Policyholder Entitled to Hire Multiple Law Firms to Handle Underlying Suit as Long as Reasonable and Necessary for the Defense

The United States District Court for the Central District of California, applying California law, has held that a licensee policyholder involved in an underlying trademark dispute was not precluded from seeking defense costs reimbursement for payments to two law firms acting as Cumis counsel.  Signal Products, Inc. v. American Zurich Insurance Company, 2:13-cv-04581-CAS-AJWx (C.D. Cal. Aug. 4, 2014). 

A luxury goods company brought the underlying litigation against another luxury goods company for trademark infringement, and then added the insured (which was that defendant’s licensee) as a co-defendant.  The insured licensee’s CGL insurer agreed to provide a defense, subject to a reservation of all rights.  The insured signed an engagement letter with the same law firm that represented the licensor, and also sought help from an independent, second firm.  The trial court ruled in favor of the plaintiff in the underlying matter, leading the insured to seek from its insurer the costs of defending the action.  After being denied reimbursement, the insured licensee brought an action against the insurer asserting breach of the duty to defend and to indemnify.

In support of summary judgment, the insurer argued that the fees to the second firm, which had served as the insured licensee’s outside general counsel for many years, were not costs as to the defense of the underlying action, but rather costs associated with advising the licensee on its dispute over its indemnification obligations to the licensor.  The insurer also argued, as an alternative, that it was not obligated to repay the fees because the licensee had not informed it that it had retained the law firm as second Cumis counsel.  The court disagreed with both arguments.  The court held there were triable issues of fact as to whether the work performed by the second firm was done in the insured licensee’s defense in the underlying action.  Additionally, the court addressed the insurer’s argument that the licensee’s payment of its defense cost portion to the licensor was barred by the “no voluntary payments” clause of the policies.  The court held that the provision does not apply to the payment of Cumis counsel fees due to the fact that when insurers consent to the independent counsel, they also consent to the expense of those counsel.

The insured licensee sought summary judgment on the issue that the insurers could not refuse to pay the second law firm as independent counsel.  The court analyzed regulations relating to Cumis counsel, noting the lack of definition for “independent counsel.”  The court reasoned that, just as law firms comprising multiple attorneys may serve as Cumis counsel, there was no basis to require that all of those attorneys be employed from the same law firm.  Nevertheless, the court denied summary judgment on this issue because the licensee had not established as undisputed that the retention of the second Cumis counsel was reasonable and necessary for the defense of the underlying action.

The court concluded by addressing the insured licensee’s motion for partial summary judgment that the insurer had breached the duty to defend the licensee, which then precluded the insurers from relying on any rate-cap protections.  The court found that genuine issues of material fact existed as to whether the duty to defend was breached.  As to the evidence presented by the licensee to support this claim, the court found that a violation of the 40 day deadline to agree to defend is not sufficient to establish that the insurer breached the duty to defend.  Moreover, the court found that the remaining three contentions, that the insurer breached its duty to defend 1) by adopting unreasonable coverage positions; 2) by refusing to pay the second firm’s fees; and 3) by agreeing to pay only a portion of the fees owed, all hinged on the yet to be determined contention that the insurer had not reimbursed the insured licensee.  Because the licensee had not yet established that the insurer owed these fees, the court held it was premature to find as a matter of law that the failure to pay such fees constituted a breach of the insurer’s duty to defend.