Thursday, March 19, 2009

SJC holds prevailing insurer not entitled to attorney's fees when it establishes another insurer's duty to defend

From my best source, Mike Tracy at Rudolph Friedmann LLP comes a decision issued today by the Supreme Judicial Court of Massachusetts:

As I have discussed in a previous post, an insured is entitled to recover attorney's fees and expenses incurred in successfully establishing in a declaratory judgment action that an insurer has a duty to defend.

In John T. Callahan & Sons, Inc. v. Worcester Ins. Co., the SJC held today that that rule does not apply when the insured's attorney's fees in the declaratory judgment action are paid by a second insurer.

Callahan was a general contractor on a construction site and was insured by Zurich. NEAC was its subcontractor, and was insured by Worcester. Callahan was an additional insured on the Worcester policy.

Lagoa, an employee of another subcontractor, was injured at the job site. He sued Callahan. Zurich agreed to defend and indemnify Callahan. Worcester refused to defend Callahan.

Callahan and Zurich brought a declaratory judgment action against Worcester, seeking a declaration that Worcester had a duty to defend and indemnify Callahan. Zurich paid the attorneys in the declaratory judgment action on behalf of itself and Callahan. Zurich and Callahan won the declaratory judgment action. Zurich sought reimbursement of the attorney's fees it incurred in the declaratory judgment action.

The SJC denied the claim for attorney's fees. It stated that the policy reason for awarding attorney's fees to insureds who are successful in establishing a duty to defend is not to punish wrongdoers or reward those who act responsibly. Rather, it is to protect the insured's right to receive the full benefit of its liability insurance contract. The court stated that Callahan received that benefit at no cost to itself because Zurich defended it.

Rather disingenuously, the court stated that Zurich also received a benefit from bringing the declaratory judgment action, because it received a judgment that Worcester reimburse it for one half of the settlement amount and attorney's fees in the underlying action. The court does not address whether that amount was more or less than the attorney's fees incurred in the declaratory judgment action.

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