August 31, 2022
A recent Law 360 story by Celeste Bott, “USAG Keeps Fee Award in Nassar Coverage Suit” reports that Liberty Underwriters Insurance Inc. must pony up the remainder of a roughly $2.1 million judgment for USA Gymnastics, a Seventh Circuit panel ruled, saying the insurer failed to show that any portion of the fees incurred during investigations into sexual abuse by former team doctor Larry Nassar were not reasonable and necessary.
At issue are legal costs incurred when USA Gymnastics responded to investigations by both houses of Congress, the Indiana Attorney General's Office, and the U.S. Olympic and Paralympic Committee into Nassar's conduct. During oral arguments in the case, a three-judge Seventh Circuit panel pushed the Liberty Mutual unit to address why it paid more than $1.4 million toward those defense costs if it believed it owed no reimbursement. In the court's opinion, written by Chief Circuit Judge Diane Sykes, the court noted that in light of that payment, all that remains up for discussion is the remaining $458,472.26 of the lower court's judgment.
Liberty argued that a district court and a bankruptcy court wrongly applied a presumption established in Thomson Inc. v. Insurance Company of North America, an Indiana case, that an insured's defense costs are reasonable and necessary if the insured has secured, supervised and paid for a defense.
Liberty said the Thomson presumption does not apply because USAG failed to adequately supervise the outside counsel it engaged and did not pay the full amount of legal fees it incurred. Liberty cited a Seventh Circuit ruling in Metavante Corp. v. Emigrant Savings Bank, in which the appellate court observed that a "prevailing party's general counsel, or similar corporate officer, has a duty, imposed by various provisions of federal and state law, to scrutinize the bills before paying them,"
The panel was unpersuaded by those arguments. It clarified Tuesday that that duty does not require a party to request write-offs from outside attorneys or ask them questions about invoices. "We hold that a litigant may supervise its outside counsel without refusing to pay portions of legal bills or engaging in hairsplitting about those bills. Nothing in the case law provides otherwise," the Seventh Circuit said. Also, no Seventh Circuit case law mentions a requirement that the party seeking fees must have paid its fees in full for the presumption of reasonableness to apply, the panel said.
The insurer also argued on appeal that USA Gymnastics's damages expert had a flawed methodology and that its chief legal officer, C.J. Schneider, was effectively a "rubber stamp" for defense counsel. It also said his review of the work of his own law firm, Miller Johnson, constituted a conflict of interest. But an apparent conflict of interest does not negate the presumption under governing case law and "an insurer's objections to a policyholder's selection of defense counsel lose force when the insurer disclaims its duty to defend and turns out to be wrong on the law," the panel said.
Liberty could have reserved its defense that it had no duty to defend and assumed USAG's defense, choosing and supervising the lawyers defending USAG and seeking reimbursement later, the court said. "Liberty chose not to do so, instead electing to gamble by not defending USAG. With the benefit of hindsight, Liberty now identifies a purported conflict of interest," the panel said. "The case law does not reward such a choice, and Liberty cannot use the purported conflict to render the presumption inapplicable."
Further, Schneider was not the only one engaging in an internal review of USAG's legal bills, as its CEO and chief financial officer also checked the bills and approved them for payment, the court said. And, while Liberty asserts that the nearly $8 million in grant funds USAG received from the National Gymnastics Foundation removed the incentive for USAG to drive down costs, the very basis for the Thomson presumption, it does not cite evidence to back that up, the panel held.