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Category: Fees & Duty to Defend

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“The parties do not cite, and this court has not found, any decision of the Court of Appeals or the Appellate Division discussing whether a prevailing policyholder is entitled to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.”

Miami Law Firm Fights for Coverage of Fee Dispute

September 21, 2023

A recent Law 360 story by Ganesh Setty, “Miami Law Firm Fights For Coverage Of Overbilling Claims”, reports that a Miami law firm's insurer cannot rely on an "ambiguous" fee dispute exclusion to totally avoid defending overbilling claims, the law firm told a Florida federal court, arguing that even if the exclusion applies, the underlying lawsuit it faces involves broader legal malpractice claims.  In a brief opposing James River Insurance Co.'s motion for summary judgment, Sheehe & Associates PA and three of its attorneys said that, despite the insurer's effort to construe the underlying action as an "overbilling scheme," at least two counts — breach of fiduciary duty and breach of oral contract — are still covered.

And the potential for coverage triggers an insurer's duty to defend an entire lawsuit, the firm noted.  According to court filings, James River issued a professional liability policy to Sheehe running from March 2020 to March 2021 that broadly provided coverage for wrongful acts in the performance or failure to perform "professional services."  The policy defined that term in part as services performed by an insured as a lawyer, arbitrator or trustee, along with other fiduciary roles performed in one's capacity as a lawyer.

In the underlying action, Frontline Insurance Co. accused Sheehe and the attorneys in state court of overbilling hours worked while handling first-party property claims, alleging that in some cases multiple attorneys for the firm individually billed Frontline more than 24 hours for a single day.  Frontline specifically lodged breach of fiduciary duty, negligent supervision, unfair trade practices, unjust enrichment, breach of oral contract, fraud and legal malpractice claims.

In denying coverage, James River argued that overbilling does not constitute professional services, pointing in part to a fee dispute exclusion that barred coverage for claims arising from the "rights or duties under any agreement including disputes over fees for services."

Highlighting an underlying allegation that Sheehe and the other attorneys failed to ensure their legal services were "reasonable and necessary and advanced the best interest of Frontline," the law firm said such a claim shows that Frontline is not just suing Sheehe for a billing dispute but its "strategic decisions," too.  "A claim for breach of fiduciary duty grounded in an attorney-client relationship is considered a malpractice action and subject to the same standards as a legal malpractice claim," Sheehe continued, adding that the same goes for the breach of oral contract claim.

As for the fee dispute exclusion itself, its use of "any agreement" renders its scope overly broad since all professional services in the policy stem from an attorney-client relationship in which an attorney agrees to appropriately represent their client's interests, the firm further argued.  "This exclusion precludes coverage for all agreements, including ones between attorneys and clients, rendering the coverage illusory if read as expansively as James River urges," it said.

For its part, James River further cited in its August motion for summary judgment a prior knowledge exclusion, which barred coverage for a professional services claim if "any insured" could have reasonably foreseen their conduct would give rise to a claim.  It also invoked a "gain of profit or advantage" exclusion barring coverage for any gain or profit an insured is not legally entitled to.

But the policy still covers claims following its retroactive date of March 2004, which was prior to Sheehe's representation of Frontline, the firm responded, adding that the audit Frontline commissioned was still ongoing at the time Sheehe's policy started coverage.  "As the audit included dates cited in the complaint late as March of 2020, there is no allegation in the underlying complaint that supports that Sheehe would or should know that a claim would arise," the firm said.  The gain of profit or advantage exclusion, meanwhile, does not extend to the breach of fiduciary duty and oral contract claims either, Sheehe said, noting both counts seek damages rather than repayment of fees.

Texas Court Rules in Insurer’s Right to Control Defense Fees

September 7, 2023

A recent Law.com story by Adolfo Pesquera, “3 Lawyers? One’s Enough, Court Rules in Insurer’s Fight Over Attorney Fees”, reports that a Texas state district court was found to have erred in denying an insurer’s summary judgment motion in an attorney fees dispute, where plaintiffs alleged more than one attorney was needed to avoid a “potential” conflict of interest.

The Ninth District Court of Appeals reversed a ruling of the Montgomery County 457th District Court in a case where a government entity and two elected officials depended on a Directors and Officers policy from Mid-Continent Casualty Co. to provide for their defense when a losing candidate filed suit alleging election irregularities.

Insurer Right to Control Defense

The reversal hinged on Mid-Continent’s right under the policy to control the defense, and whether there was an actual conflict of interest that the insurer formally recognized.  In the underlying suit, third-place candidate Edgar Clayton sued Harris County Municipal Utility District No. 400 and the two candidates who placed ahead of him, Ann Marie Wright and Cheryl Smith.

The court ultimately dismissed the lawsuit with prejudice, but the parties disagreed about how many lawyers the insurer should provide the district.  James Stilwell of Stilwell, Earl & Apostolakis, based in The Woodlands, Texas, and acting for the district responded to Mid-Continent’s letter agreeing to defend but preserving its reservation of rights.  Stilwell told Mid-Continent that was a “possibility of a conflict of interest in representation regarding Mid-Continent’s desire to have a single attorney represent all three defendants.”

Stilwell and the district were informed by a claims adjuster for Mid-Continent that it was the opinion of coverage attorney Brent Cooper of Cooper & Scully that Mid-Continent had the right to select defense counsel “because the facts to be adjudicated are not necessarily the same facts that control coverage,” and the Houston attorney Britt Harris had been retained by Mid-Continent as their counsel.

Instead, Stilwell’s subsequent correspondence informed Mid-Continent that the elected officials would be represented by Houston-area attorneys and Bruce Tough and Kenna Seiler, and the district by its general counsel, Chris Skinner of Schwartz, Page & Harding.

Conflict of Interest?

Stilwell asserted the potential conflict had to do with Wright and Clayton having run on the same slate against Smith, as well as the district’s desire to defend the election through trial, whereas the individual directors possibly wanting a do-over or settlement.

Mid-Continent attorney Mark Lewis cut a check made out to the district for $4,290 in attorney fees, which covered the period up to Mid-Continent’s offer to assume the defense.  Stilwell, in a pre-suit demand letter asked for attorney fees of $151,750 for the Clayton suit defense, plus $5,600 attorney fees for defending the wrongful denial.

Referring to the Texas Disciplinary Rules of Professional Conduct, the Ninth District court noted a lawyer may only represent multiple clients if he reasonably believes each client will not be materially affected, and each client consents after full disclosure of possible adverse consequences of common representation.

The deposition testimony and affidavit generally averred that the defendants discussed material conflicts at a board meeting and would not waive those conflicts, and they requested separate counsel, the opinion stated.  Nevertheless, the Ninth District held that the district’s “arguments are without merit.”

“We note that the information on which appellees rely falls outside the eight-corners of the pleadings and the insurance policy,” the court said.  In addition, the court said Stilwell’s responses to Mid-Continent referred only to “potential” conflicts, but never stipulating actual conflicts.

“We conclude that Clayton’s petition did not allege facts that would necessitate separate counsel. Clayton does not allege anything in his petition that would make the interests of Wright, Smith, or MUD 400 adverse to the interests of each other,” the court said.

Insurer Must Pay Full Defense Fees, Can Impose Future Rate Reductions

August 16, 2023

A recent Law 360 story by Hailey Konnath, “’SoCal Edison’s Insurer Ordered To Pay Wildfire Attorney Fees”, reports that the insurer for Southern California Edison Co. must pay in full the counsel fees stemming from a number of negligence suits over the September 2020 Bobcat Fire that the carrier initially refused to defend, a move that was a breach of its insurance contract, a California federal judge ruled.

U.S. District Judge John F. Walter granted in part and denied in part SoCal Edison's motion for summary judgment, agreeing with the utility that Greenwich Insurance Co. forfeited the right to limit counsel fees associated with those cases when Greenwich refused to defend them.  However, the insurer can indeed rely on California law to impose lower billable rates on future defense fees incurred in three cases that Greenwich agreed to defend earlier this year, the judge held.

"There is no evidence that Greenwich has breached its duty to defend as to the three lawsuits tendered on Jan. 13, 2023, and May 11, 2023," Judge Walter said.  "As such, it has not forfeited its rights and may take advantage of the rate limitations set forth in California Civil Code [Section] 2860."

The dispute centers on a slew of suits against SoCal Edison and its parent company, Edison International, following the devastating Bobcat Fire in the Angeles National Forest in September 2020.  The plaintiffs in those suits claimed that the fire was likely caused by tree branches and other vegetation that came into contact with SoCal Edison's conductors.

The utility sought coverage from Greenwich under a commercial general liability policy that the insurer issued to Utility Tree Service LLC, which SoCal Edison hired to provide vegetation services where the fire started.  But the insurer repeatedly denied its duty to defend.

Last year, SoCal Edison filed suit against Greenwich, asking the court to declare that the insurer owes coverage under the CGL policy and asserting breach of contract and bad faith claims.  Greenwich argued that it has no defense obligations to the utility company because the underlying suits don't accuse UTS of negligence.  However, in January, the court held that SoCal Edison clearly established that Greenwich has a duty to defend.

The utility lodged its motion for partial summary judgment in June, arguing that Greenwich has failed to reimburse its fees in full following that order.  Instead, it told the utility it planned to pay only a fraction of the fees by significantly reducing the hourly rate of SoCal Edison's defense counsel, it said at the time.

Insurer Owes Attorney Fees After Reduction in Fees

August 3, 2023

A recent Law 360 story by Elizabeth Daley, “Insurer Owes Sugar Co. $3.5M After Fee Cut in Emissions Suit”, reports that United States Sugar Corp. cannot recoup from its insurer all it spent in a nearly $10 million battle against a proposed class action alleging toxic emissions from pre-harvest sugarcane burns, a Florida federal judge ruled, finding costs excessive.  In his order, U.S. District Judge Robert N. Scola Jr. wrote that Commerce and Industry Insurance Co. would only be responsible for paying just over $6.5 million in connection with the underlying case, resulting "in roughly a 24% overall reduction of US Sugar's requested attorneys' fees and costs."  Because the insurer had already paid about $2.1 million and the sugar company was subject to a $1 million self-insured retention, the insurer ended up owing U.S. Sugar nearly $3.5 million, the judge said.

The dispute between U.S. Sugar and Commerce and Industry stemmed from an underlying lawsuit that was voluntarily dismissed in 2022.  The complaint, filed in 2019, accused U.S. Sugar and other leading sugar producers of harming nearby Florida properties through the practice of pre-harvest sugarcane burns, which the lawsuits alleged emitted toxic "black snow" in the Glades region.  The plaintiffs alleged the black snow, which sent plumes of smoke into the air and deposited ash on cars, homes and yards, harmed public health and local property values.

U.S. Sugar told the court that the underlying complaint was amended three times and the company spent millions of dollars defending itself.  The plaintiffs eventually dropped the litigation.  The insurer refused to defend U.S. Sugar, but was ultimately found responsible, according to court documents.  In his order, Judge Scola found that the costs of defending the lawsuit were so steep that he agreed with the insurer that they were beyond the reasonable costs that Florida law dictates must be reimbursed under the circumstances.

While opposing the insurer's request for a 50% reduction of the costs and fees, Judge Scola did agree that the work by some of the six law firms U.S. Sugar employed — Gunster, Mayer Brown, Holland & Knight, Litchfield Cavo, Haliczer Pettis & Schwamm and Clare Locke — was at times duplicative.  He specifically cited Gunster and Mayer Brown, writing "both firms [took] overlapping roles on the review and investigation of the pleadings and on legal briefing relating to the pleadings."

As a result, the judge cut Gunster's fees by 20% and Mayer Brown's by 30%. He also challenged some costs related to expert witnesses, leading him to employ the overall 24% reduction to U.S. Sugar's costs.  However, the judge declined to challenge the pay rates for three Mayer Brown attorneys despite the insurer calling their hourly rates of $1,058, $995 and $932 excessive.

Judge Scola explained that though the underlying case did not proceed to discovery, it lasted for over two and a half years.  While it did not involve novel questions, there were many legal filings and the case was more challenging than many because it involved both personal injury and environmental harm, he said.  The case required specialty environmental attorneys with "an above-average level of skill," Judge Scola wrote.  As such, he wrote that the attorney fees were high as might be expected for a complex case.

Additionally, the Miami-based judge added that "the South Florida legal market has changed drastically in the last several years.  Miami in particular has developed into a national legal market.  That top-end firms will be able to charge national hourly rates in South Florida, now, is an inevitable consequence of that development."