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Category: Fees & Duty to Defend

Insurer Must Pay Attorney Fees in Nassar Coverage Action

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.

Eleventh Circuit Tosses Insurer’s Request for Attorney Fees

June 2, 2022

A recent Law 360 story by Josh Liberatore, “11th Circ. Tosses Insurer’s Bid For Atty Fees After Reversal” reports that an insurer can't seek attorney fees on a $1.6 million judgment it previously won against a Liberty Mutual unit, the Eleventh Circuit confirmed, which comes after the court recently vacated the insurer's win on claims that the Liberty unit breached its contract while defending a fatal accident suit.  In an unpublished opinion, the appellate panel denied Endurance American Specialty Insurance Co.'s bid for attorney fees as moot. 

In May, the Eleventh Circuit reversed Endurance's $1.6 million win, finding that it couldn't show how Safeco Insurance Co. breached an indemnity agreement it had with Comegys Insurance Agency Inc., which was insured by Endurance.  "Safeco did win its appeal," the panel noted, "so, Endurance may not seek attorneys' fees."  Endurance had asked the Eleventh Circuit to overturn a lower court judge's ruling that its claims for attorney fees stemming from the judgment against Safeco were time-barred because Endurance failed to seek the fees within 14 days of the judgment.

The coverage dispute stems from an accident between driver Robert Smith and a motorcyclist, who died.  Safeco insured Smith, who bought his policies through Comegys.  Smith faced a wrongful death suit for which Safeco assigned an attorney who defended the case, and eventually a $7.3 million consent judgment was entered against Smith, according to court documents.  The consent judgment included Safeco paying the motorcyclist's estate the limits of Smith's auto policy, $1.25 million, and assigning the estate Safeco's claim against Comegys for negligent procurement, based on the theory that Comegys failed to find Smith a more robust policy after he had inquired about raising his policy limits.

Endurance insures Comegys under an errors and omissions policy, according to its suit.  The motorcyclist's estate pursued Endurance and Comegys "for the limit of Comegys's policy with Endurance," according to court documents.  The companies eventually paid just over $1.5 million to end the claims, court records show.

Endurance then sought to recoup the money from Safeco, arguing Safeco had breached its contract with Comegys by refusing to indemnify it for the alleged negligence.  Endurance's argument hinged on Safeco assigning an attorney to defend Smith, who allegedly mentioned to the motorcyclist's estate the possibility of a negligent procurement claim against Comegys and recommended an insurance lawyer to the estate.  In July 2019, a jury found in Endurance's favor, and the lower court entered a $1.6 million judgment against Safeco.

While Safeco appealed that decision to the Eleventh Circuit, Endurance launched an appeal of its own, arguing it should be awarded attorney fees for the judgment.  However, the Eleventh Circuit reversed the judgment last month, finding that Endurance couldn't show how Safeco had breached its contract with Comegys.  Safeco had acted entirely within the terms of that agreement by providing an insurance policy to Comegys's customers, tendering the policy on time after the accident and providing an attorney to Smith to defend the suit, the Eleventh Circuit panel presiding over that case found.  Safeco can't be held liable for what Smith's attorney decided to do after that, the panel said.

Mass. Justices Told Attorney Fee Award Must Be Covered

April 4, 2022

A recent Law 360 story by Ganesh Setty, “Mass. Justices Told Atty Fee Award Must Be Covered” reports that the Massachusetts Supreme Judicial Court heard oral arguments on whether an attorney fee award constitutes damages "because of" bodily injury, with the dispute appearing to hinge on whether a reasonable policyholder would interpret their policy that way in light of a narrow, inapplicable exclusion exception for such payments.

Vermont Mutual Insurance Co. argued the attorney fee award against its insureds falls outside its "because of" causation standard with respect to bodily injury claims.  The recipient of the yet-to-be-paid award, Phyllis Maston, meanwhile highlighted how the policy did not specifically define the term "damages."  The Massachusetts high court appeared hesitant to side with Maston, given the award originated from a state consumer protection statute, and Vermont Mutual's policy is a standard form insurance contract used nationwide.

According to court documents, Vermont Mutual insured Paul and Jane Poirier, franchisees of damage restoration chain Servpro, under a business owners policy between December 1998 and December 2001.  Phyllis Maston and her late husband, Douglas, hired Servpro to clean out their basement, and Phyllis Maston later suffered a nasal infection she attributed to the cleaning solution Servpro used.  The Mastons sued Servpro, and a trial court ultimately found in 2009 that Servpro violated Massachusetts' consumer protection law, Chapter 93A, through its breach of warranty.

As part of Chapter 93A, which empowers consumers to sue businesses for unfair or deceptive practices, a successful petitioner can recover their own attorney fees.  The law treats attorney fee awards as separate from awards for damages.  Vermont Mutual paid nearly $700,000 to Maston, but refused to cover her award of more than $215,000 in attorney fees, along with another $21,600 in attorney fees following Servpro's unsuccessful appeal of the original judgment, according to court documents.

The insurer subsequently filed a lawsuit against the Poiriers and Maston seeking a court declaration that the total attorney fee award is not covered since it does not constitute insured damages "because of" bodily injury as required by its policy.  A lower court sided with Maston in July 2016, noting there are no other cases in Massachusetts directly addressing a coverage dispute like Vermont Mutual's.  The court instead pointed to the 2010 Ohio Supreme Court decision in Neal-Pettit v. Lahman, which involved language similar to Vermont Mutual's policy, and found that attorney fees do qualify as damages because of bodily injury.

Vermont Mutual maintained in its high court briefs that since the policy used "because of," rather than a broader term like "arising out of," the attorney fee award is not covered, especially since Chapter 93A treats damages and attorney fee awards as separate remedies.  The insurer further argued that an exception to a contractual liability exclusion in the policy explicitly treats an attorney fee award as damages because of bodily injury only when there's an insurance contract between its insured and another party, and the parties can be jointly represented in a civil dispute.

While a policyholder reading the policy may initially think an attorney fee award constitutes covered damages, "you can't find ambiguity just because you stopped reading," Peter E. Heppner, counsel for the insurer, told the high court's seven justices.  Although inapplicable, the exclusion exception illustrates that the policy did not intend to broadly treat attorney fees as damages because of bodily injury, he said.  Justice Scott L. Kafker asked Heppner, with respect to Maston's attorney fee award: "I understand that it's two or three steps removed, but it all arises out of the fact that there's an injury, doesn't it?"

"'Arises out of' is an interesting choice of words," Heppner responded. "When the policy has 'arising out of' in several exclusions, and then 'because of' here — and we know that the Supreme Court has said 'because of' is 'but for' — there has to be a distinction between those words."

When asked by Justice Dalila Argaez Wendlandt why the exclusion exception didn't put a reasonable insured on notice that the attorney fees may not otherwise be covered, Timothy P. Wickstrom, an attorney representing Maston, said the exclusion exception was inapplicable to the case to begin with.  It only concerns defense costs for the insured and the other party it contracts with, not attorney fee awards adverse to an insured, he argued.  If Vermont Mutual wanted to broadly bar coverage for attorney fees, one sentence stating so would have sufficed, he added.  The insurance policy at issue is a standard form insurance policy, Justice Kafker further noted. "That's where it gets me nervous."

"Here [in] Massachusetts, we've got this particular 93A attorney fee provision that's idiosyncratic, and we're applying it to these nationwide forms, right?" he asked.  The coverage dispute is not about Chapter 93A's separate treatment of damages and attorney fees, but whether attorney fees are covered under the policy, Wickstrom responded. Wickstrom further highlighted that part of the total attorney fee award under Chapter 93A includes Servpro's unsuccessful appeal of the judgment in the underlying case.

"In a situation where Vermont Mutual had a duty to defend, had a duty to indemnify — the defendants, their insureds, were on the hook for the appeals court fees," he said.  "How unfair is that?"  "Just create all the complexities of 93A attorneys fees, which probably no one ever thought about when they created this sort of extra remedy for everybody," Justice Kafker quipped.