BAM! Fifth Circuit Disses Billing Guidelines?

April 5, 2017
Dear Colleague,

We thought about taking another fifteen month sabbatical, but we made New Year’s resolutions, not to mention some misguided promises in our last blog post about writing more often, then the Fifth Circuit issued Charla Aldous; Charla G. Aldous, P.C., doing business as Aldous Law Firm v. Darwin National Assurance Company, 16-10537, 2017 WL 1032616 (5th Cir. Mar. 16, 2017), so “Here [we] go again . . .” (cue the Whitesnake song).

The Fifth Circuit held that Darwin National arbitrarily cut the defense costs owed to defense counsel and rejected Darwin’s invocation of its Billing Guidelines as a rational justification for cutting defense costs. The Billing Guidelines were not in the policy, and as such, they were unenforceable against either the insured or the insured’s independent counsel. At first, the holding seems monumental in its potential scope, but it’s probably a hothouse flower considering the facts of the case.

A. Factual and Procedural Background

Lisa Blue, Charla Aldous, and Steve Malouf represented Albert Hill III (“Hill”) in litigation over a couple of trusts. At some point, Blue, Aldous, and Malouf became known as “BAM” (we aren’t sure whether they gave themselves that name). BAM represented Hill on a contingency basis. One can imagine the celebration after they won a $114,745,870 judgment in Hill’s favor. Alas, the celebration was short-lived as Hill did not want to pay his lawyers.

That triggered a second lawsuit. BAM sued Hill, and Hill counterclaimed triggering Aldous’ professional liability policy. BAM had already hired Alan Loewinsohn to represent them in their affirmative claims, so BAM requested that their insurers allow Loewinsohn to handle the defense as well. “The insurers relented.” Each carrier agreed to pay one-third of the covered costs of defense. BAM won in excess of $20 million fee plus attorneys’ fees and costs of $2,586,560.11.

What’s better than two lawsuits? Three lawsuits. In round three, Aldous and Darwin sparred over the amount Darwin owed in defense costs. The Fifth Circuit framed the lawsuit as follows:

As relevant here, Aldous alleged breach of contract, breach of the duty of good faith and fair dealing, violations of the Texas Insurance Code, and violations of the Texas Deceptive Trade Practices Act. She also sought a declaratory judgment that Darwin is liable for the costs associated with the prosecution of her affirmative claims against Hill to the extent those affirmative claims were inextricably intertwined with her defense. Darwin counterclaimed, alleging (among other things) breach of contract, unjust enrichment, and money had and received.

The district court granted a partial Rule 12(b)(6) motion against Aldous, then on cross-motions for summary judgment, ruled Aldous was judicially estopped from claiming that the costs of defending against Hill’s counterclaims exceeded $668,068.38. That limited Aldous’ one-third share to $222,689.44 which exceeded the $502,364.59 Darwin already paid Aldous for defense costs (math quiz: that would mean Aldous owed Darwin $279,675.15). The district court ruled that Darwin could recover the overpayment through an equitable action for money had and received. The district court also held that Aldous’ breach of contract claim for defense costs failed, that Aldous was not entitled to costs of prosecuting its affirmative claims, and that Darwin’s breach of contract claims were dismissed because the anti-subrogation rule applied.

B. The Fifth Circuit

1. Billing Guidelines?

The district court granted summary judgment against Aldous’ breach of contract claim, relying on the policy provision giving Darwin discretion to determine reasonable claim expenses. The policy contains a promise that Darwin will pay “all” covered “Claims Expenses.” Only “reasonable” claims expenses qualify, however, and “[t]he determination by the insurer as to the reasonableness of Claim Expenses shall be conclusive on all Insureds.” According to the district court, Darwin merely exercised its right to determine reasonableness:

Darwin’s stated reasons for making the deductions demonstrate that it did not arbitrarily make these deductions but rather made a determination as to the reasonableness of the Claim Expenses, as permitted by the Policy, according to reasonable considerations, such as its Billing Guidelines and the fact that it did not have a duty to pay for attorney’s fees associated with BAM’s affirmative claims.

Aldous argued, and the Fifth Circuit agreed, that the ruling and Darwin’s arguments would render the policy illusory because Darwin would have an “unquestionable right to pay only to the extent it pleases.” According to the Fifth Circuit, “Darwin’s right to make a binding determination regarding the reasonableness of Aldous’ claims would be implicated only if Darwin actually made a reasonableness determination.”

Darwin attempted to convince the Fifth Circuit that it determined the reasonableness of the defense costs, pointing to its Billing Guidelines as evidence of its reasonableness determination, and it noted that Loewinsohn knew of the Billing Guidelines. The Fifth Circuit was unimpressed, stating: “The ‘Billing Guidelines’ are not part of the Policy, and Darwin informed Aldous of its intent to utilize them only in a reservation-of-rights letter.” The Fifth Circuit looked to Texas Association of Counties County Government Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d 128, 131 (Tex. 2000), in which the Supreme Court of Texas held that “a unilateral reservation-of-rights letter cannot create rights not contained in the insurance policy”, and reached the conclusion that the “same is true of Billing Guidelines themselves.” In short, the Billing Guidelines were not in the policy and Aldous never agreed to them. The Fifth Circuit also noted that in cases in which the insurer selects and retains counsel, the Billing Guidelines may apply—at least as between the insurer and the defense counsel, the implication being that because Loewinsohn was not selected and retained by Darwin, he was not bound by them.

The Fifth Circuit rejected Darwin’s additional arguments that it made a reasonableness determination. Far from reasonable, Darwin’s reductions were arbitrary. In fact, they were even against the Darwin adjuster’s reasoned judgment. Darwin took some deductions “off the top” and cut the bills by 50% on the assumption that half of the claimed costs and expenses were for the prosecution of Aldous’ affirmative claim, despite the attorneys’ invoices already having been adjusted to remove fees and costs related solely to the affirmative claims. There simply was no rhyme or reason to Darwin’s “reasonableness determination.” Ultimately, the Fifth Circuit stated that it would not “opine on the general enforceability of the Policy provision at issue” because “it simply not implicated on these facts, where there is no evidence that Darwin made any genuine determination as to the reasonableness of claimed fees and instead slashed the claimed defense costs arbitrarily.”

2. Ancillary rulings.

The Fifth Circuit overturned the district court’s application of judicial estoppel. In a strongly worded analysis, the court found the district court had abused its discretion by finding that Aldous had argued in the first case that her attorneys’ fees and costs were $668,068.31, something she had never done. The judicial estoppel analysis set off the remaining analysis.

Aldous argued that Darwin was required to pay not only her defense costs but also her attorneys’ fees and costs associated with her affirmative claim because prosecution work was “inextricably intertwined” with defense work. The argument is really apples to oranges, borrowing from those cases in which a prevailing plaintiff seeks attorney’s fees under a fee shifting statute and is unable to segregate between its defense and prosecution costs rather than resting on firm coverage analysis. The policy only obligates the carrier to defend, and the “duty to defend the entire suit does not give rise to a duty to prosecute claims helpful to or even inextricably intertwined with that defense.” (emphasis in original). As such, the Fifth Circuit rejected Aldous’ argument and held that the measure of the defense costs remains a question of fact.

Aldous also argued that Darwin breached the common law duty of good faith and fair dealing. The Fifth Circuit first set out the well-established law that there is no such duty in the context of third-party claims against the insured, recognizing that Aldous’ claims were valid if they could be classified as a first-party claim. Although a claim for defense costs is a first-party claim for purposes of Texas’ prompt payment statute, as was the case in Lamar Homes, Inc. v. Mid-Continent Casualty Company, 242 S.W.3d 1 (Tex. 2007), it is not a first-party claim under common law such that a carrier owes a duty of good faith and fear dealing or breaches those duties by failing to pay defense costs. Likewise, the Fifth Circuit held that Aldous’ claims based on the Texas Insurance Code and Deceptive Trade Practices Act are barred as a matter of law because, under established precedent, there can be no recovery for extra-contractual damages for mishandling a claim unless the complained of conduct caused injury independent of those that would have resulted from a wrongful denial of policy benefits. In other words, in this context, no extra-contractual relief absent a showing of independent injury.

The Fifth Circuit then turned to Darwin’s two claims—(1) money had and received/equitable reimbursement and (2) breach of contract—against Aldous. With regard to the first claim, at least since the Supreme Court of Texas’ ruling in Matagorda County, Texas law has not recognized an insurer’s right to equitable reimbursement for an overpayment, even if the insurer defends under a reservation of rights, and has not recognized an implied-in-fact or implied-in-law right of reimbursement since Excess Underwriters at Lloyd’s, London v. Frank’s Casing Crew & Rental Tools, Inc., 246 S.W.3d 42, 45 (Tex. 2008). In Miga v. Jensen, 299 S.W.3d 98, 103 (Tex. 2009), the Supreme Court of Texas rejected the argument that Frank’s Casing should be applied to prohibit the “restitution-after-reversal rule” as nothing more than an equitable right to reimbursement. The Supreme Court easily rejected the argument distinguishing restitution after a reversal of judgment from the policy concerns associated with permitting insurers’ extra-contractual restitution claims, “against the backdrop of a highly regulated industry.” In light of Matagorda County, Frank’s Casing, Miga, and its constrained role in a diversity case, the Fifth Circuit easily held that summary judgment should have been granted in favor of Aldous with respect to Darwin’s money had and received/equitable reimbursement claim.

Darwin’s breach of contract claim against Aldous was a bit more novel, but just as easily rejected. It argued that the legal fees Hill paid to Aldous should have been paid to Darwin. The argument was framed as follows:

Darwin paid at least some measure of Aldous’ legal fees, and Aldous then recovered legal fees from Hill. Understandably, Darwin thinks it is entitled to some of the money paid by Hill.

Although Darwin conceded it did not have a subrogation right against its insured, it nonetheless argued that it “had a subrogation right against Hill as a result of its payments on Aldous’ behalf, and Aldous impaired Darwin’s subrogation rights by successfully suing Hill for money paid by Darwin that Aldous recovered and then withheld.” Darwin apparently was attempting to fit its claim within the subrogation provision of the policy that requires insureds to “cooperate with the Insurer and do nothing to jeopardize, prejudice or terminate in any way such [subrogation] rights.” The Fifth Circuit noted that Darwin should have asserted its subrogation rights against Hill instead of sitting on its rights and that Aldous had done nothing to “jeopardize, prejudice or terminate” Darwin’s subrogation rights by prosecuting her claims against Hill.

C. Commentary

There is an urge to read a lot into the holding that Billing Guidelines, neither included in the policy nor separately agreed to by the insured, cannot be enforced against the insured or the insured’s independent counsel. After all, that holding would preclude a carrier from limiting how independent counsel litigates or staffs a case. Beyond that, and carrying the holding to its natural conclusion, the carrier could not arbitrarily limit or refuse to pay counsel’s going rates. Having said that, the court’s ruling may prove limited, as the court itself noted that Darwin’s conduct was so egregious it could not be considered a “genuine determination as to the reasonableness of claimed fees.” Accordingly, the court never reached the issue of the general enforceability of the pertinent policy provision allowing Darwin to make a determination as to the reasonableness of Claim Expenses. The question remains how the court would analyze the policy provision when faced with a carrier acting reasonably. That being said, it seems clear that the Fifth Circuit is not prepared to enforce Billing Guidelines that are external to the policy against an insured. In other words, while defense counsel may agree to them, they do not become part of the policy in a subsequent or contemporaneous coverage battle between the insurer and its insured. Moreover, it also is clear from the opinion that an insurer has no right of recoupment against its insured—absent an express policy provision providing such a right.

At the end of the day, the Fifth Circuit reaffirmed the principle that provisions external to the policy (e.g., billing guidelines and unilateral reservation of rights to seek recoupment) do not become part of the policy and are not enforceable against insureds.


Lee Shidlofsky

Douglas P. Skelley

Rebecca DiMasi

Henri E. Nicolas, Jr.
Senior Counsel