July 22, 2026|Coverage Compass
If you or your business is sued, it is great comfort if your liability insurer agrees to defend you, as you believe your defense will be paid. The insurer may reserve its rights to deny coverage later but it is good news that your attorneys will be paid. When an insurer reserves its rights to deny coverage later, sometimes these reservations create a “conflict of interest,” which entitle an insured to choose its own “independent” counsel in California.[1] In this situation, instead of the insurer selecting defense counsel for the insured, which is common under a duty to defend policy, the insured gets to choose its own counsel. Still reason to celebrate, right? But, as you may suspect, this selection right comes with a catch. Even though the insured can choose its own counsel, the insurer often takes the position that it may impose a very low hourly rate for defense counsel, maybe $225 or $250 per hour (it varies, sometimes dramatically so), which is much less than what is being charged by the insured’s independent counsel. If the litigation against the insured is significant, the delta between the rate the insurer agrees to pay and counsel’s actual rate can add up to millions of dollars.
An insurer claims it need only pay these low hourly rates pursuant to the requirements set forth in California Civil Code section 2860(c), which governs the financial relationship between an insurer and an insured’s independent counsel. Section 2860(c) states:
The insurer’s obligation to pay fees to the independent counsel selected by the insured is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.
While section 2860(c) allows an insurer to only pay independent counsel the same rates it pays to other lawyers to defend similar actions in the same locale, an insured should not simply accept the insurer’s say so on this. There are several ways to challenge an insurer’s unilaterally imposed rates. Below are a few ways to do so.
1. Demand proof from the insurer as to rates it actually pays to other counsel. An insured should demand that the insurer produce detailed information about the counsel to whom it is paying these low rates. An insurer often imposes “panel counsel rates” in these situations, which are rates that an insurer pays to certain law firms that have special agreements with the insurer, often in writing. In these agreements, the panel counsel often agree to charge the insurer reduced hourly rates, regardless of the type of case, or location of the litigation, typically in exchange for the anticipation of a large volume of work from the insurer. Under such a situation, an insured can argue that there is no “similarity” of actions as mandated by the statute. Instead, the panel counsel’s rates are unaffected by the complexity, sophistication, nature of the allegations, legal claims, factual circumstances, location, or any other factors of the cases in which they are appointed. Thus, such rates provide no support under the § 2860 requirements.
2. Demand proof from an insurer as to specific cases that it claims are “similar” to the litigation against the insured. An insured should demand that the insurer provide detailed information about the specific cases that the insurer is touting as “similar actions in the community where the claim arose or is being defended,” to support the low hourly rates imposed. With this information, an insured can ascertain whether such cases are, in fact, “similar” or not. For example, are these purported “similar” actions less complex than the lawsuit against the insured? Do they involve different legal and/or factual issues? What about the amounts in controversy – are they dramatically less and therefore, the exposure potentials are not even comparable? Also, where are these other actions pending? Are they in different communities? The more an insured can demonstrate dissimilarities the better to demonstrate that the insurer cannot support the hourly rate it seeks to impose pursuant to § 2860.
3. Demand arbitration if you cannot agree on an acceptable hourly rate. If the parties cannot informally agree on an acceptable hourly rate for independent counsel, either party can seek to resolve the dispute through final and binding arbitration pursuant to § 2860. And, in any arbitration, if the Arbitrator determines that insurer’s evidence does not satisfy the § 2860 requirements, the insured should argue that a “reasonableness” standard should be applied to determine the appropriate rate for the insured’s independent counsel (with evidence to support that independent counsel’s actual rates are “reasonable”). Indeed, a “reasonableness” standard is a ubiquitous standard for attorneys’ fees in insurance litigation and other contexts. See, e.g., California Rules of Professional Conduct Rule 4-200 (setting forth factors in determining the reasonableness of attorneys’ fees); Hartford Cas. Ins. Co. v. J.R. Marketing, L.L.C., 61 Cal.4th 988, 1001 (2015) (insurer’s obligation to finance its insured’s defense is “the duty to pay the reasonable costs of defense.”).
An insured need not simply accept its insurer’s word when it imposes inappropriately low hourly rates on an insured’s independent counsel. Instead, an insured should challenge such rates, when appropriate, either informally or in arbitration.
[1] A “conflict of interest” exists when an insurer reserves its rights to deny coverage on a specific issue and the outcome of that coverage issue can potentially influence the case to favor a “no coverage” outcome.
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