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NY: Insured's Entitlement to Declaratory Action Attorneys' Fees Is Limited to Two Instances
In Liberty Surplus Ins. Corp. (“Liberty”) v. Segal Co. (“Segal”), Nos. 04-5562-cv & 04-6005-cv, 2005 U.S. App. LEXIS 16601, 2005 WL 1869146 (2d Cir. Aug. 9, 2005), in a per curiam opinion, the Second Circuit reaffirmed its view that New York allows awarding a successful insured its declaratory action attorneys' fees in two instances: 1) where the “policyholder has been cast in a defensive position by its insurer in a dispute over the insurer's duty to defend,” or 2) where the insurer is guilty of bad faith.
As reflected in a summary order that accompanied the per curiam opinion, the case began when Liberty sued for a declaratory judgment that it owed no duty to indemnify Segal under a second layer excess liability insurance policy for a suit filed by Suffolk County. 2005 U.S. App. LEXIS 16748, 2005 WL 1874725 (2d Cir. Aug. 9, 2005). Segal counterclaimed for a declaratory judgment, breach of contract, fraud and attorneys' fees. The district court ruled that Liberty's policy covered the Suffolk action, but Liberty was not in breach because the policies beneath it had not been exhausted so as to trigger Liberty's obligations. The district court also dismissed Segal's fraud claim and refused to award it declaratory action fees. The Second Circuit affirmed the coverage judgment in its summary order that will remain unpublished. It treated Segal's attorneys' fee claim in the per curiam opinion.
The per curiam opinion began with the observation that New York law is “well settled” that “an insured cannot recover his legal expenses in a controversy with a carrier over coverage, even though the carrier loses the controversy and is held responsible for the risk.” According to the Second Circuit, New York's highest court carved out exceptions to that rule in two cases: 1) Mighty Midgets, Inc. v. Centennial Ins. Co., 389 N.E.2d 1080 (N.Y. 1979); and 2) Sukup v. State, 227 N.E.2d 842 (N.Y. 1967). The Second Circuit deemed both exceptions inapplicable to Segal.
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