An often-overlooked 2020 New York federal court decision allows policyholders to potentially recover attorneys’ fees when they bring a declaratory judgment action against an insurance company that has made litigation inevitable by resisting its duty to defend. In Houston Casualty Company v. Prosight Specialty Insurance Company, 462 F. Supp. 3d 443, 444 (S.D.N.Y. 2020), the District Court for the Southern District of New York held that an insurance company’s duty to defend obliges it to pay for attorneys’ fees and costs that an additional insured incurred in attempting to establish the duty to defend at the time the insurance company resisted such a duty.

The Houston Casualty Company case concerned an underlying lawsuit brought against New York University Hospitals Center (NYUHC) by an individual who was injured on its premises. The individual was injured due to a mis-leveled elevator maintained by a New York corporation, Nouveau. NYUHC brought a third-party complaint against Nouveau, as it had agreed to hold NYUHC harmless for any claims or liabilities arising out of the maintenance and repair of elevators on NYUHC’s property.

Houston Casualty Company (HCC) issued a general liability policy to the injured individual’s employer and HCC provided a defense to NYUHC and the construction company on the site, but HCC asserted that the primary obligation to defend these lawsuits belonged to Nouveau’s general liability insurance company, New York Marine (Note: New York Marine was named incorrectly by the plaintiff, HCC, as Prosight in the case). HCC sought declaratory judgments as to NYUHC’s additional insured status; New York Marine’s duty to defend and indemnify NYUHC; and HCC’s entitlement to reimbursement for all amounts paid by HCC, including attorneys’ fees, for the defense of the underlying action. These questions were resolved by agreement of the parties, and New York Marine conceded it had a duty to defend. However, the district court considered one unresolved issue regarding “whether NYUHC is entitled to recover, from New York Marine, the fees and expenses it incurred in attempting, successfully, to establish New York Marine’s duty to defend NYUHC in the consolidated [underlying] lawsuits.” Id. at 449.

The decision began by stating that “had an action been brought by New York Marine seeking to establish that it did not have a duty to defend NYUHC against the [underlying] claims, rather than by NYUHC seeking to recognize such a duty, New York Marine undeniably would have had a duty to cover the fees incurred by NYUHC in successfully defending that action.” Id. The court stated that the New York Court of Appeals’ decision in U.S. Underwriters Insurance Co. v. City Club Hotel, LLC, 3 N.Y.3d 592, 597-98, 822 N.E.2d 777, 789 N.Y.S.2d 470 (2004) settled that question “when [an insured] has been cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations.” See 463 F. Supp at 450 (quoting Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 21, 389 N.E.2d 1080, 416 N.Y.S.2d 559 (1979)).

The court also cited another decision, which stated that “an insurer’s duty to defend an insured extends to the defense of any action arising out of the occurrence, including a defense against an insurer’s declaratory judgment action.” Id. at 451 (citing Hervochon v. Iona Coll., No. 14 Civ.6017 (CS) (PED), 2019 U.S. Dist. LEXIS 26272, 2019 WL 2451431, at *4-5 (S.D.N.Y. Feb. 15, 2019), report and recommendation adopted, 2019 U.S. Dist. LEXIS 52384, 2019 WL 1375359 (S.D.N.Y. Mar. 27, 2019)). The Hervochon court held that an insured’s fee recovery in these circumstances “is not so much an exception to the American rule that litigants pay their own fees and expenses, as it is a right that ‘arises from th[e] contractual duty’ to defend.” Id.

Based on this line of authority and the factual record, the district court concluded that it had “no difficulty finding that NYUHC, and derivatively HCC, like the insureds in the cases above, are entitled here to recover the fees they incurred in establishing the duty to defend.” Id. at 452. The court stated that “the record reflects that, from the jump, New York Marine and its insured, Nouveau, resisted New York Marine’s now-conceded duty to defend NYUHC against the [underlying] claims. … 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.” Id.

Under these circumstances, the court held that “NYUHC cannot be said to have precipitously initiated or needlessly pursued litigation over the duty to defend” and that the insurance company’s denials of its duty to defend made “litigation over the duty to defend inevitable.” Id. The court concluded that “NYUHC is properly viewed as an insured who prevailed on the merits after being ‘cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations.’” Id. at 453 (internal citation omitted).

This case is helpful for policyholders who are looking to recoup their attorneys’ fees in dealing with an insurance company that is denying its obligations and causing them to bring a declaratory judgment action to enforce the duty to defend. According to the Houston Casualty Company case, policyholders should be able to recoup these fees.