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By: William J. Fidurko

Zizik, Powers, O'Connell, Spaulding & Lamontagne, P.C.

Westwood, MA

INSURANCE LAW ALERT:

A MASSACHUSETTS JUDGE LIMITS THE FEES RECOVERABLE FOR SUCCESSFULLY ENFORCING AN INSURERS DUTY TO DEFEND TO THE MARKET RATE GENERALLY PAID BY INSURERS RATHER THAN THE HIGHER RATE PAID BY PRIVATE LITIGANTS

Anomalous Decision

In an anomalous decision, the Superior Court of Massachusetts, at Barnstable, ruled that $150 per hour was a reasonable hourly rate for counsel defending an insured under a reservation of rights and successfully establishing the insurers duty to defend the insured. Northern Security Insurance Company, Inc. v. Sandpiper Village Condominium Trust, et al., 2009 Mass. Super. Lexis 162. The case is remarkable because the Court found that the market rate generally paid by insurers, rather than the higher rate paid by private litigants, was reasonable under all the circumstances. Typically, Massachusetts courts recognize that the usual price paid by insurance companies to attorneys is not an appropriate factor for determining the reasonableness of legal fees incurred by an insured when an insurance company issues a reservation of rights and/or the insured successfully litigates a declaratory judgment action to establish the duty to defend. Indeed, in a matter involving the same insurance company, i.e., Northern Security Insurance Company, Inc., decided just three months before this decision, the Superior Court of Massachusetts, at Middlesex, held that $350 per hour was a reasonable attorney fee after an insured hired its own counsel to defend it under a reservation of rights. Northern Security Insurance Company, Inc. v. R.H. Realty Trust, et al., 2009 Mass. Super. LEXIS 32. In that case, Northern Security also argued that $150 an hour was a reasonable rate, but the Court rejected Northern Securitys argument, stating that in Massachusetts an insurer cannot insist on the hourly rate it customarily pays to its own panel of attorneys . . . the insured is entitled to have reasonable fees paid, based on market rather than panel rates. Id.

Case Background

In this case, Northern Security Insurance Company filed a declaratory judgment action to determine whether the policy it issued to Sandpiper Village Condominium provided coverage in an underlying lawsuit. The Court found that Northern Securitys policy did indeed provide coverage to Sandpiper for the underlying lawsuit. Northern Security had originally acknowledged that it had an obligation to defend some of the allegations in the underlying complaint against its insured, but denied that there was coverage or an obligation to defend with regard to some of the remaining allegations. The insured in turn rejected Northern Securitys offer to defend it under a reservation of rights, as it is entitled to do under Massachusetts law.

Under Massachusetts law, where an insurer issues a reservation of rights, an insured has the right to choose its own counsel and the insurer has a duty to reimburse its insured for reasonable attorneys fees incurred by the insureds chosen counsel. When an insurer chooses a reservation of rights, it loses its ability to control the defense but retains, as part of the duty to defend, the obligation to pay the reasonable charges of the insureds counsel, who provided the defense that the insurer was bound to furnish. Magoun v. Liberty Mutual Insurance Co.,, 346 Mass. 677, 685 (1964). Similarly, an insured is entitled to reasonable attorneys fees and expenses incurred in successfully establishing the insurers duty to defend under the policy. Hanover Insurance Company v. Golden, 436 Mass. 584 (2002).

Northern Security agreed that its insured was entitled to select counsel of its own choosing and that Northern Security was obligated under its insurance policy to pay such counsels reasonable attorneys fees and costs incurred in the defense. A dispute arose, however, when Northern Security took the position that the reasonable hourly rate for the services to be rendered by insureds independent counsel in the defense of the action should be $150, and the insureds counsel responded that their rates varied from a rate of $225 per hour for a partner and $170 per hour for the work of an associate, and that these rates were subject to change with or without notice. Over the course of time, counsels rates increased up to a maximum of $310 for a partner and $175 per hour for an associate. The insureds independent counsel not only defended the insured in the underlying action but also defended the insured in connection with Northern Securitys declaratory judgment action in which the insured successfully established that there was coverage for the underlying matter. The parties then disputed how to calculate the reasonable hourly rates of the insureds independent counsel.

In general, what is reasonable is not what an insurance company would pay to the attorneys it would normally retain, but rather what a reasonable person in the insurers position would pay for capable attorneys it chose to retain. An insured is entitled to have reasonable fees paid based on market rather than insurance panel rates. See Watts Water Technologies, Inc. v. Firemans Fund Insurance Co., 2007 Mass. Super. Lexis, 266.

Typically, Insurance Defense Panel Rates Are Not Considered Reasonable

In a previous Superior Court decision rendered by current Supreme Judicial Court Justice, Ralph D. Gantz, the Court declared that the legal standard for determining the reasonableness of legal fees incurred by an insured when the insurance company recognizes its duty to defend under reservation of rights has a variety of factors, one of which is the usual price charged for similar services by other attorneys in the same area and not the usual price paid by insurance companies to other attorneys for similar services in the same area. Watts Water Technologies, Inc. v. Firemans Fund Insurance Co., 2007 Mass. Super. Lexis, 266. As Judge Gantz stated:

Insurance companies, for at least two reasons, may often pay less than "the usual price charged for similar services by other attorneys in the same area." First, since they retain so many attorneys in so many cases, they have the leverage to obtain billing rates lower than the usual rates charged by law firms, since many firms are willing to reduce their rates in return for the hope or promise of obtaining a substantial volume of legal work. An insured retaining its own attorney will not generally possess this "buying power." Second, insurance companies in many cases that are routine to them (albeit perhaps not routine for their insureds) may prefer lower-priced attorneys if they determine that the savings in legal costs will exceed any anticipated increase in the damages they must pay on behalf of their insureds. An insured, who is looking only at its own risk if the insurer that has reserved its rights ultimately refuses to pay damages, may wish to pay more in legal fees to minimize the risk of a substantial damage judgment, especially if that insured is risk averse.

Id.

Distinguishing Factors

Considering prior decisions, this case is unusual because the judge decided that the usual price paid by insurance companies was a reasonable rate. Several factors, however, may explain this anomaly. For instance, there was evidence that insureds counsel had previously charged Northern Security Insurance Company $150 per hour when it represented one of its insureds under a reservation of rights letter in a similar matter. In fact, the firm charged a rate of $150 per hour on two prior similar matters defending a condo association, as it did in this case. Moreover, this same law firm charged the same amount, $150 per hour, to defend an insured under a general liability policy issued by Travelers. Therefore, the evidence suggested that $150 per hour was the rate typically charged by this firm for similar matters. In addition, Northern Security called a similarly experienced litigator from the same area to testify that a reasonable hourly rate for such services is $150 per hour.

General Pointers

It is important to note that the party seeking payment of attorneys fees has the burden of proving that they are reasonable. Furthermore, a judge is free to exercise discretion in determining what constitutes a reasonable fee. Although this particular judge did not make an explicit finding as to what a fair market rate would be, it is apparent that the judge found the evidence of this firms prior fee structure to be demonstrative of a reasonable rate and the Court was unwilling to permit the firm to charge higher rates than it had previously charged in similar matters.

In general, the factors in determining the reasonableness of an attorneys fee in Massachusetts are the nature of the case and the issues presented, the time and labor required, the amount of damages involved, the result obtained, the experience, reputation and ability of the attorney, the usual fee charged for similar services by other attorneys in the same area. Linthicum v. Archambault, 379 Mass. 381, 388-89 (1979). Here, the Court acknowledged that it did not conduct an analysis of each hour charged or review the nature of all of the work performed in order to accomplish each task; rather, the Court simply ordered that the firm be paid at the rate it typically charged other clients, including insurers, for similar work.

This case then is an example of the exception that proves the rule. Insurers cannot simply assume that their panel rates will be construed as reasonable hourly rates for an insureds independent counsels services. Evidence of what independent counsel actually charges in similar matters is critical.

*This Legal Alert is for information purposes only and does not constitute legal advice.

William J. Fidurko is a member at Zizik, Powers, OConnell, Spaulding & Lamontagne. His areas of practice include insurance law and civil litigation. For further information, Mr. Fidurko can be reached at (781) 320-5461 or wfidurko@zizikpowers.com.

Please visit our website athttp://www.zizikpowers.com/or http://www.primerus.com/law-firms/zizik-powers-o-connell-spaulding-lamontagne-pc-westwood-massachusetts-ma.htm.