The so-called "American Rule" governing a litigant's right to recoup attorneys' fees requires the prevailing party in litigation to pays his or her own lawyers; the prevailing party does not get to claim reimbursement for those expenses from the defeated opponent unless a specific agreement (such as an attorneys' fee clause in a contract) or an express statute authorizes an award of fees. In California, the "Brandt" doctrine will occasionally permit in insured to recover some attorneys' fees as an element of damages in a later "bad faith" case -- Decs&Excs discussed the doctrine here earlier this year -- but California generally adheres to the American Rule and generally requires the insured to bear the legal expense of defending against an insurer's declaratory relief action contesting coverage, even when the insured prevails.
Not so in New York: In a 1979 decision -- the delightfully named Mighty Midgets case -- that state's highest court, the New York State Court of Appeals, held that when an insurer denies coverage and brings a declaratory relief action and the insured prevails, the insured is entitled to recover the attorneys' fees incurred in defending against the coverage action.
The insurer in Mighty Midgets declined to provide a defense under a liability policy, and some later courts have suggested that the failure of the insurer to defend at all was the principal ground for the award of attorneys' fees in the earlier case. Now Business Insurance reports that the Court of Appeals, in response to a question posed by the 2nd Circuit U.S. Court of Appeals, has reaffirmed and expanded the Mighty Midgets doctrine, holding that an insured who successfully defends against a declaratory relief action is entitled to recover attorneys' fees, even if the insurer has been performing its obligations to defend.
In the case before the 2nd Circuit, the insurer had been providing a defense to the insured in the underlying action, subject to a reservation of the insurer's right to withdraw from the defense if and when it obtained a favorable ruling in its declaratory relief case. "The reasoning behind Mighty Midgets," says the New York Court, "is 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 relief action." Applying that logic, it makes no difference whether the insurer performs or not while pursuing declaratory relief; the insured who successfully defends against the declaratory relief action is entitled to attorneys' fees in either case:
In the instant case, it is undisputed that Shelby, a named insured under the policy, was cast in a defensive posture by U.S. Underwriters in their dispute over whether the insurer had a duty to defend and indemnify Shelby in the underlying personal injury action. Further, it is undisputed that Shelby successfully defended against the insurer's summary judgment motion and thereby prevailed in the matter.
Based on Mighty Midgets, Shelby is entitled to recover attorneys' fees. We hold that under Mighty Midgets, 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. Given 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. In other words, Shelby's recovery of attorneys' fees is incidental to the insurer's contractual duty to defend.
(Emphasis added.)
At least temporarily, the New York Court of Appeals' decision in U.S. Underwriters Insurance Co. v. City Club Hotel, LLC, et al., (Dec. 16, 2004), can be found at this link in PDF format.
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