Courts nationwide have long held that defense costs incurred by a policyholder are presumed reasonable where an insurer breaches its duty to defend. The North Carolina Business Court in an opinion written by Judge Mark Davis recently adopted this rule under North Carolina law in Murphy-Brown, LLC v. Ace American Insurance Company, 2024 WL 4327353 (N.C.Super. Sep. 25, 2024).

Understanding Murphy-Brown

In Murphy-Brown, Murphy-Brown, a hog farm owner, faced many nuisance lawsuits. Murphy-Brown’s insurers denied coverage for these lawsuits and refused to pay for Murphy-Brown’s defense costs. Insurance coverage litigation ensued. The court ultimately held that Murphy-Brown’s insurers breached their duty to defend. 2020 WL 7711360, at *18 (N.C. Super. Dec. 22, 2020). The case was then set for trial on various issues, including about the reasonableness of defense costs Murphy-Brown incurred defending the nuisance lawsuits. Ahead of the trial, the court decided the parameters of how one of Murphy-Brown’s insurers could contest the reasonableness of Murphy-Brown’s defense costs.

The court held that Murphy-Brown’s defense costs should be presumed reasonable where, as here, the insurer breached its duty to defend. The court reasoned that this rule aligned with what the “clear majority of courts” in other jurisdictions nationwide, which the court found persuasive in the absence of on-point North Carolina appellate precedent. The court further reasoned that this rule is “equitable” because it “serves as a deterrent to insurers from wrongfully breaching their defense obligations.”

While the court adopted a presumption of reasonableness, it adopted just that: a presumption. According to the court, the presumption can still be rebutted by reference to various factors described in the North Carolina Rules of Professional Conduct that bear on the reasonableness of attorneys’ fees:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8) whether the fee is fixed or contingent.

While these factors are part of the North Carolina Rules of Professional Conduct, many jurisdictions nationwide also determine the reasonableness of attorneys’ fees by reference to similar factors. As one example, in Massachusetts, these factors are known as the Linthicum factors following the Massachusetts Supreme Judicial Court’s decision in Linthicum v. Archambault, 379 Mass. 381 (1979).

Takeaways for Policyholders

Murphy-Brown is instructive for policyholders. After Murphy-Brown, North Carolina policyholders may enjoy a presumption that defense costs are reasonable where their insurer breaches its duty to defend. And while this presumption is likely to benefit policyholders, policyholders should remember that the Murphy-Brown presumption is not absolute. In other words, insurers can and are likely to try to rebut it. As a result, policyholders may want to remain aware of the factors courts may apply to determine the reasonableness of attorneys’ fees. And if the application of these factors becomes contested, policyholders may want to consider retaining a fee expert who can opine on how these factors apply to the specific facts of their case.