Does Insurance Cover Attorneys' Fees in a Class Action?

[Editor's Note: I've excerpted this article from Kirk Pasich's more detailed treatment in the August 2005 edition of our sibling newsletter, The Insurance Coverage Law Bulletin. Note also that this article specifically approaches the subject from the plaintiffs' point of view.]

The resolution of a class action almost always involves an award of attorneys' fees to plaintiffs' counsel, as part of the overall settlement or based on a separate hearng. But insurance companies often resist paying these awards. They contend that the awards constitute penalties or do not constitute insured compensatory damages. They also sometimes contend that the awards are not covered because they are derivative of uncovered claims.

These carrier arguments should not be readily accepted. As explained below, many, if not most, attorneys' fee awards in class action cases probably will be covered by insurance policies.

Policies That May Provide Coverage

Class action lawsuits typically trigger at least the potential for coverage under directors and officers (D&O) liability policies, employment practices liability (EPL) policies, and/or errors and omissions (E&O) policies. These policies typically contain much broader definitions than commercial general liability (CGL) policies in terms of the types of awards that are covered. For example, these policies usually state that they cover “loss,” which typically is defined to include not only damages, but also judgments, settlements, costs, and other expenses.

Disputing Precedents Cited by Insurers

Notwithstanding the breadth of their policy language, insurance carriers typically rely on several cases to support their notion that they need not pay for an award of attorneys' fees. See, Baker v. Mid-Century Ins. Co., 20 Cal. App. 4th 921, 25 Cal. Rptr. 2d 34 (1993); Cutler-Orosi Unified School Dist. v. Tulare County School Dist. Liability/Property Self-Insurance Authority, 31 Cal. App. 4th 617, 37 Cal. Rptr. 2d 106 (1994); Sullivan County, Tennessee v. Home Indem. Co., 925 F.2d 152 (6th Cir. 1991). However, none of these cases is persuasive. [Discussion omitted.]

Cases That Support Coverage

By comparison to these relatively limited authorities, there is a substantial body of law that supports coverage for an award of attorneys' fees. Some decisions uphold coverage because fee awards fall within the scope of covered “costs,” while others uphold coverage because the awards constitute covered “damages.”

When fee is deemed to be costs

In Prichard v. Liberty Mutual Insurance Co., 84 Cal. App. 4th 890, 101 Cal. Rptr. 2d 298 (2000), the court addressed a situation where the insured had been ordered to pay the underlying plaintiff more than $250,000 in attorneys' fees pursuant to a “prevailing party” attorneys' fee provision in their contract. The court considered the policy's “supplementary payments” provision, which is found in standard liability policies. The provision obligated the insurer to pay, with respect to any claim or suit that it defended, “[a]ll costs taxed against the insured in the 'suit.'” The court noted that the provision “is a function of the insurer's defense obligation.” Id. at 911. It concluded that because such fee awards “are statutorily defined as costs,” the carrier would be obligated to pay them under the supplementary payments provision. Id. at 912. See, Cal. Code Civ. Proc. ' 1033.5(a) (defining allowable costs as including attorneys' fees when authorized by contract, statute, or law). The court rejected the insurer's argument that the insured would benefit in cases where some or all claims against it were not covered by the policy:

It may be the case, as suggested by [the insurer], that the absence of even the possibility of coverage for the causes of action that generated the large cost award is somehow unfair because the insured is getting a benefit he never paid for by being in effect indemnified for exposure on claims the defense of which he never paid a premium for. The problem, however, is in the insurance contract, not the law. If the [standard] ISO forms are written so that attorney fees awarded as part of prevailing party clauses can be considered costs associated with the insurer's defense obligation, there is nothing we can do about it. 84 Cal. App. 4th at 912 n.22.

[Editor's Note: I must say this reasoning by the court eludes me. If "even the possibility" of coverage is absent, why would the insurer have any defense obligation?]

See also, Ins. Co. of N. Am. v. Nat'l Am. Ins. Co., 37 Cal. App. 4th 195, 206, 43 Cal. Rptr. 2d 518, 525 (1995) (rejecting carrier's argument that payment of attorneys' fee award against its insured was indemnity payment that consumed its policy limits and holding that payment was pursuant to “supplementary payments” provision).

Thus, when the statutory scheme under which a plaintiff is seeking relief treats attorneys' fees as costs, a carrier should be obligated to pay those fees under its policy's “supplementary payments” provision.

When fee is not deemed to be costs

Coverage also should be afforded in the more common circumstance where an award of fees is not deemed to be costs. In fact, the California Supreme Court has recognized that many types of payments that a defendant has to pay a plaintiff constitute compensatory, or consequential, damages. As the court explained in holding that an insured is entitled to recover from the carrier the attorneys' fees it incurred in collecting the benefits due under the policy when the carrier has acted in bad faith:

When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney's fees are an economic loss — damages — proximately caused by the tort. Brandt v. Superior Court, 37 Cal. 3d 813, 817, 210 Cal. Rptr. 211, 213-14 (1985) (citation omitted).

In any event, many courts have recognized that fee awards are covered by policies for various reasons. In City of Kirtland v. Western World Insurance Co., 43 Ohio App. 3d 167, 540 N.E. 2d 282 (1988), an insured sought coverage for a suit under the Civil Rights Act, 42 U.S.C. ' 1983, for equitable relief. No damages were sought. Attorneys' fees were awarded to the underlying plaintiff. The carrier contended that fees related to an equitable claim. The errors and omissions policy involved covered “Loss,” which was defined to “include but not be limited to damages, judgments, settlements, and costs.” However, the policy also contained an exclusion for relief “in any form other than money damages” and fees or expenses relating to claims “seeking relief or redress, in any form other than money damages.” The court found that the fee award was covered:

[The insured] will not bear the burden of [the carrier's] own uncertainty as to a term in a policy [the carrier] wrote. … Since the term 'money damages' was not defined in the policy, for purposes of this discussion and under these circumstances, this court holds that the attorney fees … were money damages. Id. at 169-70.

(Other supporting cases [discussion omitted] include City of Ypsilanti v. Appalachian Ins. Co., 547 F. Supp. 823 (E.D. Mich 1982 ); Hyatt Corp. v. Occidental Fire & Casualty Co., 801 S.W.2d 382 (Mo. Ct. App. 1990); and Sokolowski v. Aetna Life & Casualty Co., 1986 U.S. Dist. LEXIS 21721 (S.D.N.Y. Aug. 11, 1986).

Conclusion

Therefore, when an insured must, as part of a settlement or judgment, pay the plaintiffs' attorneys' fees, it should request that its carriers pay that award. Insurance policies likely will cover many such awards, whether pursuant to “supplementary payments” provisions or indemnity provisions applicable to “damages” or “loss.”

[Editor's Note: I've excerpted this article from Kirk Pasich's more detailed treatment in the August 2005 edition of our sibling newsletter, The Insurance Coverage Law Bulletin. Note also that this article specifically approaches the subject from the plaintiffs' point of view.]

The resolution of a class action almost always involves an award of attorneys' fees to plaintiffs' counsel, as part of the overall settlement or based on a separate hearng. But insurance companies often resist paying these awards. They contend that the awards constitute penalties or do not constitute insured compensatory damages. They also sometimes contend that the awards are not covered because they are derivative of uncovered claims.

These carrier arguments should not be readily accepted. As explained below, many, if not most, attorneys' fee awards in class action cases probably will be covered by insurance policies.

Policies That May Provide Coverage

Class action lawsuits typically trigger at least the potential for coverage under directors and officers (D&O) liability policies, employment practices liability (EPL) policies, and/or errors and omissions (E&O) policies. These policies typically contain much broader definitions than commercial general liability (CGL) policies in terms of the types of awards that are covered. For example, these policies usually state that they cover “loss,” which typically is defined to include not only damages, but also judgments, settlements, costs, and other expenses.

Disputing Precedents Cited by Insurers

Notwithstanding the breadth of their policy language, insurance carriers typically rely on several cases to support their notion that they need not pay for an award of attorneys' fees. See, Baker v. Mid-Century Ins. Co. , 20 Cal. App. 4th 921, 25 Cal. Rptr. 2d 34 (1993); Cutler-Orosi Unified School Dist. v. Tulare County School Dist. Liability/Property Self-Insurance Authority , 31 Cal. App. 4th 617, 37 Cal. Rptr. 2d 106 (1994); Sullivan County, Tennessee v. Home Indem. Co. , 925 F.2d 152 (6th Cir. 1991). However, none of these cases is persuasive. [Discussion omitted.]

Cases That Support Coverage

By comparison to these relatively limited authorities, there is a substantial body of law that supports coverage for an award of attorneys' fees. Some decisions uphold coverage because fee awards fall within the scope of covered “costs,” while others uphold coverage because the awards constitute covered “damages.”

When fee is deemed to be costs

In Prichard v. Liberty Mutual Insurance Co. , 84 Cal. App. 4th 890, 101 Cal. Rptr. 2d 298 (2000), the court addressed a situation where the insured had been ordered to pay the underlying plaintiff more than $250,000 in attorneys' fees pursuant to a “prevailing party” attorneys' fee provision in their contract. The court considered the policy's “supplementary payments” provision, which is found in standard liability policies. The provision obligated the insurer to pay, with respect to any claim or suit that it defended, “[a]ll costs taxed against the insured in the 'suit.'” The court noted that the provision “is a function of the insurer's defense obligation.” Id. at 911. It concluded that because such fee awards “are statutorily defined as costs,” the carrier would be obligated to pay them under the supplementary payments provision. Id. at 912. See, Cal. Code Civ. Proc. ' 1033.5(a) (defining allowable costs as including attorneys' fees when authorized by contract, statute, or law). The court rejected the insurer's argument that the insured would benefit in cases where some or all claims against it were not covered by the policy:

It may be the case, as suggested by [the insurer], that the absence of even the possibility of coverage for the causes of action that generated the large cost award is somehow unfair because the insured is getting a benefit he never paid for by being in effect indemnified for exposure on claims the defense of which he never paid a premium for. The problem, however, is in the insurance contract, not the law. If the [standard] ISO forms are written so that attorney fees awarded as part of prevailing party clauses can be considered costs associated with the insurer's defense obligation, there is nothing we can do about it. 84 Cal. App. 4th at 912 n.22.

[Editor's Note: I must say this reasoning by the court eludes me. If "even the possibility" of coverage is absent, why would the insurer have any defense obligation?]

See also, Ins. Co. of N. Am. v. Nat'l Am. Ins. Co. , 37 Cal. App. 4th 195, 206, 43 Cal. Rptr. 2d 518, 525 (1995) (rejecting carrier's argument that payment of attorneys' fee award against its insured was indemnity payment that consumed its policy limits and holding that payment was pursuant to “supplementary payments” provision).

Thus, when the statutory scheme under which a plaintiff is seeking relief treats attorneys' fees as costs, a carrier should be obligated to pay those fees under its policy's “supplementary payments” provision.

When fee is not deemed to be costs

Coverage also should be afforded in the more common circumstance where an award of fees is not deemed to be costs. In fact, the California Supreme Court has recognized that many types of payments that a defendant has to pay a plaintiff constitute compensatory, or consequential, damages. As the court explained in holding that an insured is entitled to recover from the carrier the attorneys' fees it incurred in collecting the benefits due under the policy when the carrier has acted in bad faith:

When an insurer's tortious conduct reasonably compels the insured to retain an attorney to obtain the benefits due under a policy, it follows that the insurer should be liable in a tort action for that expense. The attorney's fees are an economic loss — damages — proximately caused by the tort. Brandt v. Superior Court , 37 Cal. 3d 813, 817, 210 Cal. Rptr. 211, 213-14 (1985) (citation omitted).

In any event, many courts have recognized that fee awards are covered by policies for various reasons. In City of Kirtland v. Western World Insurance Co., 43 Ohio App. 3d 167, 540 N.E. 2d 282 (1988), an insured sought coverage for a suit under the Civil Rights Act, 42 U.S.C. ' 1983, for equitable relief. No damages were sought. Attorneys' fees were awarded to the underlying plaintiff. The carrier contended that fees related to an equitable claim. The errors and omissions policy involved covered “Loss,” which was defined to “include but not be limited to damages, judgments, settlements, and costs.” However, the policy also contained an exclusion for relief “in any form other than money damages” and fees or expenses relating to claims “seeking relief or redress, in any form other than money damages.” The court found that the fee award was covered:

[The insured] will not bear the burden of [the carrier's] own uncertainty as to a term in a policy [the carrier] wrote. … Since the term 'money damages' was not defined in the policy, for purposes of this discussion and under these circumstances, this court holds that the attorney fees … were money damages. Id. at 169-70.

(Other supporting cases [discussion omitted] include City of Ypsilanti v. Appalachian Ins. Co. , 547 F. Supp. 823 (E.D. Mich 1982 ); Hyatt Corp. v. Occidental Fire & Casualty Co. , 801 S.W.2d 382 (Mo. Ct. App. 1990); and Sokolowski v. Aetna Life & Casualty Co., 1986 U.S. Dist. LEXIS 21721 (S.D.N.Y. Aug. 11, 1986).

Conclusion

Therefore, when an insured must, as part of a settlement or judgment, pay the plaintiffs' attorneys' fees, it should request that its carriers pay that award. Insurance policies likely will cover many such awards, whether pursuant to “supplementary payments” provisions or indemnity provisions applicable to “damages” or “loss.”