August 28, 2020 Articles

Insurers May Be Obligated to Pay for Prosecution of Lawsuits

Affirmative claims for relief that are strategically defensive trigger insurer’s defense duties.

By David A. Gauntlett [1]

When Can “Offensive” Claims Be “Defensive”?

Affirmative relief claims do not typically fall within an insurer’s duty to defend. Although the general rule is that an insurer’s “duty to defend does not require an insurer to prosecute the insured’s affirmative claims,” there are scenarios where policyholders “have claims for indemnity or contribution, which have the effect of reducing the policyholders’ net liability. Liability insurers are typically subrogated to such claims. Prosecution of such claims falls within the duty to defend.”[2]

Standards of proof for policyholders seeking expansion of fee recovery beyond narrow defense fees are higher. Several cases have built on the concept that “conducting against liability” fee reimbursement may be limited where the character of the defense fees are investigatory expenses in lieu of defense fees for which reimbursement is sought. The issue is whether such fees are merely prophylactic in character as distinct from those that are “strategically defensive.” A seminal case, Barratt American Inc. v. Transcontinental Insurance Co.,[3] reversed a jury trial verdict, concluding that the showing that the policyholder bore the burden of proof on was not met when Barratt incurred costs to repair homes owned by individuals who had not joined a construction defect lawsuit but nonetheless were compensated by having their individual residences repaired to incentivize them not to join that lawsuit.[4]

In such a case, in which the insurer might have benefited, the costs might have been recoverable had the policyholder obtained authorization before the costs were incurred. Consent would have been reasonably due because the insurer benefited from avoiding defense fees and indemnification exposure related to the repair of homes as of yet non-joined plaintiffs in the subdivision.[5]

Thus, not only did this present a potential “voluntary payments” problem, but under Foster-Gardner, Inc. v. National Union Fire Insurance Co.,[6] there was no suit prior to action taken by the insured to engage in remediation activities.

Once the party initiating the lawsuit becomes a counter-defendant, it is entitled to fee reimbursement. As Adobe Systems v. St. Paul Fire & Marine Insurance Co.[7] made clear, “conducted against liability” defense fee reimbursement can be implicated where a party initiating a lawsuit incurs “defense-type legal fees and expenses where the insured is resisting a contention of liability for damages.”[8]

Defensive fees can arise in parallel legal proceedings. In Continental Western Insurance Co. v. Colony Insurance Co.,[9] the court recognized that “parallel judicial proceedings” are “an exception to the complaint rule requiring an insurer to consider the allegations in parallel judicial proceedings, of which it is aware, arising from a common core of operative facts.”[10] Under Colorado law, an insurer must consider “parallel judicial proceedings” when determining its duty to defend because the insurer has actual knowledge of the common core of operative facts, which are simply in another pleading.

Jurisdictions across the nation have addressed this issue in distinct ways.

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