Behnke v. State Farm General Insurance Company, – publication ordered June 29, 2011, Fourth District (San Diego) provides a good example of a seemingly Cumis Counsel situation. In a nutshell, California law provides that sometimes an insured (policyholder) can select his or her own defense attorney when he or she is being sued and the claims are potentially covered on their insurance policy. Specifically, Cumis counsel may be required “where an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.” Civil Code §2860(b). “Thus, the insurer must provide independent counsel for the insured when resolution of some issue in the lawsuit between the third party and the insured will bear directly on the outcome of the coverage dispute between insurer and insured. In such cases, the ‘insurer may be subject to substantial temptation to shape its defense so as to place the risk of loss entirely on the insured.’” Cal. Prac. Guide Ins. Lit. Ch. 7B-K (citing San Diego Navy Fed. Credit Union v. Cumis Ins. Society, Inc. (1984) 162 CA3d 358, 364).

Ever since the Cumis case in 1985 and the statute following was enacted in 1987, some attorneys have tried to use their client’s Cumis rights as a billing gravy train at the insurer’s expense.

Behnke arose for a mold case. Specifically, a condominium purchaser sued the seller, Michael C. Behnke, was being sued for allegedly not disclosing mold conditions in a condominium he sold her. She specifically alleged that Behnke concealed the mold by painting over it before he sold her the property.

Behnke notified his homeowner insurer of the lawsuit and retained a law firm as his defense counsel. The attorney’s billing rates were $295 and $220 per hour. The insurer agreed to provide him a defense subject to a reservation of rights, and to the law firm that Behnke had retained $160 per hour to defend him.

To try to make a long story short, the insurer eventually settled the mold lawsuit for $50,000. At that time, the law firm had billed had billed the insurer a total of about $199,000 in fees and costs. The insurer paid $140,000 to the law firm but refused to pay the remaining $59,000 on the grounds that those fees were unreasonable. Meanwhile, Behnke signed a promissory note in the amount of $127,000 in favor of the law firm, secured by a deed of trust on his home.

The insurer sought to resolve the billing dispute by binding arbitration. The Cumis statute provides for binding arbitration to resolve such attorney’s fees disputes.

The arbitrator reduced the disputed $59,000 attorney fees claim by $16,000 to $43,000, which the arbitrator awarded to the law firm, with interest. “The arbitrator found that some of the time … spent on the matter was ‘excessive in the sense that the benefit to the case was outweighed by the cost charged for that work.’” Nonetheless, the law firm foreclosed on the $127,000 deed of trust.

Behnke (the law firm) sued State Farm for fraud, breach of contract, and insurance bad faith. Guess how the trial court and the court of appeal ruled?

I wonder if Behnke is now trying to void the promissory note and undue the foreclosure by the law firm.