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THE ADJUSTER - San Diego Insurance Adjusters
Association
October, 2004
Two interesting appellate decisions have
been recently handed down regarding the entitlement to attorneys’ fees.
One is good for the industry and the other is, well, a problem for
insurance carriers who unsuccessfully appeal a “bad faith” verdict.
INSURER’S RIGHT TO REIMBURSEMENT OF
DEFENSE COSTS: The California Supreme Court has granted a petition for
review of an unpublished decision styled Scottsdale Ins. Co. v. MV
Transportation, Inc., et al., (2004) 2004WL726816, which precluded an
insurer from recovering defense costs incurred in an underlying action.
In the underlying action, plaintiff
alleged the insured misappropriated trade secrets. Scottsdale sought to
protect its right to seek reimbursement of defense fees and therefore
agreed to defend under a reservation of rights. The underlying suit
settled with the insured agreeing to return materials containing
plaintiff’s alleged trade secrets.
Neither Scottsdale nor the insured were
required to pay any money to the plaintiff. Scottsdale then sought
recovery of its defense fees in a declaratory action. The trial court
denied Scottsdale’s motion for summary judgment, concluding it owed a
duty to defend under its policies’ advertising injury coverage. The
Court of Appeal agreed, concluding “advertising injury” coverage was not
limited to injury from widespread promotional activities directed to the
public at large, but instead included the insured’s one-on-one business
solicitations.
The California Supreme Court granted
review, however, and remanded the matter back to the Court of Appeal for
reconsideration in light of Hameid v. National Fire Insurance of
Hartford, (2003)
31 Cal.4th 16. On reconsideration, the Court of Appeal concluded that the
claims made against the insured in the underlying suit were not covered
under the policies’ advertising injury coverage and, therefore, no duty
to defend was owed. However, the Court nevertheless found Scottsdale
could not recover its defense fees because Scottsdale had elected to
defend the insured and failed to “exercise its exit option” of
withdrawal from the defense.
The California Supreme Court has granted
Scottsdale’s petition for review of this ruling. It seems that the
appellate court wanted to do everything in its power to deny the
insurance carrier reimbursement of its attorneys’ fees. Time will tell
how the Supremes will react to the appellate court. INSURED’S RIGHT TO
ATTORNEYS’ FEES IN DEFENDING APPEAL FROM BAD FAITH JUDGMENT:
Applying its interpretation of
California law, the Ninth Circuit Court of Appeal held that an insured
may recover attorneys’ fees incurred in successfully defending an appeal
from a bad faith judgment against an insurer. In McGregor v. Paul Revere
Life Ins. Co., (2004) ___ 9th Cir. ___, 04 C.D.O.S. 4485, after a jury
found that Paul Revere Life Insurance Company breached its insurance
contract with McGregor and therefore committed “bad faith,” Paul Revere
unsuccessfully appealed. McGregor then moved for attorneys’ fees
incurred while defending against the appeal. In deciding this issue, the
Ninth Circuit looked to Brandt v. Superior Court, (1985) 37 Cal.3d 813,
210 Cal.Rptr. 211.
In Brandt, the California Supreme Court
held that if an insured proves “bad faith” the insured may collect
attorneys’ fees reasonably incurred to compel payment of insurance
policy benefits. The Brandt case was silent as to whether an insured may
collect attorneys’ fees incurred in successfully defending against an
appeal. Treatment of that question is mixed
throughout California.
In predicting how the
California Supreme Court would rule, however, the Ninth Circuit held
that McGregor was able to collect the fees. Because McGregor proved Paul
Revere’s “bad faith” at trial and McGregor would have been unable to
collect her policy benefits unless she successfully defended against the
appeal, the Ninth Circuit reasoned that allowing McGregor to collect
attorneys’ fees was consistent with the logic in Brandt. This case
logically extends the ruling of Brandt by finding that if the insured
was entitled to its attorneys’ fees incurred in the trial court to
compel its policy benefits, then the insured should also be entitled to
its fees if it wins the appeal from the trial court by the insurance
carrier.
James M.
Roth is a shareholder in The Roth Law Firm. Mr. Roth’s practice includes
representing TPAs and insurance carriers in coverage, SIU,
extra-contractual liability, and third party defense matters. Please
submit any questions or comments for future columns to Mr. Roth at
TheRothLawFirm.com.
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