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Behnke v. State Farm General Insurance Co. (2011)

June 29, 2011

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Horvitz & Levy successfully represented State Farm as respondents in this breach of contract and bad faith case. State Farm's insured, Michael Behnke, was sued by a third party. State Farm agreed to defend Behnke under a reservation of rights. At Behnke's request, State Farm retained the law firm of English & Gloven to serve as Behnke's Cumis counsel. Unbeknownst to State Farm, Behnke agreed to pay English & Gloven for any fees they incurred that State Farm did not pay.

The English & Gloven firm billed roughly $200,000 on the case during pretrial proceedings. State Farm objected to their fees as unreasonable and refused to pay more than $140,000. State Farm settled the underlying action for $50,000 without any contribution from Behnke. State Farm offered to arbitrate the dispute over English & Gloven's unpaid fees, but Behnke and his lawyers rejected State Farm's offer.

Behnke sued State Farm on various contract and tort theories for its refusal to pay all of English & Gloven's fees. State Farm invoked its right to mandatory arbitration of the Cumis fee dispute under Insurance Code 2860. The arbitrator ordered State Farm to pay a portion of the unpaid fees, but found that State Farm did not have to pay the full amount claimed by English & Gloven because the hours they billed exceeded what was reasonably necessary to defend the case. State Farm paid the arbitration award.

The trial court then sustained State Farm's demurrer to some of Behnke's claims (fraud, promissory fraud, and equitable estoppels), and granted summary judgment as to the remaining claims (breach of contract, bad faith, and punitive damages). In essence, the trial court concluded that nothing remained of Behnke's case after the arbitrator resolved the Cumis fee dispute. Behnke appealed.

The Court of Appeal (Fourth District, Division One) affirmed in a published opinion.  The court held that State Farm could not be liable for disputing the amount of English & Gloven's fees, because State Farm's promise to pay those fees can only be deemed an agreement to pay fees that were reasonably necessary and reasonable in amount, as determined by an arbitrator in the event of a dispute.  Thus, State Farm did not breach its contract or commit any tort by disputing the fees, submitting the fee dispute to arbitration, and paying the amount awarded by the arbitrator.