In 1985, in the case of Brandt v. Superior Court, the California Supreme Court held that an insured who successfully sues his or her insurer for damages for “bad faith” may recover, as an element of damages, at least a portion of the attorneys’ fees the insured incurred in the case. Specifically, the Brandt decision holds:
When an insurer’s tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney’s fees are an economic loss -- damages -- proximately caused by the tort. These fees must be distinguished from recovery of attorney’s fees qua attorney’s fees, such as those attributable to the bringing of the bad faith action itself. What we consider here is attorney’s fees that are recoverable as damages resulting from a tort in the same way that medical fees would be part of the damages in a personal injury action.
Only the fees relating to recovery of the unpaid benefits can be recovered as damages; additional fees relating to the “bad faith” claim itself, or to pursuing punitive damages, are not to be awarded.
Now, a closely divided (4-3) California Supreme Court has held that an insured who recovered unpaid insurance benefits of approximately $40,000 may be entitled to recover attorney’s fees of $400,000 or more as an element of damages in a related “bad faith” case.
The Cassim family suffered a loss by fire that compelled them to move out of their house. Their insurer, Allstate, initially paid living expenses, but stopped doing so early on when the company began to suspect that the Cassims may have been responsible themselves for the fire. This and other suspicions that the claim was being unduly inflated caused Allstate to delay payment under the policy, and eventually to reject the claim altogether. The Cassims ultimately lost their house to foreclosure. They retained counsel and brought suit to recover the unpaid benefits under their policy and to recover damages for the insurer’s breach of its obligations of good faith and fair dealing.
At trial, the jury found in the Cassims favor, awarding compensatory damages of $3,594.600 and punitive damages of $5 Million. The amount that the insurer should have paid (which was included in the compensatory damages) was found to be $40,856.40. The Cassims’ attorney had handled the case under a contingent fee agreement entitling him to 40% of the total recovery. Allstate argued that the recoverable attorney fee damages under Brandt should thus be $16,342.56: 40% of the policy benefits portion of the overall damages. The trial court disagreed, and awarded Brandt fees of $1,193,533.
The Supreme Court suggests that the amount awarded for fees may be too high, but that the proper amount will likely be much more than the “40% of recovered benefits” urged by Allstate. The court approves a method for determining an appropriate Brandt award:
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. 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. 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.
An example of this calculation, with numbers similar to the instant case, illustrates the point. Suppose the compensatory damages are $3,594,000. Suppose further that the attorney and the client have a 40 percent contingent fee agreement. The total legal fee for the compensatory award is thus 40 percent of $3,594,000, or $1,437,600. Now suppose counsel spent 1,500 hours on the case, and can prove this breakdown: 200 hours on issues related solely to the contract, 500 hours on issues relevant to both the contract and the tort, and 800 hours on issues related solely to the tort. The trial court could reasonably conclude that half the hours spent on the joint contract/tort issues are fairly attributable to the contract (i.e., half of 500 hours, or 250 hours), and thus 30 percent of the hours worked (200 hours plus 250 hours, divided by 1,500 total hours) is attributable to the contract recovery. Thirty percent of the total legal fee (30 percent times $1,437,600) is $431,280. This is the amount a trial court should award as Brandt fees in this hypothetical situation.
The three dissenting justices are not persuaded that the majority’s approach makes either legal or practical sense. Summarizing the dissenters’ doubts, Justice Baxter writes:
Brandt entitles the plaintiff insured to full recovery of policy benefits, undiminished by the attorney’s fees incurred to recover those benefits. In this case, where the attorney was retained under a contingent fee agreement of 40 percent, the correct award is 40 percent of the recovery under the policy. The method proposed by the majority is not only inconsistent with Brandt but will also burden the system with bitterly contested litigation over which contract issues are intertwined with the tort claims and how legal work on such issues should be apportioned. Because this method is predictably unwise and unworkable, I respectfully dissent.
The opinions in Cassim v. Allstate Insurance Company (July 29, 2004), Case No. S109711, can be read at these links in PDF and Word formats.
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