Since 2004, when the California Supreme Court ruled that a “portion” of contingency attorney’s fees are recoverable in bad-faith insurance cases, plaintiffs and their lawyers have been able to recover attorney’s fees based in part on the specific terms of the contingency-fee retainer agreement. For starters, in order to recover attorney’s fees in these actions, a policyholder must prove that (1) contractual benefits were withheld in bad faith, and (2) reasonable fees were incurred by the policyholder to recover those benefits. However, any attorney’s fees incurred merely to prove the alleged “bad faith” claims are not recoverable at all; only fees incurred to prove actual coverage are recoverable. Cassim v. Allstate Insurance, 33 Cal.4th 780, 811 (2004).
In Cassim, plaintiffs Fareed and Rashida Cassim purchased a home in Palmdale in 1989 and insured the property against loss with Allstate Insurance. In December 1990, a fire (later determined to be arson) caused damage to the home. Although the fire burned only in the master bedroom and kitchen, the extensive heat, smoke and water damage to the rest of the structure rendered the entire home uninhabitable. After plaintiffs proved “bad faith” on the part of Allstate Insurance, a jury awarded plaintiffs a combined $3,594,600 in compensatory damages and $5 million in punitive damages. The plaintiffs’ attorney had a 40%-contingency-fee agreement.
The Cassim court held that a proper calculation of attorney’s fees requires the trier of fact to determine the percentage of fees attributable to securing just the contract recovery. This formula is based on the percentage of the attorney’s overall efforts devoted to the contractual recovery portion of the case and is divided into three categories: contract claim only, bad-faith claim only, and both claims. The Supreme Court remanded the case to the trial judge to make the calculation.
Using hypothetical numbers, and assuming a total compensatory award of $1 million, the 40% contingency fee would be $400,000. If the policyholder’s lawyer spent 1,500 total hours on the case and can prove the breakdown as follows: 200 hours on the contract claim only, 800 hours on the bad-faith claim only and 500 hours on both claims, then the trier of fact could, reasonably, conclude that one-half of the hours spent on the joint “contract and bad faith” issues are fairly attributable to the contract; i.e., half of 500 hours, or 250 hours, plus the 200 hours from the contract claim only, would total 30%. That 30% of the total attorney’s fee ($400,000) would be recoverable as well: $120,000 extra paid to the plaintiffs.
However, the Cassim court also cautioned judges to disregard fee agreements designed solely to manipulate the calculation of recoverable costs to the policyholder’s benefit, as have been shown to exist in some cases in the intervening years. For instance, the case of Pulte Home Corporation v. American Safety Indemnity, 14 Cal.App.5th 1086 (2017) disallowed a last-minute modification of a fee agreement from contingency to hourly, as an improper attempt to inflate the attorney’s fee (and punitive damage) award. This case involved the development of two residential housing projects that were built beginning in 2003 and sold between 2005-2006. The various subcontractors were required to name the developer as an “additional insured” on their policies, some of which were issued by American Safety. In 2013, several homeowners sued Pulte for alleged defects in the work performed by the subcontractors who were insured by American Safety. American Safety denied coverage and refused to provide a defense to Pulte because the construction had taken place 10 years prior.
Pulte sued American Safety, and prevailed on the “bad faith” claims, but American Safety then appealed the trial court’s award of attorney’s fees and punitive damages as violating the dictates set forth in the Cassim case, specifically improperly attempting to inflate the attorney’s fee (and punitive damage) award. Pulte’s lawyer in the bad-faith case originally had entered into a contingency-fee agreement with Pulte, which would have resulted in a fee award of only $371,000 under the Cassim formula, set forth above.
After the trial on bad faith, but before the punitive damage phase, Pulte “modified” the fee agreement to be based on an hourly rate instead and, thereafter, claimed an additional $274,000 in attorney’s fees actually incurred and paid, for a total of $645,000. The trial court disagreed with American Safety’s assertion that the change in the fee agreement was to manipulate the process. After making deductions for fees unrelated to pursuing amounts due under the insurance contract, the trial court awarded Pulte $471,313.52 in attorney’s fees. Based on the one-to-one ratio with attorney’s fees, the trial court also awarded $500,000 in punitive damages.
The Court of Appeal reversed, stating, “We have serious concerns that this change in Pulte’s fee agreement was apparently ‘designed to manipulate the calculation of Brandt fees’ to the plaintiff’s benefit.” Id. at 1132. The court also rejected Pulte’s argument that, because Pulte had actually incurred and paid the hourly fee, that amount must be considered as the proper amount for the attorney-fee award. The court concluded that the judge should have based the attorney-fee award on the agreement in force during the trial and, therefore, remanded the case to recalculate the proper amount of attorney’s fees (and to adjust the punitive damage award, since because it was based on the improper attorney-fee award). Id. at 1133.
The good news for plaintiffs’ attorneys is that any “bad faith” case can be prosecuted under a contingency-fee agreement, based on the Cassim case, and an award of attorney’s fees based on that fee agreement may be possible. California courts continue to define the outlying boundaries for recovering contingency attorney’s fees, but at least there is no question that “reasonable” fees (attributable to proving actual coverage) are recoverable.