A recent Daily Business Review story by Jim Saunders, “Plan to Limit Attorney Fees in’AOB’ Cases Stalls in Committee,” reports that, in what could be a glimpse of the battles to come over the heavily lobbied issue, a Senate committee bottled up a proposal that would limit attorney fees in cases involving the insurance practice known as “assignment of benefits.”  The Senate Banking and Insurance Committee tabled a bill (SB 122) sponsored by Chairman Doug Broxson, R-Gulf Breeze, after it became apparent the measure would fail if brought up for a vote.  Though the 2019 legislative session does not start until March 5, it was at least an initial blow to the insurance industry and other business groups pushing to limit attorney fees in so-called AOB cases.

Sen. Tom Lee, R-Thonotosassa, joined three Democrats in opposing the bill, making it impossible for Broxson to patch together a majority on the eight-member committee.  Insurers and their allies argue that fee limits are needed because of an increase in AOB litigation that is driving up consumers’ property-insurance premiums.  But Lee said there are “some bad actors on both sides of the equation” and indicated he thought Broxson’s bill could end up hurting consumers who need homes repaired for such things as water damage.

“We are going to kill the patient while we try to cure the problem,” Lee said.  Sen. Keith Perry, however, said the bill “is a step in the right direction” and argued consumers will face higher insurance rates if lawmakers don’t solve the problem.  “We owe it to the working-class people of the state of Florida to do something,” Perry, R-Gainesville, said.

Assignment of benefits is a decades-old practice that has become highly controversial in recent years.  Lawmakers have repeatedly considered proposals to address the issue but have not been able to reach agreement.  In assignment of benefits, homeowners in need of repairs sign over benefits to contractors, who ultimately pursue payments from insurance companies.  Insurers contend that the practice has become riddled with fraud and litigation, while plaintiffs attorneys and other groups say it helps make sure claims are properly paid.

Under state law, insurance policyholders are entitled to have their attorney fees paid if they prevail in cases against insurers.  In 1972, a Florida Supreme Court ruling also extended the right to recover attorney fees to people, such as contractors, who have been assigned insurance benefits, according to a Senate staff analysis.

But Broxson’s bill would have prevented continuing to extend the right to attorney fees to contractors.  The staff analysis said that such a change would “make the assignment of post-loss benefits less valuable.  The assignee [the person assigned the benefits] would have to pay his or her own attorney fees to enforce the insurance contract.”

A recent Metropolitan News-Enterprise story, “No Fees for Non-Class Counsel in Volkswagen Settlement,” reports that the Ninth U.S. Circuit Court of Appeals yesterday rejected a bid by several law firms to claim attorneys’ fees in connection with the recent multi-billion dollar Volkswagen diesel vehicle class action settlement despite not being class counsel because the firms didn’t provide a compensable benefit to the class.

The opinion was written by Circuit Judge Milan D. Smith Jr. It affirms the denial by U.S. District Judge Charles R. Breyer of the Northern District of California of 244 separate attorneys fee applications in the multidistrict litigation (“MDL”), consolidating seventeen of the eighteen appeals from those fee motions (the eighteenth firm filed a notice of appeal but did not join either of the two briefs submitted on appeal).

The litigation against Volkswagen was sparked by accusations in a notice of violation (“NOV”) by the U.S. Environmental Protection Agency that the company had utilized a device designed to spoof emissions tests in 500,000 of its diesel vehicles.  Those accusations were prompted by a study commissioned by the California Air Resources Board to look into discrepancies between the emissions numbers of American and European models of certain vehicles.  Audi and Porsche, two German marques also owned by the Volkswagen Group, were also sued in the class action, which resulted in a settlement of more than $7 billion, as well as $175 million in class counsel fees, agreed to by the parties.

Breyer, responding to several motions for attorney fee liens from lawyers who were not class counsel, noted that the purpose of the settlement was to give class members opting into the agreement’s buyback program “sufficient cash to purchase a comparable replacement vehicle and thus facilitate[] removal of the polluting vehicles from the road.”

He continued: “An attorneys’ lien on a Class Member’s recovery frustrates this goal. By diverting a portion of Class Members’ compensation to private counsel, a lien reduces Class Members’ compensation and places them in a position where they must purchase another vehicle but lack the funds to do so.  Put another way, attorneys—notably, attorneys who did not have a hand in negotiating the Settlement—stand to profit while their clients are left with inadequate compensation.”

The judge enjoined state court proceedings related to any class member’s attorney’s lien on his or her recovery, but noted that some lawyers “may have provided Class Members with compensable services,” and implemented a procedure whereby such attorneys could apply for reimbursement.  That scheme resulted in the 244 applications for fees.

Nagel Rice LLP of New Jersey wrote the lead brief on appeal, joined by 15 other firms. They argued that the appeal presented “an issue of first impression in the Ninth Circuit: whether Independent Counsel who performed services and incurred costs in a multi-district litigation prior to the appointment of Lead Counsel are entitled to an award of fees and costs, or are only the firms appointed to leadership roles entitled to a fee award for services performed prior to their appointment.”  Smith responded: “In truth, however, the central issue before us is narrower: whether the district court abused its discretion when it denied Appellants’ motions for attorneys’ fees.”

The jurist noted that under Federal Rule of Civil Procedure 23, courts are permitted to award attorneys fees “authorized by law or by the parties’ agreement,” and that such awards are available even to non-class counsel in class actions.  Nevertheless, he said, a trial court must determine whether an attorney fee award is reasonable.  According to Nagel Rice, its commencement of hundreds of lawsuits against Volkswagen before the class action was commenced, its filing of discovery and other motions, and other research and communications benefitted the class.

Smith agreed with the plaintiffs in the case as to the pre-trial work done by Nagel Rice and its co-objectors, who noted on appeal that “even assuming these activities are all attributable to the Appellants, [they] fail to establish how, precisely, these activities benefitted the Class.”

He wrote: “Appellants may have filed complaints and conducted preliminary discovery and settlement work on behalf of their clients before consolidation of the MDL and appointment of Class Counsel, but they do not appear to have discovered grounds for suit outside of the information contained in the widely publicized NOVs, or otherwise provided guidance or insights that were later used in securing the Settlement.  In short, Appellants have not demonstrated that, in Plaintiffs’ words, ‘they engaged in serious settlement efforts, much less that any such efforts contributed to the class settlement framework that was ultimately reached, approved, and successfully implemented.’ ”

He also rejected the appellants’ claim that their work after class counsel was appointed, consisting largely of actions to “remain updated on the case,” helped the class, especially in light of a pretrial order stating: “Only Court-appointed Counsel and those attorneys working on assignments therefrom that require them to review, analyze, or summarize those filings or Orders in connection with their assignments are doing so for the common benefit.  All other counsel are reviewing those filings and Orders for their own benefit and that of their respective clients and such review will not be considered Common Benefit Work.”

Smith said: “We are sympathetic to Appellants, and have no doubt that many of them dutifully and conscientiously represented their clients. This is not necessarily a case where latecomers attempt to divide spoils that they did not procure. But Appellants’ efforts do not entitle them to compensation from the MDL, when the record indicates that they did not perform work that benefited the class, and that they neglected to follow the protocol mandated by the district court. We commend the district court’s efforts to successfully manage a massive and potentially ungainly MDL, and conclude that the court did not abuse its discretion when it determined that Appellants were not entitled to compensation.”

The opinion also rejects the attorneys’ contentions that Volkswagen had agreed to pay fees to them or that they were entitled to recovery on a theory of quantum meruit, which would itself require them to have benefitted the class by their work.  The case is Bishop, Heenan & Davies v. Volkswagen Group of America, No. 17-16020.

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 article was posted with permission.  The article reads:

Upon receipt of a claim, the risk manager or in-house counsel should coordinate with the company’s insurance broker to make sure notice is submitted to the insurer.  However, even earlier, in anticipation of claims, counsel should review the terms of the relevant insurance policies and develop an understanding of the defense cost coverage provisions.

An insurance company’s obligation to pay defense costs incurred by its insured in response to a claim typically falls into one of two categories: (1) a duty to defend or (2) a duty to advance defense costs. The duty to defend is most often included in general liability (GL) policies while the duty to advance is more likely to be included in directors’ and officers’ liability (D&O) policies.  Policy forms can vary, however, and a GL or D&O policy may contain either type of defense obligation.  In addition, specialty insurance policies covering, for example, employment practices or pollution liability risks may contain either a duty to a defend or duty to advance clause.

Regardless of the type of insurance policy, an insurer may be willing to consider including either defense clause if requested by the broker or the insured.  While each of these clauses provides insurance for defense costs incurred by the insured, there are distinctions worth considering which may dictate which clause is preferable for a given insured.

Duty to Defend

While case law varies to some degree from state to state, the duty to defend is broader than the duty to advance under New York law and the law of the majority of other jurisdictions.  It is also well-settled that the duty to defend is broader than the insurer’s duty to indemnify for loss under a policy. The duty to defend is triggered “whenever the allegations in a complaint against the insured fall within the scope of risks undertaken by the insurer, regardless of how false or groundless those allegations may be.” Seaboard Surety Company v. Gillette Company, 64 N.Y.2d 304, 486 N.Y.S.2d 873 (1984).  Even where some asserted claims fall outside the scope of covered risks, as long as some of the claims are within the scope of coverage, the insurer will have a duty to defend.  Once triggered, the insurer is required to pay defense costs on behalf of the insured.

While the duty to defend is broader than the duty to advance, it also gives the insurer control over the defense of the claim.  Typically, where a policy contains a duty to defend, the insurer will have the right to appoint defense counsel.  Thus, with a duty to defend policy, the insured gets the benefit of broad defense coverage but gives up the right to choose defense counsel and, effectively, control of the defense.

An exception to this rule, in most jurisdictions including New York, is that where there is a conflict of interest between the insured and the insurer, the insured is entitled to select independent defense counsel.  Public Service Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 442 N.Y.S.2d 422 (1981).  In the case of such a conflict, the insurer is responsible to pay the reasonable defense fees of independent counsel.

Duty to Advance Defense Costs 

In contrast to the duty to defend, the duty to advance merely requires the insurer to reimburse the insured for costs incurred in defense of claims.  Moreover, while the duty to defend requires the insurer to pay defense costs on behalf of an insured whenever the claims alleged fall within the scope of the risk insured, the duty to advance only requires the insurer to advance defense costs for covered claims.

Policies that contain a duty to advance clause generally require the insurer to advance defense costs on an unspecified “timely basis” or within a specified period of time that can range from 30 to 120 days after submission of invoices.  Such policies also typically permit the insurer to allocate defense costs to covered and uncovered claims and thus, in some cases, provide a basis for the insurer to advance only a percentage of the defense costs.  In addition, a duty to advance is conditional—in the event that it is subsequently determined that there is no coverage for the claims, the insurer may have a right to seek recoupment of the defense costs from the insured.

On the other hand, in the context of a duty to advance, the insured is typically entitled to select its own defense counsel and has control of the defense as well as the responsibility to defend the claim.  In addition, a duty to advance will typically be triggered by a written demand seeking monetary relief whereas a duty to defend, in some policies, will only be triggered by an actual suit.

Key Considerations

Whether a duty to defend or duty to advance is a better fit for a particular insured may depend on several factors including the insured’s profile and the types of potential claims.  For example, a cost-conscious insured may prefer a duty to defend because defense costs will be paid directly by the insurer and because the insurer is more likely to pay 100 percent (or close to 100 percent) of the defense costs above the applicable deductible or retention.  In contrast, under a policy with a duty to advance, there is likely to be considerable lag time between the submission of legal invoices and payment by the insurer, and there is also a stronger possibility that the insurer will pay less than 100 percent of the invoices—either based on an allocation between covered and uncovered claims or persons or based on the insurer’s defense counsel guidelines.

Where choice of counsel is important to the insured, a duty to advance will likely be the preferred option.  Choice of counsel may be of primary importance to an insured if the insured has a relationship with counsel in whom they have developed confidence.  Similarly, if the claims at issue require a particular expertise or in-depth understanding of a specific industry, the insured may believe it is better positioned to select counsel than the insurer.  Likewise, where the claims asserted threaten the continued viability of the insured’s business, the insured will likely prefer to retain counsel with whom they have substantial experience or counsel with a reputation for expertise in the relevant area.

While a duty to advance clause typically grants the insured the right to select counsel, in some cases selection of counsel will be subject to insurer approval, such approval not to be unreasonably withheld.  In the case of either a duty to defend or advancement policy, it may also be possible to negotiate pre-approval of defense counsel.

Where control of the defense is the primary concern, a duty to advance policy will likely be a better fit for the insured.  Control may be the primary concern where the insured is involved in a regulated industry and where it may be the subject of investigations or claims by government agencies.  Similarly, where the insured operates in an industry in which litigation is relatively common or routine, the insured may prefer to have control over its defense.  Likewise, where a claim concerns private, confidential or even potentially embarrassing issues, the insured will likely prefer to have control of the defense.

Timely Notice and Tender

In any event, regardless of the type of defense obligation, the risk manager or in-house counsel should be sure to give timely notice of claim in order to avoid jeopardizing the right to coverage.  In addition, it is crucial to give notice as soon as possible because an insurer’s obligation to pay defense costs is not typically triggered until notice has been submitted.  So while a couple of weeks’ delay in providing notice may not jeopardize coverage, the defense costs incurred prior to the notice will not be recoverable from the insurer.  Further, to the extent that an opportunity for early settlement negotiations may arise, it will be necessary to coordinate those discussions with the insurer.  Consequently, notice should always be provided before any significant defense costs are incurred.

Howard B. Epstein is a partner at Schulte Roth & Zabel, and Theodore A. Keyes is special counsel at the firm.

A recent Daily Business Review article by Richard Bec, “When Is a Prevailing Party Not a Prevailing Party for Purposes of Awarding Attorney Fees,” reports on prevailing party attorney fees.  This article was posted with permission.  The article reads:

The court just entered judgment in favor of your client after prevailing on its breach of contract action.  As you savor the victory, your lawyer brain begins outlining a motion for prevailing party attorney fees.  You notice, however, that the judge has reduced the damages award due to a “diminution of value” defense raised by defendant.  Following the reduction in the amount of damages, you question whether your client may still be the prevailing party for purposes of attorney fees under the subject agreement.

First thing first, look at the subject agreement.  If a clear reading of the attorney fees provision applies to the context and type of contract claim of your case, then you are off to a good start.  In Dear v. Q Club Hotel, Ltd. Liability Co., No. 15-CV-60474, 2017 U.S. Dist. LEXIS 181905 (S.D. Fla. Nov. 1, 2017) the Southern District refused to grant prevailing party attorney fees to a defendant that could not show how the subject attorney fees provision “clearly” and “unambiguously” authorized an award of attorney fees and costs for the type of contract claim at issue.

Your next question should be whether the only significant issue is, without a doubt, the one in which your client prevailed.  Does your case involve a clear-cut breach of contract by the defendant and nothing else, or was it more complicated?  The Eleventh Circuit Court of Appeals construes the term “prevailing party” to be the party that has prevailed on the “significant issues in the litigation.”

It is important to remember that it is not mandatory for courts to decide on a prevailing party.  The Florida Supreme Court has made clear that trial courts have the discretion to determine that there is no prevailing party and, thus, to decline to award attorney’s fees to either party, see Trytek v. Gale Industries, 3 So. 3d 1194, 1196 (Fla. 2009).  Rather, where one is determined to exist, “… the entitlement to attorneys’ fees is mandatory.”

Sometimes when parties win and lose on significant issues, the court will just pass on deciding who is the prevailing party.  That is what happened in Schoenlank v. Schoenlank, 128 So. 3d 118 (Fla. 3d DCA 2013).  There, neither party had completely prevailed on either major issue of the case.  The Third DCA stressed that an attorney fee award is not required whenever a contract provides for prevailing party fees and made clear that a trial court retains the discretion to deny fees to both parties when each has prevailed and lost on significant issues.

The same applies to federal courts applying Florida law. In R.S.B. Ventures v. Federal Deposit Insurance, 2014 U.S. Dist. LEXIS 188109, 2014 WL 11598000 (S.D. Fla. May 20, 2014), the federal court concluded that where one party had prevailed on some issues and another party had prevailed on another issue, neither party should be deemed the prevailing party for purposes of fees, and it declined to make an award to either party.

More recently, in Winn-Dixie Stores v. Big Lots Stores, 2016 U.S. Dist. LEXIS 65508, 2016 WL 2918152 (S.D. Fla. May 18, 2016) (Middlebrooks, D.J.), the court concluded that because neither party had recovered on a claim or counter-claim and because neither party had been without fault, neither was a prevailing party and neither was entitled to an award of fees.

Returning to our hypothetical at the top of this article, assuming your client’s win on the breach of contract claim is the only significant issue of the case, and your client has an applicable fee-shifting provision in the governing agreement, it is likely that your client is indeed the prevailing party.  However, a very limited result in comparison to the scope of the litigation as a whole may affect the amount of attorney fees your client may ultimately be able to recover from the court in a subsequent motion for fees see Rodriguez v. Super Shine & Detailing, No. 09-23051-CIV, 2012 U.S. Dist. LEXIS 80214, at *22 (S.D. Fla. June 11, 2012).  A setoff or reduction of damages is secondary to the significant issue of the case and generally will not affect your client’s status as the prevailing party for purposes of recovery of attorney fees.

Richard Bec is an attorney with the Miami intellectual property boutique law firm of Espinosa Martinez.  He focuses his practice on practice on intellectual property and commercial litigation, real estate law and bankruptcy matters.

A recent Law 360 story by Rick Archer, “High Court Grants Win to Social Security Atty in Fee Row,” reports that Ambac Assurance Corp., Whitebox Multi-Strategy Partners and the Bank of New York Mellon are sparring in a Puerto Rico federal court over who will pay for Mellon’s defense against Ambac and Whitebox’s claims that it mismanaged the island’s sales tax bonds.  In court papers BNYM argued that, under the terms of the plan restructuring the debt of Puerto Rico’s sales tax corporation, Ambac and Whitebox need to set money aside against the possibility they will be required to pay its defense costs, while Ambac and Whitebox argued BNYM is not owed indemnification against their claims by anyone.

Bond insurer Ambac and senior bondholder Whitebox filed suit against Mellon in 2017, alleging it had mishandled its duty as the trustee for the bondholders of the Puerto Rico Sales Tax Financing Corp., or COFINA, by failing to declare a default before April 2017.  In November, the court sent a plan to restructure nearly $18 billion of COFINA’s debt to a creditor vote.  Under the terms of the plan, Ambac and Whitebox dropped their negligence-based claims against Mellon but retained their claims of gross negligence and intentional misconduct, according to court papers.

At issue is a provision of the plan that calls for the court to determine at the plan confirmation hearing how much Ambac and Whitebox should be required to post as bond or how much should be withheld from their plan distributions to reimburse Mellon if it wins the lawsuits.  In its reservation of rights, Mellon argued the suits “lack merit” and that it has a senior, secured claim for indemnification for legal expenses from COFINA.  It said the plan places the burden of that indemnification on Ambac and Whitebox as a matter of fairness to keep those costs from being deducted from the recoveries of the bondholders who had completely dropped their legal claims as part of the reorganization plan.

“The plan recognizes that COFINA and the other beneficial holders should not be penalized for the intransigence of Whitebox and Ambac in continuing to pursue the lawsuits despite an otherwise global settlement,” it said.  Ambac and Whitebox, however, argued in their motion that neither case has been resolved and no fees have been awarded yet and that BNYM is not entitled to advance payment.  They also argued under the terms of the bond resolution COFINA, rather than Ambac or Whitebox, is obligated to indemnify BNYM.

“Moreover, even if COFINA’s indemnity obligations were somehow assumed by Ambac and Whitebox, the plain language of the resolution is clear that BNYM does not have the right to be indemnified in respect of claims for gross negligence, willful misconduct or intentional fraud, which are the only claims that Ambac and Whitebox will assert in the actions post-confirmation,” they said.

The restructuring case is In re: Commonwealth of Puerto Rico, case number 3:17-bk-03283, in the U.S. District Court for the District of Puerto Rico.

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