The Western District of Washington recently ruled that, absent a contrary term in the insurance policy, an insurer does not have the sole power to set the rates it will pay for defending its insured in a lawsuit.  The case, National Union Fire Ins. Co. of Pittsburgh, PA v. Coinstar, Inc., et al., arose after the insured, Redbox, was named as a defendant in several underlying lawsuits.  National Union agreed to pay for RedBox’s costs of defense in the underlying suits subject to a reservation of rights, including “the right to limit payment to only those attorney fees that comport with [National Union’s] defense billing guidelines.”  National Union did not, however, retain counsel for Redbox; instead, it agreed to the continued retention of the lawyers Redbox had previously hired.

A declaratory judgment action was then instituted to determine National Union’s defense obligations.  After determining that National Union had no duty to defend, the Western District followed the Immunex decision in holding that National Union was nonetheless responsible for reimbursing Redbox for all reasonable defense costs incurred up until the time the Court ruled that no duty to defend existed.  National Union then argued that it was not responsible for reimbursing Redbox’s defense counsel at their standard rates, but instead at rates that National Union deemed reasonable (topping out at $240/hour for a senior partner).

Judge Coughenour disagreed with National Union, writing: “barring a contract term to the contrary, National Union does not have unbounded discretion to unilaterally limit the rates it will pay.  […] And while National Union did say that the rates it would pay were limited by the terms and conditions of the insurance policies, no attorney fee rates were set out in the policies.  […]  In the absence of a policy provision limit on the rates National Union agreed to pay, it is responsible for the reasonable rates incurred by its insured.”  Judge Coughenour then concluded that determining whether or not the rates sought by Redbox and by National Union were “reasonable” was not appropriate for summary judgment resolution.

Policyholders would do well to keep this decision in mind when involved in disputes with their insurers over the rates payable to their defense counsel.