When an insurance company is evaluating whether to file a declaratory judgment action or defend one filed against it, the principal issues under consideration are likely to be its chance of success and the amount of attorney’s fees that it will incur to achieve the desired result. But there is another factor that should also be included in the risk evaluation: having to pay the policyholder’s attorney’s fees. I sometimes see this consideration overlooked, or not given enough weight, in the calculus.

Despite our legal system’s bedrock principle, that the losing party is not obligated to pay the prevailing party’s attorney’s fees, insurance coverage litigation is often-times an exception. In the vast majority of states -- almost all in fact -- the possibility exists, in some way, shape or form, that the insurer may be obligated to pay some, or all, of a successful policyholder’s attorney’s fees in addition to the amount of the claim.

One commonly cited rationale for this exception is that, if the insured must bear the expense of obtaining coverage from its insurer, it may be no better off financially than if it did not have the insurance policy in the first place. The specific approaches to this insurance exception vary widely by state and can have a significant impact on the likelihood of the insurer in fact incurring an obligation for its insured’s attorney’s fees.

Some states have enacted statutes that provide for a prevailing insured’s recovery of attorney’s fees in an action to secure coverage. Other states achieve similar results, but do so through common law. But whichever approach applies, the most important factor is the same: whether the prevailing insured’s right to recover attorney’s fees is automatic or must the insured prove that the insurer’s conduct was unreasonable or egregious in some way.

For example, a Hawaii statute mandates an award of attorney’s fees without regard to the insurer’s conduct in denying the claim. In other words, it imposes strict liability for attorney’s fees on an insurer that is ordered to pay a claim. Maryland also takes a strict liability approach, but it is the result of a decision from its highest court. A Virginia statute departs from strict liability and permits an award of attorney’s fees, but only if there was a finding that the insurer’s denial of coverage was not in good faith. Connecticut also rejects a strict liability rule, but it was established judicially and not legislatively. A handful of states use a combination of legislative and judicial avenues to address whether attorney’s fees are to be awarded to a prevailing insured. Under this hybrid approach, consideration is first given to the state’s general statute that allows for an award of attorney’s fees in an action on a contract. The court then interprets this statute, covering contracts in general, to include an insurance contract dispute. And some states address the issue by applying their general statutes permitting an award of attorney’s fees against a party that engages in frivolous or vexatious litigation.

While the mechanisms vary, in almost all cases an insurer that is unsuccessful in coverage litigation will either be automatically obligated to pay for its insured’s attorney’s fees or may be litigating post-trial whether such obligation exists. Whichever the case, the potential for being saddled with the attorney’s fees incurred by its prevailing insured in a declaratory judgment action is a consideration that insurers will usually not be able to avoid.

A recent decision from an Oregon federal court demonstrates in stark terms how significant the attorney’s fees issue can be for an insurer that is unsuccessful in coverage litigation.

In Schnitzer Steel Industries v. Continental Casualty Company, No. 10-1174 (D. Or. Nov. 12, 2014), Schnitzer sought coverage from Continental for defense costs incurred with respect to claims for contamination of sites in the vicinity of Portland Harbor.

Following protracted litigation the case went to trial and the jury awarded Schnitzer all of the defense costs it sought -- $8,601,700 (plus $2.4 million in pre-judgment interest). [According to Continental, some of these defense fees eventually clocked in at $900/hr. for some partners and $375/hr. for paralegal work.] But the legal fees didn’t end there. Schnitzer then sought to recover $3,483,878 in attorney’s fees incurred for recovering the $8.6 million in defense fees, as well as $49,681 for its attorney’s fees for preparation of the fee petition. The authority for all of this was an Oregon statute.

The Oregon statute -- ORS § 742.061(1) – reads like this in relevant part: “[I]f settlement is not made within six months from the date proof of loss is filed with an insurer and an action is brought in any court of this state upon any policy of insurance of any kind or nature, and the plaintiff’s recovery exceeds the amount of any tender made by the defendant in such action, a reasonable amount to be fixed by the court as attorney fees shall be taxed as part of the costs of the action and any appeal thereon.”

The court had this to say about the statute: It is “intended to ‘encourage the settlement’ of insurance claims and to ‘reimburse successful plaintiffs reasonably for moneys expended for attorneys fees in suits to enforce insurance contracts.’ When the conditions enumerated in [the statute] are met, attorney fees must be awarded.”

Having concluded that the conditions in the statute were satisfied, the court then turned to another statute - ORS § 20.075 -- that lists factors the court must consider in determining the amount of an award of attorney fees. There are a staggering sixteen of them.

Despite all of these considerations, the court described what’s generally to be examined: “[T]here are two main components in any attorney fees award: (1) determining whether or not the hourly rates claimed by the attorneys and their staff are reasonable; and (2) determining whether or not the total number of hours claimed by the attorneys and their staff is reasonable. [The statute] contains several factors that are relevant to determining the appropriate hourly rate for each timekeeper. The most relevant factors are those that require the court to consider the complexity of the case, the rates charged in the locality for similar legal services, the time limitations imposed by the client or the case, and the experience, reputation, and ability of the attorney performing the services.”

In general, Continental argued that the coverage rates sought were unreasonably high for the Portland market. It is beyond the scope here to address the court’s very detailed analysis in arriving at its conclusion that all of the fees sought would be awarded. But that’s what it did by concluding that the rates, as well as hours worked, were reasonable.

The take away here is easy. States differ widely in how they address the recovery of prevailing party attorney’s fees in coverage litigation. The outcome of Schnitzer certainly would not have been the same in all states. Nonetheless, it must be remembered that there is sometimes more to the calculus, whether to engage in coverage litigation, than simply the chances of prevailing on the merits.