Attorneys' Fees As Covered Costs, Damages, Or Loss

INSURANCE LAW Wording and Interpretation Attorneys’ Fees as Covered Costs, Damages, or Loss By Thomas R. Newman To help preclude obligations to defend or indemnify insureds for suits seeking awards of attorneys’ fees, insurers and their counsel need to understand the effect of policy language and courts’ interpretation of it. ■ Thomas R. Newman is of counsel to Duane Morris LLP in New York City. He practices in the areas of insurance and reinsurance law, including coverage, claims handling, contract drafting and arbitration, and litigation. He has served as lead counsel in more than 60 reinsurance arbitrations and also has handled hundreds of appeals in both state and federal courts. He is a member of DRI, the American Academy of Appellate Lawyers, the American College of Coverage and Extracontractual Counsel, and the Federation of Defense and Corporate Counsel, and a life member of the American Law Institute. 8 ■ For The Defense ■ March 2014 Attorneys’ Fees as Covered Costs, Damages, or Loss ‘bodily injury’, ‘property damage’ or ‘per- In the United States, under the so-called “American rule,” sonal and advertising injury’ to which this insurance applies are alleged.” 300 P.3d the prevailing party in a litigation is ordinarily not entitled at 34. The majority in EMC, quoting from that to reimbursement for its reasonable attorneys’ fees and court’s earlier decision in Mutual of Enum- claw v. Harvey, 115 Idaho 1009, 1013, 772 expenses from the loser in the absence of a statutory or P.2d 216, 220 (1989) (“Harvey”), stated: “The contractual provision allowing such an policy. The Donnellys brought the under- fact the company reserved its contractual award to be made. When such an award is lying action against RCI, alleging, among rights before undertaking the defense in made and the losing party is insured under other things, negligent and intentionally no way dissipates its obligation to pay such a liability policy—e.g., a commercial gen- faulty workmanship, breach of contract, costs.” 300 P.3d at 35. The court explained eral liability policy (CGL) or a directors’ and breach of warranties. that a reservation of rights can only pre- and officers’ (D&O) liability policy—it usu- EMC filed a declaratory judgment action serve existing rights. “It is not a destruction ally will seek to pass the burden of payment against the Donnellys and RCI to estab- of the insured’s rights nor a creation of new of those fees and expenses to its insurer as lish that it had no duty to pay any dam- rights for the Company. It preserves that to covered “costs” or “damages.” Whether the ages claimed or awarded to Donnelly which the parties had originally agreed.” insured will succeed depends on the exact in the underlying action. RCI counter- Id. And the insurer had agreed to pay “all policy wording and the court’s interpreta- claimed against EMC, alleging bad faith costs taxed against the insured in any suit tion of those terms in the context of the rest and a breach of contract. A jury in the defended by the Company.” There is noth- of the policy wording, as well as consider- underlying action rendered a special ver- ing in this policy wording to “indicate that ations of public policy. dict, finding that RCI had breached the payment of costs is conditioned upon a final implied warranty of workmanship result- determination that the policy covers the in- Attorneys’ Fees Covered as ing in $126,611.55 in damages. A settle- sured’s conduct.” Harvey, supra, 115 Idaho “Supplementary Payments” ment was then reached between EMC and at 1012, 772 P.2d at 219. Even Without a Covered RCI regarding the declaratory action and The Idaho Supreme Court also fol- Claim for Indemnity the underlying action under which RCI lowed its earlier decision in Harvey for In Employers Mutual Casualty Co. v. Don- dropped its counterclaims and agreed not the proposition that [t]hough the word nelly, 300 P.3d 31 (Ida. 2013)(EMC), a to contest EMC in the declaratory action. ‘costs’ as a legal term of art may be divided Idaho Supreme Court recently af- The district court ruled that, as to the con- ambiguous, it is not so from the perspec- firmed a judgment ordering a contractor’s tract-based damages, there was no insur- tive of the ordinary person unfamiliar CGL insurer that had defended its insured ance coverage for the underlying $128,611.55 with the jargon of the legal and insur- under a reservation of rights in a home- in compensatory damages that the Donnel- ance professions standing in the position owners’ underlying action for breach of con- lys incurred, but there was coverage for the of the insured. An insurance policy must tract, breach of warranties and negligence award of $296,933.89 in costs and attorneys’ be interpreted from that perspective. to pay $296,933.89 in costs and attorneys’ fees. The Idaho Supreme Court affirmed the 115 Ida. at 1013, 772 P.2d at 220. The court fees. This was despite a finding that the -in decision of the district court. looked to Webster’s Third New Interna- surer had no duty to indemnify the con- EMC’s policy contained a “Supplemen- tional Dictionary, which defines the term tractor for the contract damages awarded tary Payments” provision that stated: “costs,” in relevant part, as against it because the policy contained an 1. We will pay, with respect to any claim 4. costs pl.: expenses incurred in litiga- express exclusion for contractual damages. we investigate or settle, or any tion; as a: those payable to the attorney The EMC case arose out of a dispute “suit” against an insured we defend: or counsel by his clients esp. when fixed between the Donnellys and Rimar Con- a. All expenses we incur. by law b: those given by the law or the struction, Inc. (RCI), a contractor that the … court to the prevailing against the losing Donnellys had engaged to do repairs and e. All costs taxed against the insured party in equity and frequently by stat- further remodeling on their home after a in the “suit.” ute—called also bill of costs fire. RCI was insured by Employers Mutual The CGL policy defined “suit” as “a civil The court found that this definition Casualty Company (EMC) under a CGL proceeding in which damages because of “represents the common understanding For The Defense ■ March 2014 ■ 9 INSURANCE LAW of the term ‘costs.’ The plain, ordinary and costs and attorney’s fees by reason of “pursuant to prevailing party clauses.” 84 popular meaning of ‘costs’ is the expense of the supplemental payments provision Cal. App. 4th at 911, 101 Cal. Rptr.2d at 312. litigation which includes attorney fees.” 115 of its insurance policy, or so at least the The California Court of Appeal Ida. at 1013, 772 P.2d at 220. majority holds. found that In EMC, the court pointed out that 300 P.3d at 33–34 [citation omitted] the supplementary payments provision in Harvey The majority opinion did not address providing all ‘costs taxed’ is a function the duty to pay emanated from the sup- the dissenter’s point, but one justice wrote of the insurer’s defense obligation, not plemental coverages… [while] EMC’s a concurring opinion “to address argu- its indemnity obligation. Liberty’s con- obligations emanate from the insurer’s ments made by the dissent.” 300 P.3d at 39. tention that its insurance policy would In his view, the policy wording was clear not ‘apply’ to a defended mixed action and unambiguous, the underlying lawsuit where there is no actual coverage is was a “suit” under the policy definition and belied by the direct references to the The EMC decision can “because EMC defended that suit it is con- defense obligation and the allegation tractually obligated to pay all costs assessed of damages. have far- ranging effects if against RCI, its insured, in that suit.” 300 84 Cal. App. 4th at 911–12, 101 Cal. Rptr.2d P.3d at 40. He disagreed that whenever at 312–13. The court recognized that in followed elsewhere since the covered and uncovered claims are alleged the absence of even the possibility of cov- in the complaint, the insurer is “squarely erage, the result may be “somehow unfair policy wording construed by between a rock and a hard place,” stating because the insured is getting a benefit he If EMC does not want to be obligated to never paid for.” “The problem, however, is the Idaho Supreme Court is pay all costs assessed against its insured in the insurance contract, not the law. If in lawsuits that EMC defends, then it the ISO (Insurance Services Office) forms taken from ISO’s standard simply has to change the wording of its are written so that attorney fees awarded as policy… . It is not up to us to rewrite part of prevailing party clauses can be con- form CGL policy that is in EMC’s policy to say what it now wishes sidered costs associated with the insurer’s it would have said. defense obligation, there is nothing we can widespread use throughout 300 P.3d at 40. do about it.” 84 Cal. App. 4th at 912 n.22, The EMC decision can have far- ranging 101 Cal. Rptr.2d at 313 n.22. the United States. effects if followed elsewhere since the policy wording construed by the Idaho Supreme Attorneys’ Fees as Court is taken from ISO’s standard form Covered “Damages” duty to defend as provided in the supple- CGL policy [CG 00 01 (Ed.

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