Attorney’s fees: How to get paid in an insurance bad faith lawsuit
As appeared in the Advocate, Journal of Consumer Attorneys Association for Southern California
By John N. Quisenberry and Heather M. McKeon
Twenty years ago the California Supreme Court fashioned a tort remedy for an insured who establishes at trial that the insurer unreasonably withheld his policy benefits. The judicial remedy was to allow the insured to recover part of his attorney’s fees as a measure of tort damages, the tort being the breach of the covenant of good faith and fair dealing implied in the insurance contract. The rationale behind Brandt v. Superior Court (Standard Insurance Co.) (1985) 37 Cal. 3d 813 [210 Cal. Rptr. 211] was that an insured who is forced into court to obtain policy benefits, and prevails on a bad faith cause of action as well, should not see his policy benefits reduced by the amount of the attorney’s fees he was compelled to incur.
Such Brandt fees are still available, but the recent case of Cassim v. Allstate Ins. Co. (2004) 33 Cal. 4th 780 [16 Cal. Rptr. 3d 374] changes the way those fees are calculated.
Furthermore, Brandt fees awarded by the court are not the same as the attorney’s fees agreed to in a retainer agreement. (We will assume that the hourly rates or the contingency fee arrangement is reasonable.) What is the interplay between Brandt fees and the fees agreed to between the insured and his counsel? Are Brandt fees included as “compensable damages” in the evolving due process jurisprudence limiting the amount of punitive damages to some low ratio of punitive damages to compensatory damages? State Farm Mut. Auto. Ins. v. Campbell (2003) 538 U.S. 408 [123 S.Ct. 1513]. If the insured’s counsel is entitled to a percentage of the punitive damages awarded, and the amount of punitives is proportional to compensatory damages, it is obviously important to include any Brandt fees as part of compensatory damages.
This article first addresses how Cassim changes the way Brandt fees are calculated. It then discusses how Brandt fees may be counted as compensatory damages in justifying the amount of punitive damages allowed under Campbell, thereby maximizing the value of counsel’s entitlement to a percentage of the punitive damages awarded.
What exactly did the Brandt court decide?
In Brandt, the court asked the specific question, “[w]hen an insurer tortiously withholds benefits, are attorney’s fees, reasonably incurred to compel payment of the policy benefits, recoverable as an element of the damages resulting from such tortious conduct?” Id. at 815. Answering its own question the court held: (1) If the insured had to incur attorney’s fees to compel the payment of policy benefits; and (2) the attorney’s fees are reasonable, and (3) the insured proves bad faith, which is the unreasonable withholding of policy benefits, then (4) the insured can recover his attorney’s fees.
However, the Brandt court limited recovery to those fees “reasonably incurred to compel payment of the policy benefits.” The insured cannot recover attorney’s fees incurred in proving the tort of bad faith itself. In other words, the insured can only recover those fees attributable to the breach of contract cause of action, not the bad faith cause of action.
Unfortunately, the Brandt decision fails to provide any practical guidance on how to allocate the attorney’s fees between the two causes of action. This uncertainty is compounded when the attorney is retained on a contingency basis and does not keep contemporaneous time records. Without specific instructions to guide them, or their own time records to prove their time, most insureds’ attorneys have argued that they are entitled to their contingent percentage on all amounts recovered. For instance, assume an insured obtains a jury verdict for $100,000 in policy benefits (the breach of contract cause of action), $200,000 in emotional distress damages (the bad faith cause of action) and $2 million in punitive damages. The retainer agreement entitles the insured’s counsel to one-third of all amounts received in settlement or trial. Counsel has not kept a record of his time. Without time records, counsel might claim $100,000 in attorney’s fees (one third of the sum of policy benefits and emotional distress damages), arguing that no reduction should be made because the identical effort was necessary to recover both contract and tort damages. (The argument does not extend to the recovery of punitive damages, even under the most liberal reading of Brandt.)
On the other hand, carriers argue that because the insured’s policy benefits are only $100,000, then the insured’s recovery of attorney’s fees should be limited to $33,000, or one third of $100,000, which would satisfy the Brandt rationale of leaving the insured with the full policy benefits after paying attorney’s fees. These are the exact arguments made by the parties in Cassim v. Allstate Ins. Co. (2004) 33 Cal. 4th 780 [16 Cal.Rptr.3d 374]. In rejecting both arguments, the court announced a more complex formula that resulted, at least on the facts of Cassim, in a fee somewhere in the middle.
Was the Cassim decision a victory for insureds?
The Cassim court specifically held that in a contingency case the recoverable attorney’s fees could exceed the contingent fee percentage of the benefits owing under the contract. Id. at 810. Therefore, the Brandt fees could exceed $33,000 in our hypothetical. In fact, Cassim held that the fees could even exceed the amount of the contract benefits entirely, provided the fees were reasonably incurred in compelling the payment of policy benefits. Id. at 809. Accordingly, it would appear that the decision does favor insureds. Upon further reflection, it may not. It depends on the ability of insured’s counsel to prove a favorable allocation of the total amount of his efforts to prevail on the breach of contract cause of action. Contemporaneous time records are the best way to prove the amount of time actually spent in recovering the contract benefits.
The fee agreement in Cassim was a contingency fee, so the holding and formula are only binding on contingency cases. However, the court’s reasoning could apply to hourly cases as well. For instance, if an attorney billed a total of one hundred hours, the court could still determine a percentage of time spent on contract, such as thirty percent or thirty hours, and multiply that number by an hourly rate. In hourly cases, the time spent presumably is well documented, but the attorney must describe the tasks performed in such a way to make clear an allocation between contract and tort damages.
Although it has long been the practice of insurance bad faith attorneys not to keep time records, Cassim should change that. Without time records, the attorney’s fees will be determined by the Cassim formula discussed infra, which presumes that less time will be spent on the contract cause of action than the bad faith cause of action.
An attorney does not keep time records and is working on a contingency is at the mercy of the guidelines set forth in Cassim. As a starting point, the Court made the following general rules regarding attorney’s fees:
1. “[N]o portion of legal fees attributable to the punitive damage award can be recovered as Brandt fees”; Id. at 812.
2. “[T]he Brandt fees can never exceed the legal fees for the combined tort and contract recovery; in most cases the amount will be far less;” Id.
3. “To determine the percentage of the legal fees attributable to the contract recovery, the trial court should determine the total number of hours an attorney spent on the case and then determine how many hours were spent working exclusively on the contract recovery;” Id.
4. “Hours spent working on issues jointly related to both the tort and contract should be apportioned, with some hours assigned to the contract and some to the tort;” Id.
5. “This latter figure, added to the hours spent on the contract alone, when divided by the total number of hours worked should provide the appropriate percentage.” Id.
Returning to the hypothetical, how much could the insured expect to receive in attorney’s fees applying the formula in Cassim? First, the Court would ignore the $2,000,000 in punitive damages. Second, the Court would add the $100,000 in contract damages and the $200,000 in tort damages together for a total compensatory award of $300,000. Using the attorney’s contingency fee of a third, the Court would limit the attorney’s fees to a maximum of $100,000. In so doing, the Court has concluded that $100,000 is the maximum amount that the insured potentially could recover for fees. It is now the attorney’s job to recover as much of that $100,000 as possible by establishing that a majority of his time was spent on proving the breach of contract, not the tort.
In Cassim, the court’s example found only thirty percent of the fees were incurred for the breach of contract cause of action, thus presuming that thirty percent would be the fall back figure if the insured cannot prove a higher percentage. In other words, the insured would only recover $30,000 in attorney’s fees, which is less than the $33,000 that would have been recoverable under the theory advanced by the defense. Thus, it is imperative that the insured’s attorney document every hour that is attributable to establishing the breach of contract cause of action, so that no fees are lost.
To further explore this, let us assume that an attorney worked one hundred hours on the case. The attorney filed two oppositions, one opposing a demurrer to the breach of contract cause of action (clearly recoverable) and one opposing a motion to strike punitive damages (clearly not recoverable). Without time records, a court could easily allocate ten hours to both oppositions. However, it is possible that the opposition to the demurrer contained a novel legal theory and actually took eighteen hours, while the opposition to the motion to strike was a standard pleading and required only two hours. The only way the attorney could prove this allocation is with detailed, reliable, contemporaneous time records, and of course the pleadings themselves. Therefore, if we assume thirty percent or thirty hours were spent on the contract claim and the attorney can prove that these eight hours should be reallocated to that cause of action, the Brandt fees would be increased by $8,000. Clearly, most insurance bad faith cases require more than one hundred hours of work, so each hour assigned to the contract column will not yield such dramatic results, but the cumulative effect of proving an accurate allocation of time might well be dramatic.
Another issue raised by the Cassim decision is its effect on the ability of business insureds to recover attorney’s fees. Because many insureds, such as businesses or homeowner’s associations, cannot claim emotional distress damages, these entities have only limited ability to collect tort damages. Diamond View Ltd. v. Herz (1986) 180 Cal.App.3d 612 [225 Cal.Rptr. 651]. In rare cases, an insured could recover for damage for fraud or possibly discrimination, but in a typical insurance bad faith case, these insureds are limited to contract damages, attorney’s fees and punitive damages. In our hypothetical, without emotional distress damages, the most the business insured can recover, in addition to policy benefits, is $33,000 in attorney’s fees. Therefore, the Cassim case could have a disproportionately adverse impact on these insureds, making it even more important in these cases that the attorney prove that the majority of his work, if possible, was spent obtaining the contract benefits and not establishing that the insurer had unreasonably withheld those benefits.
Additionally, with the current efforts by tort reformers to limit all contingency fees to twenty percent, the amount recoverable will be severely limited if an attorney cannot prove his work went towards the contract cause of action. Although this proposed law, if enacted, could have substantial ramifications that are well beyond the scope of this article, it is one more reason to be as diligent as possible when recording your time, to ensure that you will be able to maximize your recovery several years from now when your case finally resolves.
Including Brandt fees as compensable damages when punitive damages are at stake.
The importance of maximizing attorney’s fees under Brandt has increased with the recent rulings regarding the amount of punitive damages allowable under the due process clause of the Federal Constitution. The United States Supreme Court in Campbell, supra, essentially held that punitive damages could only rarely exceed a nine to one ratio between punitive damages and compensatory damages, and that a four to one ratio would be the norm for most cases. Campbell, 538 U.S. at 417.
Therefore, the question becomes whether the attorney’s fees awarded in a bad faith case can be included in the compensatory damages figure when determining the appropriate ratio of punitive damages to compensatory damages. If Brandt fees are compensatory damages, then every dollar awarded in attorney’s fees potentially can be worth nine times that in a punitive damage award. Of course, the inverse is not true: A higher punitive damage award cannot increase the amount recovered for attorney’s fees under Brandt or Cassim. Cassim, 33 Cal.4th at 812.
The courts are just now beginning to address this issue both in California and in other states. There is not yet a consensus, or even a trend, as to whether attorney’s fees should be used in the calculation of punitive damages. In fact, the Utah Supreme Court, on remand in Campbell v. State Farm Mt. Auto. Ins. Co. (2004) 98 P.3d 409, did not use the attorney’s fee awarded in that case when determining the appropriate ratio of punitive and compensatory damages. The Utah Supreme Court held that “[t]o consider attorney fees and expenses in awarding punitive damages also invites unnecessary and practical complications.” Id. at 420. The court was particularly concerned that:
“[t]he incorporation of attorney fees and expenses into the compensatory damages award would substantially alter the manner in which trials are conducted in this state. Under our general practice, the issues of whether attorney fees are available to a party and the reasonableness of the requested fees are reserved for determination by the judge after the conclusion of the trial or other proceedings.” Id.
On the other hand, in the Federal Courts of Appeal, the Third Circuit, in Willow Inn v. Public Service Mut. Ins. Co. C.A.3 (Pa.), 2005 - - - F.3d - - -, 2005 WL334200, applying Pennsylvania law, held that the attorney’s fees awarded as bad faith damages could be used in determining the ratio for punitive damages. The court reasoned attorney’s fees should be considered in calculating punitive damages or plaintiffs would have less incentive to pursue insurance companies wrongfully withholding policy benefits. Willow Inn, at *9. Following the reasoning of the Willow Inn court, an insured in California should argue that Brandt's rationale would be undermined, if not defeated, if attorney’s fees are not included in the punitive damage ratio. This was the exact argument accepted by the Pennsylvania Supreme Court in Hollock v. Erie Ins. Exch. (PA Super 2004) 842 A.2d 409 (holding that attorney’s fee should be used in the calculation of punitive damages).
In Textron Fin. Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh (2004) 118 Cal. App. 4th 1061 [13 Cal.Rptr.3d 586], the California Fourth District Court of Appeals limited punitive damages to a four to one ratio of the tort damages only. The court did not include the policy benefits recovered as “compensatory damages” in applying a four to one ratio of punitive damages to compensatory damages. Id. at 1085. Instead, the court departed from the Supreme Court’s analysis in Campbell and turned to California law, specifically Civil Code 3294(a), which allows the recovery of punitive damages “[i]n any action for breach of an obligation not arising from contract, where it is proven...the defendant has been guilty of oppression, fraud or malice...” Id. at 1084. The court then reasoned that since the only cause of action providing a basis for punitive damages was the tort claim, it would not be proper to consider the breach of contract cause of action when reviewing, on constitutional due process grounds, the ratio of punitive damages to compensatory damages. The court held “[t]hus, our consideration of the disparity between plaintiff’s actual harm and the punitive damage award must be limited to its tort relief.” Id.
This reasoning sacrifices common sense to a strained application of a statute, and cannot be based on the Supreme Court’s holding in Campbell, which spoke broadly to compensatory damages. Obviously “compensatory damages” include policy benefits. Using the Textron court’s phrase, plaintiff’s “actual harm” clearly includes the loss of policy benefits.
However, the Textron court does appear to have included attorney’s fees as tort damages in reviewing the amount of punitive damages awarded. Perhaps that is because the Brandt court awarded attorney’s fees as a measure of recovery for the tort of bad faith, satisfying even Textron’s harsh scrutiny of punitive damages. Accordingly, returning to our hypothetical, an award of punitive damages would be limited to four times the $200,000 emotional distress award plus attorney’s fees. For instance, if the jury awards $200,000 in emotional distress damages and $30,000 in Brandt fees, the maximum amount allowed for punitive damages would be 4 times $230,000 or $920,000. But if the insured recovers the full $100,000 in Brandt fees, and $200,000 in emotional distress damages, then the punitive damage award would be $1.2 million (4 times $300,000). In other words, a $70,000 difference in Brandt fees becomes a $280,000 difference in punitive damages. Of course, the difference is even greater at a ratio of nine times the compensatory damages. Moreover, in some cases Brandt fees may be the only tort damages available to business plaintiffs. If Textron is correct in disregarding contract damages when applying a ratio of punitive damages to “tort damages,” then punitive damages will be a multiple only of the Brandt fees.
In sum, documenting attorney’s fees is more important than ever for a meaningful recovery of both attorney’s fees and punitive damages. After Cassim, it is quite clear that it will be up to insureds and their attorneys to prove their recoverable attorney’s fees with proof of the specific number of hours spent on the breach of contract cause of action. Finally, whether attorney’s fees can be used in the calculation of punitive damages will greatly affect the amount of attorney’s fees counsel is entitled to under a retainer agreement or statute. (Under Senate Bill 1122, which was enacted into law on August 16, 2004, as Civil Code section 3294.5, punitive damages are shared between the plaintiff and the State of California, 75 percent and 25 percent, respectively. The law caps attorney’s fees on punitive damages to 25 percent of the total punitive damage award.)
John Quisenberry, a graduate of UCLA School of Law, has represented insureds for over twenty years in numerous lawsuits involving punitive damages and complex coverage issues.
Heather McKeon, a graduate of the Georgetown University Law Center, heads The Quisenberry Law Firm’s insurance bad faith litigation practice group, representing plaintiffs in insurance disputes.
