Additional Insured Attorneys' Fees Win May Set Trend in NY

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.

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¹ See U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 822 N.E.2d 777 (2004); see also Hanover Ins. Co. v. Golden, 766 N.E.2d 838 (Mass. 2002); US Fire Ins. Co. v. Greater Missoula Family YMCA, 454 F.Supp. 3d 978 (D. Mont. 2020).

² See Fla. Stat. Ann. § 627.428.

³ This declaratory judgment action arose from a series of state court personal injury lawsuits. The plaintiff, Houston Casualty Company (HCC), sought declaratory judgment that the insurer for the primary insured, New York Marine Insurance Company, had a duty to defend an additional insured (New York University Hospitals Center (NYUHC)) in the personal injury lawsuits. HCC and New York Marine reached a settlement agreement where New York Marine conceded to its duty to defend NYUHC. However, HCC and New York Marine disputed whether New York Marine's duty to defend also entitled HCC to recover legal fees and costs incurred in the litigation to establish the duty to defend. The court held HCC was entitled to recover the attorneys' fees. New York Marine filed a motion for reconsideration, which was denied. New York Marine subsequently filed and then withdrew an appeal. See Houston Cas. Co. v. Prosight Specialty Ins. Co., No. 20-1997, 2020 WL 5667722 (2d Cir. 2020).