An insurer retained the services of a large law firm to defend its insured, a law partnership, against a claim alleging professional malpractice. The insurer notified its insured of the arrangement and that the retained law firm would bill the defendant law firm, the insured, for the first $10,000 in legal fees. The professional liability insurance policy contained a $10,000 deductible for payments for loss, and claims expenses, including legal fees.

The insured law firm questioned a $22,000 bill for legal services submitted by its attorneys, after they were successful in obtaining a dismissal of the malpractice action. The insured did not pay the $10,000 amount of the policy deductible, whereupon the insurer initiated legal action to secure payment. The insurer's motion for summary judgment was denied when the court found the total amount of the fees to be an issue, requiring a trial. The insurer appealed.

The appeal court said that the insurer, "having undertaken a defense in this matter, is entitled to reimbursement, up to $10,000, for those counsel fees that are attributable to a reasonable defense." It found that the determination of reasonable fees in the matter at hand was a factual issue to be resolved at trial.

The trial court order was modified to grant that part of the motion and award summary judgment on the matter of the obligation of the insured to the insurer. The insured was liable to the insurer for $10,000 in legal fees.

(SHAND MORAHAN & CO., INC., Appellant v. RICE ET AL., Respondents. New York Supreme Court, Appellate Division, Third Judicial Department. No. 59817. April 5, 1990. CCH 1990 Fire and Casualty Cases, Paragraph 2452.)