Other People's Money, Cumis Counsel and the Tripartite Relationship

We have talked before on this blog about the tripartite relationship among insurers, the defense counsel they appoint, and the insured; this is a topic of wide interest to all sides in the insurer/insured relationship, and, in fact, my handy dandy two minute guide to the relationship’s issues is among my most read pages. However, there is a twist in the normal relationship reflected in that guide when, rather than the typical situation where the insurer is appointing defense counsel to represent the insured, the insured is a fortune 100 or so company with its own preferred counsel and wants the insurer to simply pay for that counsel, and not to appoint its own selected counsel to defend the insured against a covered lawsuit. In that scenario, the relationship becomes a little off balance, and not really the sort of equal, three sided triangle that one usually envisions when referring to the tripartite relationship. In that scenario, rather, the defense counsel is much more the handmaiden of its usual client, the insured, than it is controlled by or answerable to the insurer, and the insurer is placed in the awkward position of being expected to primarily simply pay the bills for the insured’s defense. You often run into the old “other people’s money” problem when that happens, where the insured and the defense counsel have no real economic incentive to control costs, because the costs of the case are being paid by a third party, the insurer, to whom neither is really answerable; after all, the insured is still going to continue to use its favored outside counsel in the future, regardless of whether the insurer, who paid the bills in that case, was or was not happy about the defense lawyers’ billing practices, effectiveness or cost efficiency in that case. Various states, to varying degrees, have rules - whether statutory or judge made - in place that try to control for that dynamic, most famously California, which by statute obligates the insurer to only pay counsel in that situation the same rates it normally pays to counsel the insurer itself retains to defend cases of that type. What happens when the insured and its outside counsel don’t want to live by those rates, however, is the subject of this story right here.