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Category: Practice Area: Insurance Coverage Litigation

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.”

Does New Texas Law Cut Out Attorney Fees?

October 6, 2023

A recent Law.com story by Adolfo Pesquera, “Does New Insurance Law Cut Out Attorney Fees? High Court to Decide”, reports that the Texas Supreme Court justices responding to a federal appellate certified question appeared perplexed about the lack of guidance on how or if attorneys could get paid on property-damage insurance claims.  The justices heard oral argument on Rodriguez v. Safeco Ins. Co. of Indiana, a case that came to them from the U.S. Court of Appeals for the Fifth Circuit.  A federal trial court granted the insurer summary judgment and the homeowner appealed.

The appeal argued that when Safeco invoked the policy appraisal provision after litigation began, and paid damages and interest, a Texas insurance law created by the legislature in 2017 did not intend to eliminate attorney fees.  In examining the 2017 Texas Prompt Payment and Claims Act, the Fifth Circuit decided it could not interpret the law and asked the Supreme Court to weigh in on the issue.

Melissa W. Wray of Daly & Black, arguing for the homeowner, said the intent of the law is to promote prompt payment of insurance claims by imposing liability for statutory interest, attorney fees and prejudgment interest on insurers who do not pay claims in accord with the act’s deadline.

“Safeco asks the court to adopt an interpretation of the statute that would, in the context of attorneys fees, ignore the claim payment deadlines that the legislature has put in place and effectively redefine prompt payment of a claim to mean payment of a claim at any time up until the moment before the trial judge enters the final judgment,” Wray said.

Throughout the hearing, the justices grappled with a phrase in the law—”the amount to be awarded in the judgment”—and Justice Brett Busby began by referring to caselaw, Ortiz v. State Farm Lloyds (Texas 2019), where the supreme court said there is no claim for breach of contract when the insurer pays the appraisal award.  “So, wouldn’t the ‘amount to be awarded’ in the judgment for your claim under the insurance policy be zero?” Busby asked.

Wray drew a distinction, moving away from a breach of contract claim, to argue damages was not necessarily relevant to an “amount to be awarded,” because the only defined term in the statute was a “claim.”  “Safeco wants to interpret that as the amount of unpaid policy benefits for which the insurer remains liable at the time of judgment.  Those words aren’t used in the statute,” Wray said.

When Safeco’s representative, Mark D. Tillman of Tillman Batchelor, rose to speak, the justices repeatedly tried to pin him down on when the language of the statute allegedly read attorney fees out of the act.  “There has to be the possibility that a plaintiff can obtain a judgment,” Tillman argued.  “The legislature clearly tied the ability to award attorney’s fees to, in the future, obtain a judgment. That simply cannot happen here.”  Justices Busby, Jeff Boyd and Evan Young took turns arguing that point.

Boyd said Tillman was embracing the absurd argument that, speaking hypothetically, a $50 million building could be destroyed and insurance company disagrees with the amount damages claimed.  “You have five years of litigation, finally get to a jury trial, the jury finds for the insured, and you file your JNOV and the judge denies it and the judge says ‘send me an order.  I’m going to sign a final judgment awarding all this money,’ and your client at that moment can write a check and avoid all attorney’s fees,” Boyd said.

Busby jumped in, “You’re getting back to my question then.  Where is the moment … when you’re looking at what is ‘to be awarded?’  To Boyd’s point, it’s not the day before the judgment is signed.  So in the life of the case, when is it?”

Tillman said that in this particular case, the appraisal amount was paid immediately.  “I understand, but we have to write the rule not just for your case,” Busby said.  Justice Young asked, “What will inform the answer to that question if it’s not in the text of the statute?”  Tillman finally said he did not know.  Then we go right back to Justice Boyd’s hypothetical.  I’m with him.  I don’t understand where the line is if that’s the only thing the statue says and the only thing we’re guided by,” Young said.

Tillman argued Boyd’s hypothetical scenario was an extreme case and one he had never encountered in the real world.  He told the court not to “throw the baby out with the bathwater” using an extreme example to overturn a statute intended to curb abuses by trial attorneys that led to its passage in the first place.  “Then why not just embrace it and say, ‘Yeah, that’s an extreme hypothetical, not going to happen, but the statute says it and if it’s a problem there’s no judicially discernable way to draw that line, leave it to the legislature to fix that,” Young suggested.

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.

Judge Cuts Billing Rates to Reflect Denver’s Prevailing Market

September 1, 2023

A recent Law 360 story by Thy Vo, “Colo. Judge Cuts Condo Developer’s Atty Fee Award to $2.3M”, reports that a Colorado federal judge has pared down a condominium developer's attorney fee award to $2.3 million after it secured a verdict against its insurer in a construction coverage dispute, with the judge finding that the developer requested hourly rates higher than the prevailing rate in Denver's legal market.

U.S. District Judge Charlotte N. Sweeney on cut Curtis Park Group LLC's fee award from the $2.77 million requested by the developer down to $2.35 million, writing in her order that the requested rates, ranging from $350 to $1,175 an hour, were "excessive" compared with similar legal services in the region.  "At bottom, Curtis Park's repeated emphasis on its counsel's status as an AmLaw 100 firm does not make its requested hourly rates reasonable," Judge Sweeney wrote.

But the judge declined to cut into the developer's fee award as steeply as defendant Allied World Specialty Insurance Co. insisted, finding it would be "inappropriate" given the "excellent skills, experience and reputations" of Curtis Park's attorneys from Haynes and Boone LLP.  "Moreover, even though this insurance dispute case did not rise to the level of a 'niche practice,' it certainly was a complex insurance dispute with high stakes, as both parties have acknowledged," Judge Sweeney wrote in her order.

The fee award comes after a jury in April found that more than $2.5 million in covered benefits related to Curtis Park's condo project in Denver was improperly delayed or denied by Allied World's bad faith conduct.  Curtis Park sued the insurer in federal court in February 2020, alleging Allied World improperly denied coverage for losses resulting from an unexpected amount of "downward deflection" in a concrete podium deck beneath four of the development's five buildings.

Judge Sweeney's order also cut the amount of travel time Curtis Park's attorneys could recover in half, citing decisions by other courts.  But the judge rejected other claims by Allied World that the developer's fees should be reduced even further.  "Allied World fails to persuade, based on the case file and evidentiary record, that Curtis Park impermissibly 'hid' Pat Casey's involvement at various stages of litigation," Judge Sweeney said.  "And notably, as Allied World states, Curtis Park does not seek to recover fees for Mr. Casey's time."