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The Adjuster - October 2004

The Roth Report: Reimbursement of defense costs due to “bad faith”

​James M. Roth, Esq., The Roth Law Firm


Two interesting   appellate decisions have been recently handed down regarding the entitlement to   attorneys’ fees. One is good for the industry and the other is, well, a problem   for insurance carriers who unsuccessfully appeal a “bad faith”   verdict.

​INSURER’S RIGHT   TO REIMBURSEMENT OF DEFENSE COSTS: The California Supreme Court has granted a   petition for review of an unpublished decision styled Scottsdale Ins. Co. v. MV   Transportation, Inc., et al., (2004) 2004WL726816, which precluded an insurer   from recovering defense costs incurred in an underlying action.

In the   underlying action, plaintiff alleged the insured misappropriated trade secrets.   Scottsdale sought to protect its right to seek reimbursement of defense fees and   therefore agreed to defend under a reservation of rights. The underlying suit   settled with the insured agreeing to return materials containing plaintiff’s   alleged trade secrets. Neither   Scottsdale nor the insured were required to pay any money to the plaintiff.  

​Scottsdale then sought recovery of its defense fees in a declaratory action. The   trial court denied Scottsdale’s motion for summary judgment, concluding it owed   a duty to defend under its policies’ advertising injury coverage. The Court of   Appeal agreed, concluding “advertising injury” coverage was not limited to   injury from widespread promotional activities directed to the public at large,   but instead included the insured’s one-on-one business solicitations.

The California   Supreme Court granted review, however, and remanded the matter back to the Court   of Appeal for reconsideration in light of Hameid v. National Fire Insurance of   Hartford, (2003)   31 Cal.4th 16. On   reconsideration, the Court of Appeal concluded that the claims made against the   insured in the underlying suit were not covered under the policies’ advertising   injury coverage and, therefore, no duty to defend was owed. However, the Court   nevertheless found Scottsdale could not recover its defense fees because   Scottsdale had elected to defend the insured and failed to “exercise its exit   option” of withdrawal from the defense.

​The California   Supreme Court has granted Scottsdale’s petition for review of this ruling. It   seems that the appellate court wanted to do everything in its power to deny the   insurance carrier reimbursement of its attorneys’ fees. Time will tell how the   Supremes will react to the appellate court. INSURED’S RIGHT TO ATTORNEYS’ FEES   IN DEFENDING APPEAL FROM BAD FAITH JUDGMENT:

​Applying its   interpretation of California law, the Ninth Circuit Court of Appeal held that an   insured may recover attorneys’ fees incurred in successfully defending an appeal   from a bad faith judgment against an insurer. In McGregor v. Paul Revere Life   Ins. Co., (2004) ___ 9th Cir. ___, 04 C.D.O.S. 4485, after a jury found that   Paul Revere Life Insurance Company breached its insurance contract with McGregor   and therefore committed “bad faith,” Paul Revere unsuccessfully appealed.   McGregor then moved for attorneys’ fees incurred while defending against the   appeal. In deciding this issue, the Ninth Circuit looked to Brandt v. Superior   Court, (1985) 37 Cal.3d 813, 210 Cal.Rptr. 211.

​In Brandt, the   California Supreme Court held that if an insured proves “bad faith” the insured   may collect attorneys’ fees reasonably incurred to compel payment of insurance   policy benefits. The Brandt case was silent as to whether an insured may collect   attorneys’ fees incurred in successfully defending against an appeal. Treatment   of that question is mixed throughout California.

​In predicting how the California Supreme Court would rule, however, the   Ninth Circuit held that McGregor was able to collect the fees. Because McGregor   proved Paul Revere’s “bad faith” at trial and McGregor would have been unable to   collect her policy benefits unless she successfully defended against the appeal,   the Ninth Circuit reasoned that allowing McGregor to collect attorneys’ fees was   consistent with the logic in Brandt. This case logically extends the ruling of   Brandt by finding that if the insured was entitled to its attorneys’ fees   incurred in the trial court to compel its policy benefits, then the insured   should also be entitled to its fees if it wins the appeal from the trial court   by the insurance carrier.



​James M. Roth is a shareholder in The Roth Law Firm. Mr. Roth’s practice includes representing TPAs and insurance carriers in coverage, SIU, extra-contractual liability, and third party defense matters.