The Rogak Report: 11 November 2004 ** Coverage Disputes - Attorney's Fees **
- IN ABSENCE OF A DUTY TO DEFEND, ATTORNEYS FEES DO NOT GET AWARDED IN
COVERAGE DISPUTE WITH REINSURER
Folksamerica Reinsurance Co. v. Republic Insurance Co., NYLJ 11/11/04
(USDC - SDNY) (BAER, j)
This attorneys' fees case began as a reinsurance coverage dispute
between Folksamerica (the reinsurer), Republic (the insurer), and Aon
Re Worldwide, Inc. and Aon Specialty Re, Inc. (the reinsurance
broker). The underlying action emerged from an alleged late notice to
Folksamerica of claims under several reinsurance certificates
involving two insureds - Clemtex, Ltd., a supplier of sandblasting
equipment, and Thorpe, a masonry and insulation contractor.
Previously, the Court granted summary judgment to Republic, finding
that Folksamerica was required to honor its reinsurance obligations
and Republic had not violated the reinsurance certificates.
After adjudicating the summary judgment motions, the Court referred
the issue of attorneys' fees and costs to a Magistrate Judge, who
denied Republic's motion for attorneys' fees but awarded photocopying
Pursuant to the "American rule," parties may agree by contract to
permit recovery of attorneys' fees, and a federal court will enforce
contractual rights to attorneys' fees if the contract is valid under
applicable state law. Similarly, under the "New York rule,"
attorneys' fees are the ordinary incidents of litigation and may not
be awarded to the prevailing party unless authorized by agreement
between the parties, statute, or court rule. This policy provides
freer and more equal access to the courts and promotes democratic and
libertarian principles, held the Court.
The main contention between the parties on the subject of attorneys'
fees focuses on the narrow exception carved out by the New York
courts, and set forth in the "Mighty Midgets" case, to the general
American rule that a prevailing party cannot recover attorneys' fees.
Under the Mighty Midgets doctrine, an insured is permitted to recover
fees when the policyholder has been cast in a defensive posture by
the legal steps an insurer takes in an effort to free itself from its
The majority of federal district courts have concluded that in a case
in which it was clear that the insurer had discharged its duty to
defend in the underlying action, no attorneys' fees should be awarded
to the insured. Alternatively, the majority of New York Appellate
Divisions have concluded that Mighty Midgets requires the awarding of
fees whenever the disclaimer declaratory action has been brought by
the insurer - even where an insurer does not breach its duty to
defend in the underlying suit.
In order to trigger the Mighty Midgets exception, held this Court,
the insured must not only be cast in a defensive posture by the
insurer, but "cast in a defensive posture by its insurer in a dispute
over the insurer's duty to defend." Mighty Midgets does no more than
carve out a narrow exception to the general rule that litigation
costs are not recoverable by a winning litigant; that exception
arises when a policyholder has been cast in a defensive posture by
its insurer in a dispute over the insurer's duty to defend.
Here, Folksamerica does not have a "duty to defend" Republic under
the facultative reinsurance certificates. According to the
Certificates, upon "receipt of a definitive statement of loss" the
reinsurer is to indemnify certain enumerated costs. "Noticeably
absent from the certificates detailing the costs that Republic was
indemnified against, was the duty to defend. While the contract
provides for proportional reimbursement of court costs which Republic
incurs in defense of the underlying action, the relevant section
fails to attribute to Folksamerica a duty to defend in any such
action. In other words, the Certificates only require Folksamerica to
provide Republic with post-litigation reimbursement, but failed to
require Folksamerica to represent Republic. Absent a clear indication
of a duty to defend clause in Republic's reinsurance contract, under
the Mighty Midgets exception and its progeny, attorneys' fees cannot
Therefore, "Where, as here, the insurers have no contractual duty to
defend, the Mighty Midgets exception for attorney's fees does not
The Court noted that "reinsurance is not insurance. The reinsurer is
not directly liable to the original insured and reinsurers do not
examine risks, receive notice of loss from the original insured, or
In the reinsurance context, seemingly a matter of first impression,
the concerns discussed in both Mighty Midgets and Underwriters are
not as compelling here because the relationship between the reinsurer
and the reinsured is fundamentally different from insurer and the
insured. Reinsurers are generally less likely to undertake the
defense of the reinsured, who will itself be an insurance company
capable of defending itself. The role of the reinsurer is to assist
in the distribution of risk that the reinsured faces in its policy
with the insured. The purpose of reinsurance is to reimburse, not
represent or defend. The relationship created between reinsurer and
reinsured is strictly one of indemnification.
"An insurance company that wants to be able to recover its attorneys'
fees in the event of a declaratory judgment action by the reinsurance
company can negotiate to include such an attorneys' fee provision in
the reinsurance agreement," stated the Court. Here, the contract
between Republic and Folksamerica failed to provide the language
necessary to trigger such an award of attorneys' fees.
As a result, the request for attorney's fees was denied.