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Insurer Must Pay Attorney Fees in Nassar Coverage Action

August 31, 2022 | Posted in : Coverage of Fees, Practice Area: Insurance Coverage Litigation

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 Tuesday, 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 Tuesday, 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.

"There is no dispute that USAG was bankrupt and lacked money to spare. Liberty has not identified evidence to challenge the factual finding that USAG used the grant money to stay afloat by paying some bills it had incurred," it said. "The record does not support, much less require, any finding that USAG stockpiled vast sums of money for legal expenses, which would have removed any need to economize."

The appellate court also said it lacked any adequate basis for overriding the bankruptcy court's determination that USAG's expert witness was more credible than Liberty's in its analysis of whether the legal fees at issue were reasonable and necessary.

The Seventh Circuit ruled earlier this year the Liberty Mutual unit must help fund USA Gymnastics' $380 million bankruptcy settlement with Nassar's victims after the insurer had appealed a 2020 summary judgment order holding that it has a duty to defend USA Gymnastics in lawsuits alleging it allowed the Olympic team doctor to abuse hundreds of victims. All those claims have since been resolved through the $380 million settlement trust in the organization's Chapter 11 plan.

Liberty argued that Nassar's effective life sentence triggered an exclusion in USA Gymnastics' directors and officers insurance policy barring coverage for criminal conduct and willful violations of law.

But the Seventh Circuit majority said the exclusion applies only to the 10 counts of criminal sexual assault admitted in Nassar's 2017 guilty plea. The hundreds of other claims by victims, many of which Michigan state prosecutors agreed to drop as part of the plea deal, are too different to group together under the exclusion, the court concluded.