Obligation of Insurer to Pay Legal Fees
After the underlying matter was settled, the insurer brought a declaratory judgment action seeking determination as to its obligation to pay reasonable legal fees to a private attorney hired by the insured. The insured had refused the insurer's legal representation due to the fact that the insurer offered coverage and defense conditioned upon a reservation of rights letter. This case is Northern Security Insurance Company, Inc. v. R.H. Realty Trust, 941 N.E.2d 688 (2011).
The Niininen family commenced a lawsuit against the R.H. Realty Trust complaining that the family was exposed to mold from a property that they had leased from the trust. The family was required to vacate the premises and stay in a hotel and they claimed $14,000 in damages in addition to medical expenses. After the complaint was served on the trust, the trust sent it to its insurer, Northern Security Insurance. The insurer sent a reservation of rights letter to the insured noting that the trust was only covered for one of the counts in the complaint. The insured rejected representation with the reservation of rights and subsequently retained its own attorney, Dailey, for its defense.
Dailey provided status reports to Northern Security throughout his defense work and mailed two bills reflecting a rate of $225 per hour. The insurer only paid at a rate of $150 per hour. In addition to not paying the attorney's rate, the insurer did not pay the experts or court reporters. After Dailey settled the underlying case, he sent a bill to the insurer seeking the balance between his rate of $225 and Northern Security's rate of $150. The insurer filed a declaratory judgment action asking the court to determine what constituted reasonable attorney's fees for the services rendered by Dailey. The trial court said that the $225 per hour fee was per se reasonable. The insurer appealed.
The appeals court noted that when an insurer seeks to defend its insured under a reservation of rights, and the insured is unwilling that this happen, the insured may require the insurer either to relinquish its reservation of rights or relinquish its defense of the insured and then reimburse the insured for its defense costs. In such instances, the insurer must pay the reasonable charges of the insured's retained counsel. So, the issue in this appeal was the reasonableness of the fee paid ($150 per hour) versus the fee demanded ($225 per hour).
The insurer said that its rate was based on what it paid its panel attorneys. However, the court noted that this fee was based on what the insurer was able to bargain for as a large insurance company handling various cases involving many attorneys who presumably wished to continue receiving referrals. In addition, the insurer failed to offer any more credible evidence in support of its $150 rate other than “that's what we pay our panel attorneys”.
In this instance, the appeals court found that the overwhelming evidence was in support of the $225 rate. The court said that Dailey was a very capable attorney with an excellent reputation and years of experience who normally charged $350 per hour. Moreover, the court noted that the insurer could have included in the policy explicit provisions concerning the cost of defense and it did not do so. Therefore, the ruling of the trial court in favor of the $250 per hour rate was upheld.
Editor's Note: Judicial discretion in determining reasonable attorney fees is guided by several factors: the nature of the case; the issue presented; the time and labor required; the amount of damages involved; the result obtained; the experience, reputation and ability of the attorney; the usual price charged for similar services by other attorneys in the area; and the amount of awards in similar cases. Taking all these factors together, plus the fact that the insurer offered no sound basis for insisting on paying its chosen rate, allowed the court to find against the insurer. Also as the appeals court noted, the insurer could have explicitly stated its cost of defense position in the policy but failed to do so. This left it up to the court to determine the reasonable attorney fees and the insurer lost its case.