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The Rogak Report: 11 November 2004 ** Coverage Disputes - Attorney's Fees **

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  • Lawrence Rogak
    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.,
    Message 1 of 1 , Nov 11, 2004
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      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
      costs.

      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
      policy obligations.

      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
      be awarded."

      Therefore, "Where, as here, the insurers have no contractual duty to
      defend, the Mighty Midgets exception for attorney's fees does not
      apply."

      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
      investigate claims."

      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.

      Larry Rogak
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