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Category: Defense Fees / Costs

Insurer Must Pay Defense Costs in Underlying Litigation

February 20, 2024

A recent Law 360 story by Jennifer Mandato, “Insurer Must Pay Defense Costs In Newspaper Shooting Row”, reports that an insurer owed coverage to the parent companies of a Maryland newspaper for the legal fees resulting from two underlying lawsuits brought by the victims and their families after a 2018 mass shooting, an Illinois federal judge ruled. 

In his order, U.S. District Judge Matthew F. Kennelly ruled that ACE American Insurance Co. breached its duty to defend Tribune Publishing Co. and The Baltimore Sun Co. by refusing to pay for or reimburse any portion of the defense expenses incurred from the underlying litigation.  How much coverage is afforded is still undetermined.

Judge Kennelly determined that Tribune and the Sun were entitled to retain independent counsel, and therefore ACE can't "viably argue" that the publishers' $4 million in defense fees and expenses were considered voluntary, relieving it of the duty to reimburse them.

Tribune and the Sun filed suit in December 2022, accusing the Chubb unit of impermissibly trying to "allocate" some of the company's defense costs to its commercial general liability policy, which has a $1 million deductible that effectively cancels out a corresponding $1 million coverage limit.  Allocating defense costs to the CGL policy would improperly reduce the amount of defense costs covered under the Tribune's worker's compensation policy, which also has a $1 million deductible and $1 million policy limit, but the deductible doesn't erode the policy limit, filings show.

The coverage dispute stems from a June 2018 shooting at the Capital Gazette's offices in Annapolis, Maryland.  The gunman, Jarrod Ramos, broke into the office space and opened fire, killing five employees and injuring others, according to Tribune's complaint.  Ramos was sentenced to multiple life sentences in September 2021.  Tribune was later named in a pair of lawsuits filed by 10 plaintiffs seeking damages for the shooting, the publishing company said.  The underlying suits asserted claims for wrongful death, survival and negligence based on premises liability.

According to court records, it's undisputed that Tribune paid over $900,000 in workers' compensation claims filed on behalf of the victims and their families and that ACE was aware that the publisher did so.  In September, Tribune sought a determination that ACE breached its duty to defend and had no valid reason to deny coverage of the underlying suits under their employers' liability policy.

Judge Kennelly granted the publisher's request, finding that because ACE agreed to defend Tribune and the Sun — even under a reservation of rights — it was obligated to continue to defend the insureds until it subsequently sought and obtained a judgment relieving it of any obligation.  While ACE argued that Tribune wrongfully appointed independent counsel, Judge Kennelly disagreed.

Instead, he found that the insurer knew Tribune and the Sun were represented by outside counsel in the underlying suits, but failed to put forth any evidence showing that it expressed disapproval of the publishers' choice.  Judge Kennelly also supported Tribune's notion that a conflict of interest entitled it to retain independent counsel.

According to the order, Tribune and the Sun had a "strong interest" in proving that they were excluded from the underlying suits because of workers' compensation exclusivity laws, and thus would be entitled to coverage under the workers' compensation policy rather than the CGL policy, to the detriment of ACE.

Although the court concluded that ACE owed the publishers' reimbursement for any portion of their defense expenses, Judge Kennelly held that the finding didn't necessarily entitle them to coverage of the entirety of their claimed defense expenses.   An insurer may only be required to cover reasonable defense expenses, an amount which remains unsolved at present, according to the order.

Attorneys Seek Fees Defending Former DraftKings Executive

February 14, 2024

A recent Law 360 story by James Mills, “Ex-DraftKings Exec’s Attys Seek $310K For Court Pingpong”, reports that lawyers for a former DraftKings Inc. executive who recently defected to rival Fanatics are seeking more than $310,000 in attorney fees, arguing the amount is reasonable and would cover their work for two "objectively unreasonable" removals of the case to federal court by DraftKings, behavior they called "disturbing litigation conduct."

Michael Hermalyn, a former vice president of growth with Massachusetts-based online sports betting company DraftKings, has sued in California to void a noncompete clause in his contract to allow him to work for California-based sports betting company Fanatics VIP. California law does not recognize noncompete agreements.  However, DraftKings has twice in the past week removed the case from state court to federal court.

"DraftKings' successive, baseless removals constitute an abuse of process, undertaken for the improper purpose of preventing Mr. Hermalyn from seeking immediate relief in state court," reads the motion filed in federal court by attorneys with Munger Tolles & Olson LLP, representing Hermalyn.

"As of the filing of this brief, Mr. Hermalyn still has not had an opportunity to be heard on an application for emergency relief that he attempted to file over a week ago," the brief continues.  "Meanwhile, DraftKings' removals have achieved exactly what they were designed to do — hamstring Mr. Hermalyn while DraftKings raced to file its own lawsuit, and obtain its own temporary injunction, in another forum."  As a result of DraftKings removing the cases to federal court, Hermalyn's attorneys have had to scramble to respond, according to the motion.

They are asking for $193,326 in attorney fees for work connected to contesting the first removal — almost 150 hours spent by nine attorneys.  They are also seeking $117,278 in attorney fees for work connected to the second removal — over 90 hours spent by eight attorneys.  Hermalyn's attorneys are charging an average rate of $1,279 per hour, an amount the motion calls "squarely within the billing rates approved as reasonable by a number of Los Angeles courts."  The motion notes the average Los Angeles attorney fees have been over $1,000 an hour for a decade.

Fourth Circuit Denies Coverage of Defense Fees in Fraud Case

January 4, 2024

A recent Law 360 story by Emily Enfinger, “Md. Atty Not Owed Defense Coverage, 4th Circ. Finds”, reports that a Maryland attorney is not entitled to defense costs under his law firm's insurance policy after he was indicted on allegations that he fraudulently seized control of $13 million in Somalian government funds, the Fourth Circuit has ruled, affirming in full a district court's summary judgment.

In a published opinion, the panel agreed that Axis Surplus Insurance Co., Endurance American Specialty Insurance Co. and Prosight Syndicate 1110 at Lloyds do not owe coverage to Jeremy Schulman in connection with the underlying fraud and money laundering charges.  Schulman, who is based in Bethesda, Maryland, has asserted that a part of the policy saying it covers "demands" should give him coverage after prosecutors said they were coming for his property.

But the indictment does not fall within several definitions of the word "demand," the panel said, noting that the forfeiture allegation in the indictment did not require the attorney to turn over any money or property to the government.  Instead, at most, the forfeiture allegation is "a notice that there will be a demand in the future," the panel said.  "The ordinary meaning of 'demand' does not encompass a notice that, on the condition a triggering event occurs, something will be demanded in the future," the panel continued.

Schulman has also argued that a letter the insurers sent him in June 2017 was a binding contract in which the insurers promised to cover fees and costs related to the indictment, and that he relied on that promise "to his detriment," the panel's opinion read.  The panel was unconvinced that the letter triggered coverage, saying that "the insurers never made a clear and definite promise to cover the expenses over which Schulman has sued."  Rather, the letter limits coverage for a subpoena, the panel said, not the indictment.

Federal prosecutors said Schulman assisted the Somali government in unfreezing nearly $13 million in assets through fraud and money laundering, taking $3.3 million for his law firm and hundreds of thousands of dollars for himself in the process.  Schulman is accused of forging documents and lying to banks about his authority to obtain the Somali government's money.

Prosecutors charged Schulman in December 2020 with 11 criminal counts, including conspiracy to commit mail fraud and money laundering, wire and bank fraud, and money laundering.  After being indicted, Schulman said he racked up about $2 million in criminal defense costs.

Article: Understanding Attorney Fee-Shifting to Mitigate Risk

December 5, 2023

A recent Business Insurance article by Iran Valentin and Allison Scott, “Perspectives: Understanding Attorney Fee Shifting to Mitigate Exposures”, reports on the importance of understanding attorney fee-shifting in litigation to mitigate risk.  This article was posted with permission.  The article reads:

The availability of attorneys fees is a significant concern to policyholders.  Without the potential to recover the fees, most dubious claims and suits related to employment law and consumer protection, for example, would not be pursued.  The potential of a fee recovery also drives up the cost of resultant litigation, settlements and awards.  Thus, a double-headed monster emerges: an increase in the number of claims and an increase in exposure, which can eventually drive up the costs of insurance.

An existential threat that exists for corporations is a “nuclear verdict,” or a runaway jury award.  These huge verdicts grew in the face of incessant legal advertising by plaintiffs attorneys and the resultant slanted narrative effectively desensitized potential jurors to the value of money and preemptively taints prospective jury pools.

Within this context, it is more important than ever for insurance professionals and defense counsel to understand the significance of attorney-fee shifting.  When crafting a defense strategy, many factors are considered, including the nature of the alleged loss, the profiles of the litigants, the reputation of the claimants’ counsel, recent jury verdicts and the jurisdiction.  Equally as important should be considering the effect of fee-shifting, to develop strategies to mitigate that exposure.

Remedial legislation

Basically, fee-shifting requires a losing party in litigation to pay a prevailing party’s attorneys fees.  It represents a departure from the “American Rule,” which generally provides that each party to a litigation will bear their own fees.  However, fee-shifting statutes have continued to grow, especially in the areas of employment and consumer protection, or so-called remedial legislation.

One of the purposes of remedial legislation is to introduce policies intended to benefit the public good, including anti-discrimination, anti-retaliation and consumer protection.  The policies enable fee-shifting provisions so alleged victims have access to competent legal representation.  It is not always the alleged victims who seek vindication, but rather lawyers who make a market in an area where attorneys fees are available.

Fee-shifting is sometimes a misnomer, as the availability of fees under enabling law is often limited to a prevailing plaintiff, as opposed to a prevailing defendant.  Under those laws, legislators seek to avoid the creation of a “chilling effect,” in dissuading potential plaintiffs and their lawyers from pursuing a claim.

Some laws allow for more traditional fee-shifting, by allowing prevailing defendants to recover defense fees for claims that lack merit or are brought in bad faith.  While a prevailing party may be awarded fees under a fee-shifting law, there is often attendant litigation over who constitutes a “prevailing party.”  Generally, a prevailing party is one who achieves a substantial proportion of the relief sought, whether or not that party actually obtains a verdict.  Courts have held that parties may not only prevail by judgment but also by compromise or settlement. 

In at least one jurisdiction, fee-shifting has also been made available in the professional liability context.  In New Jersey, the precedential 1996 case of Saffer v. Willoughby allowed a successful plaintiff to recover attorneys fees in prosecuting a legal malpractice action.  The New Jersey Supreme Court held that a negligent attorney is responsible for resulting legal fees and costs.  Interestingly, those fees were not considered fee-shifting, but “consequential damages” flowing from the attorney’s negligence.  New Jersey courts also allow recovery of fees by a third-party if the attorney intentionally breaches a recognized duty owed to a non-client, such as when serving as a fiduciary. 

The “common fund” and “substantial benefit” doctrines are also court-created fee-shifting mechanisms.  The common fund doctrine applies where litigation has created or preserved a common fund for the benefit of a group of people — such as a class action — and, accordingly, an attorney may be awarded attorneys fees out of that fund.  The substantial benefit doctrine applies if a judgment confers a substantial benefit on a defendant, such as in a corporate derivative action, which could lead to the payment by the defendant of the attorneys fees incurred by the plaintiff. 

Outside of the statutory and court-created fee-shifting framework, parties to a contract may agree to fee-shifting provisions.  Commercial contracts quite commonly contain default provisions that call for the payment of attorneys fees to a prevailing party in a dispute to enforce the terms of the agreement.

In most jurisdictions, attorneys fees that are awarded pursuant to a fee-shifting statute are calculated by setting a “lodestar,” which is the number of hours reasonably expended by an attorney multiplied by a reasonable hourly rate in the jurisdiction. Courts have the flexibility to adjust the lodestar considering certain factors, such as the results obtained by the attorney; the time and labor required to obtain that result; the attorney’s skill; the attorney’s customary fee; the amount of money involved in the claim; and awards in similar cases.

If the prevailing party has only achieved partial or limited success, the requested lodestar may be considered excessive and reduced.  Moreover, the attorney’s presentation of time billed must be set forth with sufficient detail, based on appropriate rates and in compliance with the jurisdiction’s ethical requirements.

Determining exposure

When a claim arises, insurance professionals and defense counsel should determine whether the policyholder is exposed to any court rule, statute, regulation or case law that allows fee-shifting or an award of attorneys fees.  They should also conduct an early assessment of liability and damages and consider early avenues to resolution to mitigate the exposure to fee-shifting.  Depending on the jurisdiction, defense counsel may be able to craft strategies designed to cabin the availability of attorneys fees, helping to drive resolution.  These are good faith strategies and methods employed during a case to drive resolution and also mitigate the exposure to attorneys fees. 

Often, a reasonable settlement curbing increased fees and costs is the second-best result outside of obtaining an early dismissal.  However, it is important to take care during settlement negotiations and the drafting of settlement agreements, releases and stipulations resolving litigation to account for attorneys fees and costs.  Lack of attention or poor drafting could result in unintended consequences, including the imposition of a fee award. 

When an adverse judgment calls for the imposition of an award of attorneys fees, strategies can still be employed to curb a disproportionately excessive fee claim, by relying on mitigation strategies employed at the outset designed to limit the recovery of fees; exposing the limited success of a claimant; exposing an adversary’s wastefulness during the dispute; questioning the proofs submitted in support of the fee claim; and otherwise contesting the reasonableness of the fee claim.

Iram Valentin is co-chair of the professional liability practice group in the Hackensack, New Jersey, office of Kaufman Dolowich LLP.   Allison Scott is an associate at the firm.

NY Court: Policyholder May Recoup Attorney Fees

December 4, 2023

A recent Law.com story by Emily Saul, “’Policyholders May Recoup Attorney Fees If Insurer Fails in Contesting Duty to Indemnify”, reports that an insurer defending a policyholder in litigation must also reimburse the insured party’s coverage action costs if the insurer loses a legal challenge to its indemnity obligation, a judge has ruled.  Manhattan Supreme Court Justice Gerald Lebovits, in a case without a definitive decision from the state’s highest court, affirmed that when an insured “is cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations,” and the insured party then prevails, the policyholder may recover attorney fees “incurred in defending against the insurer’s action.”  Little New York appellate precedent exists on this specific fee issue, Lebovits noted in his 10-page order, issued.  The decision increases insurance companies’ risk, should companies seek to deny coverage.

The underlying litigation—which continues—involves construction in two mixed-use commercial and residential buildings in Manhattan.  Plaintiffs sued defendants Crystal Curtain Wall System Corp. and other affiliated entities in 2011 over water damage caused by alleged construction defects.  Utica Mutual Insurance Company and Utica National Assurance Company sued their policyholder Crystal entities in 2022, asking a judge to define the scope of its duty to indemnify the client.

Crystal subsequently moved to dismiss the action not yet ripe and sought an award of attorneys fees, should their motion prevail. Utica cross-moved for partial summary judgment, asking the court to find it had no duty to indemnify Crystal as to the costs of repair or replacement of the curtain wall.  “This attorney fee request implicates a legal question about the parameters of a prevailing insured’s entitlement to attorney fees from its insurer that New York appellate courts appear not to have considered,” the judge wrote.

“The parties do not cite, and this court has not found, any decision of the Court of Appeals or the Appellate Division discussing whether a prevailing policyholder is entitled to attorney fees when the insurer has acknowledged a duty to defend but contested the duty to indemnify,” the order states.  Absent precedent, Lebovitz said the court concludes for itself that a policyholder is entitled to attorneys fees when it prevails in an action brought by the insurance company challenging its duty to indemnify.

“New York doctrine in this area rests on the insurer’s duty to defend its insured in ‘any action arising out of the occurrence, including a defense against an insurer’s declaratory-judgment action.’ (City Club Hotel, 3 NY3d at 598 [emphasis added].)  This is true when an insurer contests both the duty to defend and to indemnify,” the judge wrote.  “No logical reason exists why it should be different—why an insurer’s duty to defend its insured should suddenly cease—when the insurer disputes only the duty to indemnify.  And the Court of Appeals’ holdings in this area have always been phrased in broad terms that would encompass an insurer’s indemnification-only challenge: They permit recovery by the insured that prevails against ‘the legal steps an insurer takes in an effort to free itself from its policy obligations,’ period—not merely the insurer’s policy obligation to defend.”

Late Fee Request Cost Defense Over $130K

October 27, 2023

A recent Law.com story by Aleeza Furman, “Defendants’ Late Motion Costs Them An Over $130K Attorney Fees Award”, reports that a late motion in a long-running contract dispute lost defendants...

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