Additional insured coverage for bodily injury and property damage claims is a
heavily litigated area of the law, particularly in New York courts.
Acknowledgment
Many thanks to Samantha Oliveira, coauthor of this
article.
After an insurer wrongfully denies a claim for additional insured coverage,
the insured may be forced to file a declaratory judgment against the insurer
requesting that the court declare the additional insured's rights under the
relevant insurance policy. When an insured files this suit, it incurs costs,
including court costs and attorneys' fees. In some cases, it may cost more
money to litigate the declaratory judgment action than the insured would be
entitled to recover under the insurance policy. Too often, insurance companies
leverage this dynamic, and the insureds' financial vulnerability creates an
unequal playing field that frustrates appropriate additional insured
rights.
A recent decision out of the US District Court, Southern District of New
York, provides new ammunition to policyholders in this position by permitting
recovery of attorneys' fees even when the policyholder initiates
litigation. Previously, case law in New York regarding the recovery of
attorneys' fees had only specifically addressed the situation where the
policyholder is nominally in a defensive position. With Houston Cas. Co. v.
Prosight Specialty Ins. Co., 462 F. Supp. 3d 443 (S.D.N.Y. 2020), New York
courts recognize that the "defensive position" rule for the recovery
of fees is not strictly limited by the position of the parties in a lawsuit
but, rather, by the overarching tactics of the insurer in denying the claim.
Thus, an additional insured may recover attorneys' fees incurred litigating
a declaratory judgment action against the insurer to determine its duty to
defend when the insurer "pertinaciously denied" the claim.
The American Rule
In many legal systems, prevailing litigants are entitled to recover
attorneys' fees accrued in the successful prosecution or defense of their
legal claims. For example, in England and Wales, courts typically order the
losing party in litigation to reimburse the winning party for the legal costs
the winning party has incurred. However, in the United States, the plaintiff
and the defendant must pay their own attorneys' fees, regardless of who
wins the case. This "American rule" generally prohibits the recovery
of attorneys' fees without a statutory or contractual basis.
Recovering Attorneys' Fees in the Insurance Coverage Context
In insurance coverage cases, courts disagree as to whether a prevailing
insured may, in the absence of a statute or contractual agreement, recover
attorneys' fees accrued in a declaratory judgment action to determine
coverage. In some jurisdictions, attorneys' fees may be recovered by a
policyholder who prevails in an action brought by an insurer to
determine coverage.1 Other jurisdictions allow an
insured to recover attorneys' fees from an insurer regardless of which
party initiated the action.2
The recent New York Federal District Court decision in Houston Cas.
Co. suggests an additional insured, who prevails in a declaratory action
against an insurer seeking to deny the duty to defend and indemnify, may
recover the legal fees expended regardless of which party initiated the
litigation.
Recovery of Attorneys' Fees in a Declaratory Judgment Action
Generally, in New York, a prevailing party may not recover attorneys'
fees from the losing party unless authorized by statute, agreement, or court
rule. See U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 N.Y.3d
592, 597 (2004).
However, the situation differs under New York law, 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 who prevails on the
merits. See Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12
(1979). Therefore, an insured who prevails in a declaratory action brought by
an insurance company seeking to deny the duty to defend and indemnify the
insured is allowed to recover attorneys' fees expended in defense of the
action. U.S. Underwriters Ins., 3 N.Y.3d at 597.
Houston Cas. Co. v. Prosight Specialty Ins. Co.
In Houston Cas. Co. v. Prosight Specialty Ins. Co., the Southern
District of New York was asked to determine whether a party seeking additional
insured status was entitled to recover fees incurred in a declaratory judgment
action brought against the insurer, where the insured successfully
established a duty to defend. Answering in the affirmative, the court expanded
the exception set forth in Mighty Midgets and broadened the
interpretation of what constituted a "defensive
posture."3
Factual Background
In April 2011, New York University Hospital Center (NYUHC) entered into a
5-year service agreement with Nouveau Elevator Industries, Inc., for the
maintenance and repairs of elevators located on NYUHC's property. The
agreement required Nouveau to obtain general liability insurance coverage and
name NYUHC as an additional insured. The agreement also contained a hold
harmless provision requiring Nouveau to indemnify NYUHC from "all
liability claims and demands on account of injury … but only to the extent
caused in whole or in part by [Nouveau]."
In October 2013, Tyrone Jadusingh, an E.J. Electric Industries, Inc.,
employee, was injured in an accident involving an NYUHC elevator. While Mr.
Jadusingh was moving a transformer, the transformer caught on the misleveled
elevator and fell, causing severe personal injuries. Mr. Jadusingh subsequently
brought negligence claims against NYUHC and Nouveau.
NYUHC then tendered the suit to Houston Casualty Company (HCC) (E.J.
Electric's general liability insurer), seeking defense and indemnity as an
additional insured. HCC alleged, under its policy's "other
insurance" provision, that the primary obligation to defend NYUHC belonged
to Nouveau's insurer, New York Marine. Accordingly, HCC filed suit seeking
contribution for defense costs and a declaration as to the existence and scope
of New York Marine's obligation to defend and indemnify NYUHC.
In April 2019, HCC and New York Marine reached a settlement, wherein New
York Marine acknowledged its duty to defend NYUHC in the underlying action.
However, they could not agree on whether New York Marine was obliged to cover
certain attorneys' fees incurred by HCC while HCC was seeking a declaratory
judgment to establish New York Marine's duty to defend and indemnify
NYUHC.
New York Marine's Reliance on Mighty Midgets
In determining whether HCC (standing in the shoes of NYUHC) was entitled to
recover attorneys' fees it incurred in attempting, successfully, to
establish New York Marine's duty to defend NYUHC as an additional insured
in the underlying lawsuits, the court relied on the governing principles set
forth in Mighty Midgets.
In Mighty Midgets, the New York Court of Appeals held that the
insured is allowed fees "when he has been cast in a defensive posture by
the legal steps an insurer takes in an effort to free itself from its policy
obligations." Mighty Midgets, Inc., 47 N.Y.2d at 21. The insured,
who prevailed in a declaratory action brought by the insurance company seeking
to relieve itself from its defense and indemnity obligations to the insured,
was allowed to recover fees expended in defending against that action.
Here, New York Marine argued that under the Mighty Midgets
rule the insured was not entitled to attorneys' fees when the
additional insured initiated suit against its own insured. New York Marine
claimed Mighty Midgets only applied to instances in which the insurer
initiated litigation.
A Favorable Interpretation of Mighty Midgets
The court rejected New York Marine's argument, favorably interpreting
the Mighty Midgets rule, holding that permitting recovery of
attorneys' fees "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" reflected the view that an insurer's duty to defend an
insured extended to the defense of any action arising out of the
occurrence. As such, "a court may look beyond the labels
'plaintiff' and 'defendant' to determine whether an insured is
in an offensive or defensive position vis-a-vis its insurer in a dispute over
the duty to defend." (quoting City of New York v. Zurich-American Ins.
Group, 2004 WL 2403179, at *4 (N.Y. Sup. Ct. Oct. 22, 2004)).
Applying a broader scope of "defensive posture," the court
determined HCC was entitled to recover fees it incurred in establishing New
York Marine's duty to defend. The court found Nouveau and New York Marine
"pertinaciously denied" its duty to defend NYUHC, despite the texts
of the NYUHC/Nouveau Agreement and the New York Marine Policy, which
"effectively forced NYUHC's hand," making litigation over the
duty to defend and indemnify inevitable. The court reasoned New York Marine
denied its duty from the following.
The jump … they did so in Nouveau's answer to NYUHC's third-party
complaint, in which it denied such a duty; in Nouveau's counterclaim
seeking a judgment against NYUHC and an accompanying declaration that it
lacked such a duty; and in New York Marine's answer in this federal
litigation, in which it again denied such a duty. They persistently and
seemingly reflexively denied this duty despite the texts of the NYUHC/Nouveau
Agreement and the New York Marine Policy, which each made this duty
plain.
As such, the court viewed NYUHC as an insured who prevailed on the merits
after being "cast in a defensive posture by the legal steps an insurer
[took] in an effort to free itself from its policy obligations" and
awarded HCC reimbursement of its attorneys' fees from New York Marine.
Conclusion
Houston Cas. expands New York's interpretation of the general
American rule that a prevailing party cannot recover attorneys' fees. An
additional insured who prevails in a declaratory action seeking to establish a
duty to defend and indemnify, after an insurer has pertinaciously denied its
duties under the policy, may be allowed to recover fees expended when the
insured has been cast in a defensive posture, regardless of whether the insurer
or insured initiated the action.
The Houston Cas. decision could have significant implications for
New York policyholders, particularly upstream parties such as owner/developers
seeking additional insured status from downstream parties' insurers. Under
Houston Cas., an additional insured may now recover attorneys'
fees when successfully pursuing a declaratory judgment against an insurer if it
can establish that litigation over the insurer's duty was inevitable
because the insurer's own actions caused it. Accordingly, insureds should
proactively monitor and document any wrongful denials issued by an insurer. Any
denials in the underlying litigation should be assessed as to whether there has
been a "pertinacious denial" to be used if/when an insured is forced
to file suit against an insurer to get the coverage it is rightfully owed under
the policy.