An insurer that breaches a duty to defend its insured for a lawsuit will typically be held liable for the expenses the insured “incurred in defending the suit, including reasonable attorney’s fees and court costs.” Primrose Operating Co. v. Nat’l Am. Ins. Co., 382 F.3d 546, 559-60 (5th Cir. 2004).  Depending on which state’s law controls a policyholder’s right to coverage, the insured may be able to rely on a presumption that the defense costs it incurred were reasonable, leaving the insurer with the burden to rebut that presumption.

Some states apply evidentiary presumptions for paid bills

In some states, paid bills in general are presumed reasonable as a matter of evidence law. Hawaii Rule of Evidence 303(c)(16), for example, provides: “A bill for goods or services that has been paid is presumed to be authentic and to embody fair and reasonable charges for the itemized goods or services.”  Illinois Rule of Evidence 803(24) similarly treats a “paid bill as … prima facie evidence that the charge was reasonable.” The Illinois Supreme Court has explained that “[t]he prima facie reasonableness of a paid bill can be traced to the enduring principle that the free and voluntary payment of a charge for a service by a consumer is presumptive evidence of the reasonable or fair market value of that service.” Arthur v. Catour, 833 N.E.2d 847, 854 (Ill. 2005).

Such rules have been applied to deciding whether attorney fees were reasonable. In Sorenson v. Fio Rito, 413 N.E.2d 47, 54-55 (Ill. App. 1980), the court looked to the presumption of reasonableness for paid attorney bills for taxation work. In Zapfel v. Xerox Corp., No. FST-X08-CV-166030461-S, 2022 Conn. Super. LEXIS 2262, at *25 (Stamford-Norwalk Jud. Dist. Super. Ct. Oct. 18, 2022), a case that found breach of a severance agreement, the court stated: “Attorney Adrian’s billing rate is presumptively reasonable as it is undisputed that the plaintiff, a sophisticated client, paid all of the bills without objection.” The court in Auxier v. Kraisel, 466 A.2d 416, 420-21 (D.C. Ct. App. 1983), adopted “the approach” that treats “paid bills for attorney’s fees as prima facie proof of reasonableness” in an action for breach of a property management company’s fiduciary duties.

Courts have employed the evidentiary presumption for the cost of defending policyholders as well.  E.g., Continental Western Ins. Co. v. Country Mut. Ins. Co., 3 F.4th 308, 319 (7th Cir. 2021) (“[T]he attorney’s fees in this case [‘to defend Hamel Fire in the underlying lawsuits’] were paid….  Thus, the district court’s award of that amount was presumptively reasonable.”).

Others courts hold payment is evidence of reasonableness

Even absent a presumption, payment may be considered evidence of reasonableness. In Century Woods Condo. Ass’n, Inc. v. Next Century Partners, LLC , No. 21SMCP00109, 2021 Cal. Super. LEXIS 99298, at *3-4 (Cal. Super. Ct., L.A. County Sept. 2, 2021), the court said it “believe[d] that it is some evidence as to reasonableness if the fees sought were actually billed and paid by the client.“ In a similar way, some federal courts have said “that the best evidence of whether attorney’s fees are reasonable is whether a party has paid them.” Cintas Corp. v. Perry, 517 F.3d 459, 469-70 (7th Cir. 2008). They examine attorney bills under market standards and reason that “[i]f the bills were paid, this strongly implies that they meet market standards.” Medcom Holding Co. v. Baxter Travenol Labs., Inc., 200 F.3d 518, 520 (7th Cir. 1999).

Many states presume reasonableness for wronged policyholders in particular

Many states recognize a presumption of reasonableness arising from the breach of an insurer’s defense obligation as well. In Olin Corp. v. Insurance Co. of North America, 218 F. Supp. 3d 212, 228 (S.D.N.Y. 2016), for example, the court stated: “Where an insurer has breached its duty to defend, the insured’s fees are presumed to be reasonable and the burden shifts to the insurer to establish that the fees are unreasonable.” One basis for presuming reasonableness in this context is the understanding that “it is unfair to let a breaching insurer nit-pick costs later when it could have—had it honored its duty to defend—initially directed the defense in any reasonable way it wished.”  Thomson Inc. v. Ins. Co. of N. Am.,11 N.E.3d 982, 1024 (Ind. App. 2014).

Policyholders should keep these evidentiary rules and presumptions in mind when they seek to recover the costs they incurred defending themselves. Even absent law entitling them to a presumption, they may benefit from cases recognizing payment as at least some evidence of reasonableness.