1. final
October 28-29, 2013
LA Downtown Hotel, Los Angeles

2. The Mechanics of Buss and Blue Ridge Actions

3. Larry Beemer, CLMP
QBE North America
larry.beemer@us.qbe.com
Mary Craig Calkins
Kilpatrick Townsend & Stockton LLP
mcalkins@kilpatricktownsend.com
Mari Henry Leigh, CLMP
Meckler Bulger Tilson Marick & Pearson LLP
mari.henry.leigh@mbtlaw.com

4. 
Buss v. Superior Court, 6 Cal. 4th 35 (Cal. 1997)
◦ An insurer must defend its policyholder against claims ―that are
merely potentially covered, in light of facts alleged or otherwise
disclosed.‖ Buss, at 46 (emphasis added).
◦ An insurer may only obtain reimbursement for those ―[d]efense
costs that can be allocated solely to the claims that are not even
potentially covered.‖ Buss, at 57.
◦ An insurer ―must carry the burden of proof as to these costs by a
preponderance of the evidence. And to do that . . . it must
accomplish a task that, ‗if ever feasible,‘ may be ‗extremely
difficult.‘ Hence, the insurer will probably pursue the matter only
in apparently exceptional cases—for example, where the defense
costs the insurer may obtain in reimbursement are clear and
substantial and where the assets the insured has available for
reimbursement are themselves of the same sort.‖ Buss, at 57
(citations omitted).

5. 
Blue Ridge Ins. Co. v. Jacobsen, 25 Cal. 4th 489, 505
(Cal. 2001)
◦ An insurance company may seek reimbursement for a settlement
paid on behalf of an insured even in the absence of the insured‘s
express agreement. Blue Ridge, at 502.

6. Other case law supporting allocation:

Johansen v. California State Auto. Assoc., 15 Cal. 3d 9 (Cal. 1975)
◦ Insurer can obtain reimbursement of amounts paid to settle on behalf of
policyholder, because duty to indemnity is narrower than duty to defend
and only exists where there is actual coverage).

State Farm Gen. Ins. v. Mintarsih, 175 Cal. App. 4th 274 (Cal. Ct. App. 2009)
◦ ―The contractual duty to defend extends only to those claims for which
there is at least potential coverage under the policy, as we have stated. An
insurer has no contractual duty to defend the insured as to claims that are
not even potentially covered.‖ Mintarsih, at 286 (citing Buss).

Scottsdale Ins. Co. v. MV Transportation, 26 Cal. 4th 643 (Cal. 2005)
◦ ―[A]n insurer, having properly reserved its rights, may advance sums to
defend its insured against a third-party lawsuit, and may thereafter recoup
such costs from the insured if it is determined, as a matter of law, that no
duty to defend...‖ Scottsdale, at 662 (discussing Buss).

7. Case law rejecting recoupment absent an express
agreement:

General Agents Ins. Co. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill.
2005).
◦ ―As a matter of public policy, we cannot condone an arrangement
where an insurer can unilaterally modify its contract, through a
reservation of rights, to allow for reimbursement of defense costs
in the event a court later finds that the insurer owes no duty to
defend.‖ General Agents, at 1102.

Shoshone First Bank v. Pacific Employers Ins. Co, 2 P.3d 510 (Wyo. 2000).
◦ ―Recognizing that in other jurisdictions allocation is allowed
between the insurer and the insured, we eschew this theory, and
hold that unless an agreement to the contrary is found in the
policy, the insurer is liable for all of the costs of defending the
action.‖ Shoshone, at 514.

8. Buss =Defense---------BlueRidge = Indemnity
The ―How To‖ Issues:

Preservation of rights
◦ Initial Reservation of Rights Letters should be completed as soon as possible (generally
within 60 days of receiving the claim or suit). Certain cases due to their nature may
take more time.
◦ The Reservation or Rights or Partial disclaimer of coverage should detail as many facts
as possible.
◦ A thorough investigation to obtain the relevant facts is essential. ―FACTS ARE
STUBBORN THINGS‖ John Adams
◦ The Reservation letter must be specific to the causes of action in the lawsuit and
relating the facts and coverage to them. Simply reserving to the entire policy will not
work.

Identification of covered vs. uncovered claims
◦ Initially the identification of covered vs. uncovered claims may be difficult. As more
facts are developed, the Reservation or Partial Disclaimer should be updated.

9. Buss =Defense---------BlueRidge = Indemnity
The ―How To‖ (continued):



Create a paper trail advising the insured constantly of the coverage
issues and the right to reimbursement.
Early in the case try to work out an allocation with the insured. The
insured and carrier need to consider the overall economic outcome by
working out an early allocation.
In a Buss situation if the matter cannot be resolved early, the carrier
should consider the retention of counsel who is an expert in legal bill
review.

10. How a Legal Fee Expert Can Assist the Parties by Providing Helpful
Data on Defense Costs

Defense Costs Allocation Methodologies
◦ ―Excess of Costs‖ – Carrier is required to show ―but for‖ the uncovered claims the
defense costs would not have been as large; carrier allowed to recoup the ―excess‖
over costs to defend covered claims. Buss, 16 Cal 4th 35 (1997).
◦ ―Fair Share‖ or Equitable Allocation

―The lack of scientific certainty [in allocation] does not justify imposing all of the costs
on the insurer by default. The legal system frequently resolves issues involving
considerable uncertainty. We presume that the insurer and insured can negotiate a
satisfactory settlement that fairly apportions the defense costs. When they are unable to
agree, we likewise presume that our courts will be able to analyze the allegations in the
complaint in light of the coverage of the policy to arrive at a fair division of costs.‖ SL
Industries, Inc. v. American Motorists Ins. Co. , 128 N.J. 188 (1992).

11. How a Legal Fee Expert Can Assist the Parties By Providing
Helpful Data on Defense Costs
Fees
Research,
$12,296
Settlement,
$2,604
Strategy/Status,
$29,514
Trial, $2,291
Appeal, $3,091
Pre-Litigation,
$1,015
Discovery,
$184,226
Pleadings,
$18,958
General Counsel,
$88,775
Motions, $331,693
Vague *, $8,180
Management,
$28,226
Non-Defense/Ins.,
$27,380
Investigation,
$21,136

12. How a Legal Fee Expert Can Assist the Parties by Providing
Helpful Data on Defense Costs
All Motions Activity
Motion for Summary Judgment on
Intentional Conduct
475
120
Motion to Bifurcate Fraud Claims
72
Motion to Dismiss Fraud Claims
0
100
200
300
400
500

13. How a Legal Fee Expert Can Assist the Parties by Providing
Helpful Data on Defense Costs:
Clearly
Covered
Clearly
Uncovered
Mixed
Vague

14. How a Legal Fee Expert Can Assist the Parties with Cumis Rates
Average Actual Rates Charged vs.
Average Rates Typically Paid by Carriers
$458
$351
Senior Partner
$210
Average Rates Paid by
Carrier
$405
Junior Partner
$315
$190
$345
Average IP Rates
Published by Survey
$272
Senior Associate
$158
$235
Associate
Average Rates Charged
by Counsel
$197
$143
$155
Paraprofessional
$0
$129
$70
$100
$200
$300
$400
$500

15. 
In Blue Ridge the carrier should consider a
consistent approach to handle the matter properly
◦ Evaluate the suit for settlement. When defending the insured, can
the company achieve a reasonable settlement?
◦ Analyze the reasonable value of the case for settlement while not
considering coverage. To be reasonable, the tenents of the
proposed settlement should be more favorable to the insured than
the likely judgment if the case goes to trial. Remember Johansen
◦ Make a reasonable settlement offer. If the carrier wants to seek
reimbursement of uncovered damages the company can settle but
must give the insured timely notice of its intent to resolve the
claim and seek reimbursement.

16. 



Advise the insured in writing of your intent to accept the
settlement offer.
Again, in writing, reserve your right to seek reimbursement
for non-covered claims pursuant to Blue Ridge.
If the insured does not agree to the settlement notify the
insured of the option for it to assume its own defense.
Once the case is resolved, again, write the insured seeking
reimbursement. Consider mediation, or some form of ADR or
limited litigation proceeding.

17. 
Burden of proof: The burden is the ―preponderance of the
evidence‖ standard and the insurer bears the burden
◦ Insureds may argue the carrier must show that costs were
―not reasonably related‖ and/no greater than otherwise
would have been incurred in the defense via the Larger
Settlement Rule:
 Safeway Stores v. National Union Fire Ins. Co., 64 F.3d 1282, 1289 (9th
Cir. 1995) (―Safeway‘s defense costs are reasonably related to
the defense of its officers and directors in the class-action
suits and are therefore fully covered by the D&O policy.‖);
 Raychem Corp. v. Federal Ins. Co., 853 F. Supp. 1170, 1182 (N.D. Cal.
1994) (allocation refused where all defense costs were
―reasonably related‖ to the defense of a covered claim).

18. Insureds will raise same arguments on burden of proof for recovery of
settlements:

Caterpillar, Inc. v. Great Am. Ins. Co., 62 F.3d 955, 964 (7th Cir.1995) (―insurer
may attempt to allocate settlement, but only to "the extent which the
settlement was larger because of claims against uninsured persons . . . . " ).
See, also, Nordstrom, Inc. v. Chubb & Son, 54 F.3d 1424, 1432 (9th Cir. 1995).
Insurers will argue that insureds should bear the burden of proof to
allocate between covered and nonconvered claims where insured
controlled the defense because the insured typically would have better
access to information.

Federal Ins. Co. v. Hawaiian Electric Indus. , No. 94-00125, 1996 U.S.

Clackamas County v. Midwest Employers Cas. Co. , No. CV 07-782-PK, 2009
Dist., LEXIS 22804 (D. Haw. Oct. 27, 1996).
U.S. Dist., LEXIS 118195 (D. Or. Oct. 8, 2009).

19. A Frequently Asked Question:

Cumis counsel issues and controlling the defense
◦ ―[W]here there are divergent interests of the insured and the
insurer brought about by the insurer's reservation of rights
based on possible noncoverage under the insurance
policy, the insurer must pay the reasonable cost for hiring
independent counsel by the insured.‖ San Diego Navy Federal
Credit Union v. Cumis Ins. Soc., 162 Cal. App. 3d 358, 375 (1984).

20. Other Frequently Asked Questions:


Does a reservation of recoupment rights implicate bad faith
issues?
When can you bring a recoupment action?
◦ See Montrose Chemical Corp. v Superior Court, 6 Cal. 4th 287, 24 Cal.
Rptr. 2d 467, 861 P.2d 1153 (1993).
―(A stay of the declaratory relief action pending resolution of
the third party suit is appropriate when the coverage question
turns on facts to be litigated in the underlying action.)‖

Who and what cases are most susceptible to recoupment?

21. 


Is the ―juice worth the squeeze,‖ i.e., does the amount in
controversy exceed transactional costs of litigation and
reallocation of non-economic resources?
Is the insured solvent and capable of repayment?
Is there an alternate means of resolving the recoupment
issues?

23. 
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Larry Beemer
VP, Claims Management Litigation &Specialty Claims
QBE North America/Irvine, CA
(949) 222-7482
larry.beemer@us.qbe.com
Mary Craig Calkins
Partner, Kilpatrick Townsend & Stockton LLP/Los Angeles
(310) 777-3720
mcalkins@kilpatricktownsend.com
Mari Henry Leigh
Partner, Meckler Bulger Tilson Marick & Pearson LLP/Chicago
(312) 474-7133
mari.henry.leigh@mbtlaw.com