A recent Law 360 story by Emily Johnson, “Ga. Panel Finds $43M Trust Not On Hook For Legal Fees”, reports that the Georgia Court of Appeals rejected a request from beneficiaries of a $43 million furniture fortune, finding that the trust's ex-trustees should not be saddled with attorney fees and litigation costs while the trust's beneficiaries sued them for allegedly mishandling the trust and overpaying themselves.

At the same time, an appellate panel said that former trustees Phillip Faircloth and Ted Sexton were not faced with a threat of irreparable injury, so the lower court erred in granting the interlocutory injunction that ordered the trust to pay for Faircloth and Sexton's attorney fees while the trust sues them.  The lower court's interlocutory injunction required the current trustees to take up the cost of the former trustees' legal battle, including attorney fees and litigation costs.  "In sum, the record lacks evidence to support a finding that the interlocutory injunction is necessary to prevent an irreparable harm having no adequate legal remedy," the appellate panel said.

Beneficiaries of a trust tied to furniture tycoon Sherwin Glass, who founded Farmers Furniture Co., sued Faircloth and Sexton in 2017.  The appellate court panel found that because the trust has been lending money to Faircloth and Sexton for their legal costs, they were not harmed, a requirement for an interlocutory injunction.  "Due to the loan by Farmers, they have not been harmed by going unrepresented, and any monetary harm can be remedied by repayment of interest paid pursuant to the loan," the appellate panel said.

The appellate panel left in place a lower court's rejection of the request that the former trustees reimburse the trust about $4.6 million in legal fees that had already been paid.  This is the third time the case has been before the state's Court of Appeals, according to the decision.

Counsel for the Glass Dynasty Trust told the panel in September that the injunction required the trust to pay 50% of attorney fees and costs incurred by two of the firms representing Faircloth and Sexton, as well as 100% of the fees incurred by another, within 14 days of receiving an invoice.

Representing Faircloth and Sexton, J. Randolph Evans, partner at Squire Patton Boggs LLP, told Law360 Pulse on Monday that the court's decision is one of the biggest decisions this year in the state, saying this has "turned indemnity/insurance law on its head."

"The whole purpose of us having [a] duty to defend is so we don't have to front money to the lawyer," Evans said. "They pay the lawyer. Now they're saying, you pay the lawyer, and sue the insurance company and get back the money."  Evans said that the decision means that the former trustees and others won't be able to enforce a duty to defend from insurance carriers or indemnitors unless you can't pay for your defense.

The implications of the panel's decision for Georgia are enormous, he said.  "They went one step further, which made people really react," Evans said. "It's not just that you don't have the money; if you can borrow the money, you can't enforce the duty to defend."

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.

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.”

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.

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.

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