers here.  And, for that matter, not even many answers.  I’ve always found it curious that there is not more case law on the issue.

A New York federal court addressed the issue last month in Value Wholesale, Inc. v. KB Insurance Company, No. 18-5887 (E.D.N.Y. Nov. 2, 2020).  To be clear, the court had found that the insurer breached its duty to defend and was now determining how much the insured was entitled to recover for its defense costs.  That may not be the same as an insurer who affirmatively agrees to pay independent counsel, for its insured’s defense, and then a dispute arises over the rates.  A policyholder can be expected to argue that a court should be less sympathetic to the insurer in the former case.  So the argument may go - if the insurer is not happy with the defense costs, it should have defended the case.  I’ve seen courts say just that.

In Value Wholesale, the court had earlier determined that the insurer beached the duty to defend its insured in an intellectual property case that had triggered commercial general liability coverage for advertising injury.  The ins and out of that are not important for purposes here.  I address here simply the court’s handling of the hourly rate issue that was part of the policyholder’s claim for reimbursement of its defense costs.  [There are lots of other issues address by the court, concerning the attorney’s fees to be paid, that I do not discuss here.] 

The insurer argued that the fees charged by the insured’s counsel were too high.  To support its argument, the insurer cited to civil rights cases that involved fee shifting.  But the court concluded that these decision were not directly on point.  In civil rights cases, the court observed, the plaintiff’s attorney likely worked on a contingency fee basis.  There, because the plaintiff paid no fees, the court’s job is to determine what a reasonable, paying client, would be willing to pay. 

Here, when the breach of the duty to defend is at issue, “the court is not faced with a situation in which it must award fees, pursuant to a fee-shifting statute, to a plaintiff's lawyer who did not yet receive any fees. Rather, the question before this court is the amount of damages owed by KBIC as a result of its breach of its contractual duty to defend Value. In such a situation, the amount of damages is the attorneys’ fees and litigation expenses reasonably incurred by the insured in defending the underlying action. Though the fees must have been reasonably incurred, the reasonableness inquiry is slightly different than the one at issue in [the civil rights cases].”

The court concluded that the rates charged, for complex intellectual property litigation in Brooklyn federal court, involving a sophisticated medical device company -- $550/hr. for partners and $325 for associates, increasing to $600 and $400 after July 1, 2018 – were reasonable.  In reaching this conclusion, the court had this to say: “Where an insurer has breached its duty to defend, the insured’s fees are presumed to be reasonable and the burden shifts to the insurer to establish that the fees are unreasonable.”

[It didn’t help the insurer’s case that its own expert charged $550/hr. to review and analyze the law firm’s invoices.]

In reaching its decision, that the time expended by the attorneys was reasonable, despite the insurer’s vocal protestations, the court quoted what it called a “persuasively written” observation from the Seventh Circuit’s Judge Richard Posner in Taco Bell Corp. v. Continental Casualty (2004): when there is “uncertainty about reimbursement, [an insured has] an incentive to minimize its legal expenses (for it might not be able to shift them); and where there are market incentives to economize, there is no occasion for a painstaking judicial review.”