U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 N.Y.3d 592 (2004)

An insured who prevails in a declaratory judgment action brought by its insurer to determine coverage obligations may recover attorney’s fees incurred in defending that action, regardless of whether the insurer provided a defense in the underlying suit.

Summary

U.S. Underwriters brought a declaratory judgment action against its insured, City Club Hotel, seeking a declaration that it had no duty to defend or indemnify the insured in an underlying personal injury suit. The District Court granted summary judgment to the insured, finding the insurer’s disclaimer of coverage untimely but denied the insured’s request for attorney’s fees. The Second Circuit certified questions to the New York Court of Appeals regarding the availability of attorney’s fees to a prevailing insured in a declaratory judgment action brought by the insurer. The Court of Appeals held that the insured could recover attorney’s fees incurred in defending against the declaratory judgment action, regardless of whether the insurer had provided a defense in the underlying action, reasoning that such fees were incidental to the insurer’s duty to defend.

Facts

U.S. Underwriters issued a commercial general liability policy to City Club Hotel and Shelby Realty. A construction worker, Marek Szpakowski, was injured while working on Shelby’s property. U.S. Underwriters received notice of the claim. Szpakowski sued Shelby for personal injuries. U.S. Underwriters disclaimed coverage to City Club and Shelby based on an employee exclusion but provided Shelby a defense. U.S. Underwriters then filed a declaratory judgment action, asserting it had no duty to defend or indemnify Shelby.

Procedural History

U.S. Underwriters brought a declaratory judgment action in the U.S. District Court for the Southern District of New York. The District Court granted summary judgment to the defendants (the insureds) on the issue of the disclaimer, finding it untimely. The District Court denied the defendants’ motion for attorney’s fees. Both sides appealed to the Second Circuit. The Second Circuit affirmed the District Court’s finding that the disclaimer was untimely. Due to uncertainty in New York law, the Second Circuit certified two questions to the New York Court of Appeals regarding attorney’s fees. The New York Court of Appeals accepted certification.

Issue(s)

1. Whether, in a case in which an insurance company has brought a declaratory judgment action to determine that it does not have obligations under the policy but has defended in the underlying suit, a defendant prevailing in the declaratory judgment action should be awarded attorneys’ fees expended in defending against that action?

2. Whether, in the special circumstances of this case, attorneys’ fees should be awarded to one or more of the defendants?

Holding

1. Yes, because an insured who prevails in an action brought by an insurance company seeking a declaratory judgment that it has no duty to defend or indemnify the insured may recover attorneys’ fees regardless of whether the insurer provided a defense to the insured.

2. The Court of Appeals declined to answer this question.

Court’s Reasoning

The Court of Appeals relied on the principle that a prevailing party cannot recover attorney’s fees unless authorized by statute, agreement, or court rule. However, the Court cited the exception established in Mighty Midgets, Inc. v. Centennial Ins. Co., where an insured, placed in a defensive posture by the insurer’s legal actions to escape policy obligations, can recover attorney’s fees when prevailing on the merits. The Court reasoned that the insurer’s duty to defend extends to actions arising out of the occurrence, including defending against the insurer’s declaratory judgment action. Because Shelby was a named insured, was cast in a defensive posture by U.S. Underwriters, and prevailed, Shelby was entitled to recover attorney’s fees. The Court stated, “[G]iven that the expenses incurred by Shelby in defending against the declaratory judgment action arose as a direct consequence of U.S. Underwriters’ unsuccessful attempt to free itself of its policy obligations, Shelby is entitled to recover those expenses from the insurer.” Thus, Shelby’s recovery was “incidental to the insurer’s contractual duty to defend.”