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Category: Defense Fees / Costs

Texas Legislation Changes Fee-Shifting Provision in Dismissals

May 17, 2019

A recent Texas Lawyer story by Angela Morris, “Why Are Civil Defense Lawyers Thrilled the Texas House Passed This Bill?,” reports that, just as lawmakers are pushing to narrow Texas’ anti-SLAPP motion to dismiss, the Texas House also passed a bill that would sweeten the deal for civil defense attorneys to make more use of a different type of motion to dismiss.

Under current law, this motion, known as the “91a motion to dismiss” because it’s located in Texas Rules of Civil Procedure Rule 91a, allows attorneys to argue for the dismissal of a case that has no basis in law or fact.  There’s a mandatory loser-pays provision that says the prevailing party collects attorney fees from the losing party.  Defendants have not used the motion too frequently because they don’t want to risk paying attorney fees to plaintiffs if they lose a dismissal fight.

House Bill 3300, which the Texas House passed 136-5, proposes a small but significant tweak to the law.  In the loser-pays provision, it changes the word “shall” to “may,” which gives a judge discretion to decide to award fees.  The bill heads to the Senate where, in the final weeks of the session, it must get a public hearing in committee, pass committee and pass the full Senate.

Texas Lawyer asked attorneys on Twitter whether this legislation, if passed, might lead defendants to file 91a motions to dismiss more often.  Here are a handful of the tweets we got in reply, edited for style and grammar.

“Yes — no question. Loser-pays is the only disincentive to filing a 91a motion in every case.  And defendants often waive their fee recovery from plaintiffs because courts are more likely to grant 91a dismissal if it doesn’t require saddling plaintiffs with fees,” tweeted Anne Johnson, a partner in Haynes and Boone in Dallas.

“As things stand, TRCP 91a creates a sort of game of chicken: A lot of defendants will file the motion but then pull it down before it is heard, unless they are almost 100% confident they will prevail.  With mandatory fees, the risk of paying the other side money is just too high,” tweeted Christopher Kratovil, managing member of Dykema’s Dallas office.

“As someone who works more in federal court — where 12(b)(6) reigns — I’ve always thought 91[a]‘s mandatory fee-shifting was a big problem.  This would be helpful.  I suspect more plaintiff oriented folks strongly disagree,” tweeted Raffi Melkonian, a partner in Wright, Close & Barger in Houston.

“I’m against the mandatory fees provision.  The fees usually aren’t too high, but it still discourages the use of an otherwise valuable tool,” tweeted Jadd Masso, a member of Clark Hill Strasburger in Dallas.

“This is a welcome change, though the Rule 91a standard itself should be clarified and improved,” tweeted Lee Whitesell, an associate with Hogan Lovells in Houston.

Insurers Fight Over Paying Attorney Fees in Litigation

April 4, 2019

A recent Law 360 story by Frank Runyeon, “Equinox Gym Insurers Battle Over Sex Assault Suit Fees,” reports that one of Equinox Fitness’ insurers is not paying its fair share of the luxury gym’s legal fees in an ongoing sexual assault lawsuit involving two former employees, Beazley Insurance Co. alleged in a complaint filed in California federal court.  In its 21-page filing, Beazley said that National Casualty Co. stiffed the fitness company when a worker claimed in a Jane Doe suit in Los Angeles Superior Court that another employee assaulted her and that she was retaliated against when she complained.  When NCC failed to pay, Beazley was stuck with the bill, according to the suit.

“Without satisfactory explanation, consideration of the facts, or reliance on any legal authority, NCC wrongfully denied coverage for the Doe Lawsuit on a number of unsupportable bases,” Beazley said.  “A significant portion of the Doe Lawsuit falls squarely within the coverage provided by the NCC Policies.”

In the meantime, Beazley says it’s stuck paying advance legal fees for Equinox’s defense in a case where the central allegation — that an Equinox massage therapist sexually assaulted a Pilates instructor and others on the premises — fell under NCC’s coverage, but not Beazley’s.  Beazley argued that both NCC’s general liability and employment liability policies required it to provide coverage to Equinox for any damages or lawsuit seeking damages for bodily injury, which, it said, would include the alleged sexual assault.  Beazley said its policies did not provide coverage for sexual assault claims, but did provide coverage for other allegations in the suit.

“Beazley noted that the claims in the Doe Lawsuit for harassment, discrimination, retaliation, and wrongful termination appeared to involve covered Wrongful Acts, but the claims for assault, battery, and ratification did not,” the company said.  The sexual assault lawsuit was filed in Los Angeles Superior Court in 2017, seeking damages for 11 causes of action, including sexual assault and battery, sexual harassment, discrimination, retaliation, failure to investigate and wrongful termination.

In her complaint, the Pilates instructor said that she and the massage instructor were Equinox employees who traded services at the encouragement of the company.  After the massage instructor assaulted her after-hours on the premises, she said she reported the incident to a manager who told her that at least four employees and three clients had previously said they “felt uncomfortable during a massage” with the man.  Several women later told her “they, too, were victims,” she said.  The instructor accused the company of failing to warn its clients about the man and then firing her after she took a leave of absence.

The case is Beazley Insurance Company Inc. v. National Casualty Company, case number 2:19-cv-02175, in the U.S. District Court for the Central District of California.

Deepwater Horizon Defendants Drown in Legal Fees

March 11, 2019

A recent Texas Lawyer story by Steven Meyerowitz, “Deepwater Horizon Defendants Drown in Legal Fees,” reports that the Supreme Court of Texas has ruled that an insurance policy issued to the minority owners in the Deepwater Horizon operation did not limit their right to recover for the legal fees and related expenses they incurred defending against liability and enforcement claims as argued by the policy’s underwriters.  Pursuant to a joint venture arrangement with BP entities and MOEX Offshore 2007 LLC, Anadarko Petroleum Corporation and Anadarko E&P Company, L.P. (together, “Anadarko”) held 25% of the ownership interest in the Macondo Well in the deep waters of the Gulf of Mexico.

During drilling operations on April 20, 2010, the well below the Deepwater Horizon drilling rig blew out.  Over the ensuing months and years, numerous third parties filed claims against the BP entities, Anadarko, and MOEX, seeking damages for bodily injury, wrongful death, and property damage.  Many of those claims were consolidated into a multi-district litigation (MDL) proceeding in the federal district court for the Eastern District of Louisiana.  The federal government also pursued civil penalties under the Clean Water Act and a declaratory judgment of liability under the Oil Pollution Act of 1990.

The MDL court granted a declaratory judgment, finding BP and Anadarko jointly liable under the Oil Pollution Act.  BP and Anadarko then reached a settlement agreement in which Anadarko agreed to transfer its 25% ownership interest to BP and pay BP $4 billion.  In exchange, BP agreed to release any claims it had against Anadarko and to indemnify Anadarko against all other liabilities arising out of the Deepwater Horizon incident.  In light of that agreement, the United States agreed not to pursue claims against Anadarko.  BP, however, did not agree to cover Anadarko’s legal fees and other defense expenses, which totaled well over $100 million, according to Anadarko.

Before the incident, Anadarko had purchased an “energy package” insurance policy through the Lloyd’s London market.  The policy provided excess liability coverage limited to $150 million per occurrence.  The policy did not require the underwriters to defend Anadarko against liability claims.  But it did require the underwriters to reimburse Anadarko for expenses it incurred providing its own defense.  The underwriters contended, however, that an endorsement within the policy reduced the $150 million limit when — as in this case — Anadarko’s liability arose out of the operations of a joint venture.  Based on the product of Anadarko’s percentage interest in the Deepwater Horizon joint venture (25%) and the total coverage limit under Section III ($150 million), the underwriters contended that this endorsement capped their excess coverage liability at $37.5 million.

Anadarko agreed that the Joint Venture Provision reduced the amount the Underwriters had to pay to cover Anadarko’s joint venture liabilities to third parties.  Anadarko contended, however, that the Joint Venture Provision capped the excess coverage only for Anadarko’s liabilities to third parties, and not for its “defense expenses.”  Therefore, it argued, in addition to the $37.5 million already paid, the underwriters still had to pay all of Anadarko’s defense costs up to the total $150 million limit.  When the parties could not resolve their dispute, Anadarko filed suit, seeking payment of its defense expenses up to $112.5 million ($150 million minus the $37.5 million already paid).

The trial court denied the Underwriters’ summary judgment motion and granted Anadarko’s summary judgment motion in part.  Finding the Joint Venture Provision unambiguous, the trial court concluded that the clause at issue in the Joint Venture Provision applied to and limited coverage for Anadarko’s defense expenses, but that an exception also applied and increased the Underwriters’ liability to “the combination of Anadarko’s working interest percentage ownership and the additional percentage for which Anadarko becomes legally liable, . . . subject only to the limits of the policy after subtracting monies that Underwriters have already paid.”

The court of appeals reversed the trial court’s judgment and rendered judgment for the Underwriters.  The dispute reached the Texas Supreme Court.  The court reversed the court of appeals’ judgment, rendered judgment granting Anadarko’s motion for partial summary judgment, and remanded the case to the trial court.  In its decision, the court explained that the primary issue was whether the clause at issue in the Joint Venture Provision limited Section III’s excess liability coverage only for amounts Anadarko was required to pay in response to third party claims or also for amounts Anadarko paid as defense expenses.  The court concluded that the clause did not limit the coverage for defense expenses and that, as a result, it did not have to address any exception.

The court observed that the clause stated that “the liability of Underwriters under this Section III shall be limited to” $37.5 million (that is, the product of Anadarko’s 25% interest in the joint venture — and $150 million — the total limit under Section III).  With a focusing on specific policy language, the court found that the clause only limited the underwriters’ liability for Anadarko’s “liability . . . insured,” which did not include its defense expenses.

The court was not persuaded by the underwriters argument that the reference to Anadarko’s “liability . . . insured” included defense expenses and that even if the term “liability” did not include defense expenses, the clause limited their liability for all of Anadarko’s Ultimate Net Loss, which included defense expenses.

The court observed that, although the policy did not define the term “liability,” it consistently distinguished between Anadarko’s “liabilities” and “expenses.”  Based on the policy’s usage of the term “liability” and its distinguishing references to “expenses,” the court concluded that, consistent with the term’s “common meaning within insurance and other legal contexts,” “liability” referred in this policy to an obligation imposed on Anadarko by law to pay for damages sustained by a third party who submitted a written claim.

The case is Anadarko Petroleum Corp. Houston Casualty Co., No. 16-1013.

AIG Can’t Recoup $19M in Fees/Costs in Underlying Claim

February 27, 2019

A recent Law 360 story by Jeff Sistrunk, “AIG Can’t Escape Paying AlixPartners’ $19M Costs on Appeal,” reports that an AIG unit cannot recoup over $19 million paid to help AlixPartners LLP defend and settle a claim that it gave bad advice to a private equity firm that acquired a model railway maker, a Michigan appeals court affirmed, agreeing that AlixPartners’ notice of the claim was timely. 

A panel of the state Court of Appeals upheld Judge Wendy Potts’ March 2017 ruling granting AlixPartners' motion for summary disposition on AIG unit Illinois National Insurance Co.'s complaint, saying the trial judge got it right when she determined that the consulting firm had properly notified the insurer of the underlying arbitration claim lodged by Kingsbridge Capital Management GP Ltd.  As such, Illinois National cannot recover the sums it paid on AlixPartners’ behalf, the panel found.  “Finding no error in the court’s determination as to when the claim was first made, we affirm the trial court’s finding that the Kingsbridge claim was covered under [the policy],” Judge Deborah A. Servitto wrote for the panel.

London-based Kingsbridge had hired AlixPartners to perform due diligence in connection with its acquisition of Marklin, a German model train company.  The consulting firm prepared a report indicating that, by shifting production to Asia and implementing online marketing, Marklin could significantly increase its earnings before interest, tax, depreciation and amortization, or EBITDA, according to court documents.  In May 2006, AlixPartners and Marklin signed a separate management consulting contract, with AlixPartners agreeing to help implement the restructuring concept it crafted, court papers indicated.

By 2007, though, Marklin’s earnings were almost €6 million ($8.3 million) lower than the projections AlixPartners had presented.  Marklin sent a letter in March 2008, and a subsequent letter the following month, requesting that AlixPartners return part of its fees, according to court papers.  Due to the problems at Marklin, Kingsbridge initiated arbitration against AlixPartners in late 2011, alleging the consulting firm committed malpractice during the due diligence process.  An arbitrator found in favor of Kingsbridge, determining that Marklin’s earnings and debt level were significantly lower than AlixPartners had presented in its investment advice.  However, while the award was on appeal, Kingsbridge and AlixPartners reached a multimillion-dollar settlement.

Illinois National had agreed to defend and indemnify AlixPartners, while reserving its rights to later challenge coverage.  After paying $19.1 million in defense and settlement costs on AlixPartners' behalf in the Kingsbridge action, the insurer filed the instant suit in 2014, seeking reimbursement.  AlixPartners contended that it had properly reported the Kingsbridge dispute to Illinois National under a policy spanning from March 15, 2008, through June 15, 2009, with an extended reporting period through the end of August 2009.  The consulting firm gave notice to the insurer in August 2009 after receiving a draft arbitration complaint from Kingsbridge a month prior, according to court documents.

Illinois National, on the other hand, argued that AlixPartners first became aware of the Kingsbridge dispute when it received Marklin's March 2008 letter and, as a result, failed to properly report the claim.  Judge Potts sided with AlixPartners, finding in her March 2017 order that, among other things, the consulting firm's fee dispute with Marklin and the arbitration against Kingsbridge were two different matters.

In the decision, the appellate panel said Judge Potts’ reasoning was sound.  Kingsbridge’s claim revolved around AlixPartners’ advice on the Marklin acquisition, while Marklin’s claim concerned the consulting firm’s alleged mismanagement of the model train maker, the panel noted.  In addition, it said, the Illinois National policy excluded claims pertaining to fee disputes, so AlixPartners had no obligation to report Marklin’s demands to the insurer.

“The Kingsbridge arbitration complaint clearly referred to issues specific to the defendant’s contract with Kingsbridge in the same way that the March and April letters referred to matters unique to the defendant’s Marklin agreement,” Judge Servitto wrote.  The appeals panel also said Judge Potts properly declined to retroactively reform AlixPartners’ policy. Illinois National had argued that AlixPartners wrongfully concealed the fee dispute with Marklin in its application for a policy renewal.

Judge Potts, however, pointed out that none of the questions in the renewal application requested information regarding any circumstances that may have resulted in a claim against AlixPartners.  Under Michigan law, a policyholder is not obligated to volunteer information about any pending or prior claims, the judge said in her order.  The appellate panel agreed with Judge Potts that AlixPartners was not required to disclose Marklin's letter demands to Illinois National, given that those fee-related claims were excluded from coverage under the policy.  “[Illinois National] fails to provide an explanation as to why an uninsured claim need be reported and how a claim that [Illinois National] would not be responsible to cover under the policy would materially change the risk for those claims that it contracted to cover," Judge Servitto wrote.

The case is Illinois National Insurance Co. v. AlixPartners LLP, case number 337564, in the State of Michigan Court of Appeals.

Judge Blasts Attorney for Wasting Time, Awards $1.6M in Fees

January 29, 2019

A recent Law 360 story by Daniel Siegal, “Judge Blasts Atty for Wasting Time, Awards $1.6M in Fees,reports that a Denver federal judge awarded a host of insurance companies nearly $1.6 million in attorneys' fees for defeating allegations that they unfairly denied coverage to homeowners, holding the plaintiffs’ attorney personally liable for most of the fees and blasting his “prolix, redundant and meandering” filings that wasted the insurers’ time.  In a 22-page ruling, U.S. District Judge John Kane granted the consolidated bid for attorneys' fees filed by dozens of defendants, including Allianz Life Insurance Co. of North America Inc., Chubb Corp. and insurance standards organization ACORD, finding that their request for about $1.6 million in fees was “fully foreseeable” and reasonable given the sprawling allegations.

“Plaintiffs initiated this litigation and were in control of its course.  There is no indication defendants’ counsel acted unreasonably or stepped outside the bounds of competent representation of their clients,” Judge Kane wrote.  “Plaintiffs cannot now complain that the fees incurred by defendants are excessive because such an inordinate number were forced to take part … They have imposed costs on virtually the entire insurance industry, and under the law, they must shoulder the result.”

Judge Kane wrote that the plaintiffs’ attorney, Josue David Hernandez of the Law Office of Josue David Hernandez, must personally bear liability for the attorneys' fees incurred by the defendants in the district court, given “his incessant filing of absurdly lengthy and legally incorrect briefs” and vexatious conduct throughout the litigation.  Some fees were incurred by the defendants on appeal, and Judge Kane asked them to file only the amount of fees that applied to the district court proceeding.

Judge Kane said he analyzed the plaintiffs' positions only to the extent that he could “extract them from the morass” of the briefing filed by Hernandez.  “I have struggled to decipher plaintiffs’ legal arguments throughout this case,” Judge Kane wrote.  “Those that pertain to the attorney fee award are no exception.”  The judge sided with the defendants’ expert witness’ testimony that the hours of legal work they expended defending the case were reasonable and necessary over the plaintiffs’ argument, which was based not an expert’s testimony but an “unreliable and bewildering” 24-factor test of Hernandez’s own concoction.

Judge Kane also noted that throughout the litigation, the plaintiffs had repeatedly made extra work for the defendants, such as filing a 40-page motion for more time to respond to the defendants’ motion to dismiss.  After the defendants filed a seven-page opposition to that motion, the plaintiffs followed with a 47-page reply brief that “illustrates a system gone mad,” the judge said.

Terence Ridley of Wheeler Trigg O’Donnell LLP, who represented First American Property and Insurance Co. and argued on behalf of all fee-seeking defendants, told Law360 that he was honored to argue the motion for the numerous insurers, saying that “the language of the order is important, and the order is important.”  Hernadez told Law360 via email that Judge Kane's ruling had failed to address key issues, including whether Colorado's attorneys fee statute was preempted by federal law, and the fact that the defendants had filed more papers and other documents in the case than the plaintiffs. 

"If one were to take the time to review the actual documents on the public record (which is something I would encourage anyone truly interested in the case to do), they would likely find that the ruling failed to include the necessary treatment of at least eight extremely significant issues raised," he said. 

Named plaintiff Dale Snyder and 17 others filed suit in June 2014, and in a 260-page amended complaint asserted 23 claims against 113 defendants, alleging a broad, multi-decade conspiracy to deny homeowners coverage of damages from floods and fires.  In January 2016, Judge Kane dismissed the suit due to the plaintiffs' failure to include a “short and plain statement of the claim showing that the pleader is entitled to relief” in the complaint.  The Tenth Circuit affirmed that ruling in May 2017 and ordered appellate attorneys' fees to be awarded to the defendants.

The case is Dale Snyder et al. v. ACORD Corporation et al., case number 1:14-cv-01736, in the U.S. District Court for the District of Colorado.

Article: Defense Costs Coverage 101

January 16, 2019

A recent New York Law Journal article by Howard B. Epstein and Theodore A. Keyes, “Defense Costs Coverage 101,” reports on defense fees and costs in the insurance coverage practice area.  This...

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