Low, Ball & Lynch's

WEEKLY LAW RESUME

January 22, 2004 Issue By: Raymond Coates

Duty to Defend - Cumis - Expenses

Gray, Cary, Ware & Friedenrich v. Vigilant Insurance Company Court of Appeal, Fourth District (January 22, 2004)

Civil Code section 2860 provides for arbitration of disputes regarding defense fees. This case concerned the issue of whether the arbitration provision of this section applies to expenses incurred by Cumis counsel.

Gray, Cary, Ware & Friedenrich (Gray, Cary) was sued by Deepak Chopra and other associates alleging a conspiracy to invade Chopra's privacy, steal his lawyer's trash and defame and extort money from him. Gray, Cary was named as an insured under a general liability policy issued by Vigilant Insurance Company. Vigilant agreed to defend Gray, Cary under a reservation of rights. It further agreed that Gray, Cary could defend itself as Cumis counsel. In the lawsuit, a private investigator retained by Gray, Cary was named as a defendant. Gray, Cary determined that it would pay the legal fees incurred for separate counsel to represent the investigator. It did so without discussing the matter with Vigilant. When Gray, Cary sought reimbursement of the legal fees to defend the investigator it had paid, Vigilant denied the request. Gray, Cary then demanded arbitration pursuant to section 2860. Vigilant refused. Gray, Cary filed a petition to compel arbitration. The trial court denied the petition. Gray, Cary appealed.

The Court of Appeal affirmed. The Court noted that Civil Code section 2860 provides that Cumis counsel may settle disputes with the insurer about fees by final and binding arbitration before a single neutral arbitrator selected by the parties to the dispute. Gray, Cary asserted the term "attorneys' fees" should be construed as encompassing defense costs incurred by Cumis counsel.

The Court stated that section 2860(c) addresses disputes about the amount of legal fees or the hourly billing rate of independent counsel. It does not require arbitration of any other disputes. No court has interpreted this section as requiring arbitration of the propriety of defense costs. The Court stated that there is a distinction between attorneys' fees and costs recognized in the law. Since the Legislature did not include defense costs as a subject of arbitration, the Court interpreted this action as leaving the subject outside the scope of the arbitration provision. The Court refused to rewrite the statute to include binding arbitration of defense costs.

The Court noted that arbitrating disputes concerning the reasonableness and necessity of defense expenses would be more efficient and cost effective. However, the lack of efficiency was not a sufficient basis for rewriting the statute. Furthermore, the Court noted the parties may stipulate to such an arbitration if they so desire. Absent that, defense costs are not subject to the Cumis statute with regard to arbitration. The order was affirmed.

COMMENT

This case emphasizes that the statute will be read literally as encompassing only disputes over the rates and fees charged by independent counsel. The costs incurred by defense counsel as Cumis counsel are not subject to arbitration. ____ To order a printed version of this analysis, or change your subscription information, reply to this transmission. Information regarding this and other WEEKLY LAW RESUME TM articles is available from Raymond Coates at

(650) 366-4000, RCoate[email protected] or at WWW.LOWBALL.COM. The WEEKLY LAW RESUME TM is published fifty-two times a year, and is a complimentary publication of LOW, BALL & LYNCH, Attorneys at Law, a Professional Corporation, with offices in San Francisco, Redwood City and Monterey, California.