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Vol. 4, Iss. 11
November 11, 2015

Prevailing Party Attorney’s Fees:
The Sometimes Overlooked, Critically Important Coverage Issue

 

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: possibly 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.

In those states where the prevailing insured’s right to recover attorney’s fees is not automatic, but tied to the insurer’s conduct in denying coverage, collateral litigation is likely to take place to determine whether the prevailing insured is entitled to recover such fees. This was the situation before the Montana Supreme Court in Mlekush v. Framers Insurance Exchange, No. 15-66 (Mont. Oct. 20, 2015).

Mlekush involved a UIM claim. Tanya Mlekush was in an auto accident. She recovered the at-fault driver’s $50,000 policy limit and then pursued an underinsured motorist claim against her insurer – Farmers (Bum ba-dum bum bum bum). The policy had a $200,000 limit. Mlekush’s counsel and Farmers went back and forth for a while on the claim and Mlekush eventually filed suit. The parties exchanged settlement offers for seventeen months but no deal got done. The case went to trial and a jury awarded Mlekush $450,000. She stipulated to a judgment against Farmers for $200,000.

Mlekush sought to recover her attorney’s fees. The court noted that Montana generally follows the “American Rule” regarding attorney fees. This means that each party is required to bear his or her own litigation expenses -- absent a contractual or statutory provision to the contrary. However, Montana, and other states, recognize some narrow exceptions to the American rule. “Mlekush sought attorney fees under the ‘insurance exception,’ which entitles an insured to recover attorney fees ‘when the insurer forces the insured to assume the burden of legal action to obtain the full benefit of the insurance contract.’” This gets back to the concept 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 lower court concluded that Mlekush was not entitled to recover her attorney’s fees. It’s reason was that, because Farmers did not deny Mlekush’s UIM coverage and Mlekush filed her complaint before the evidence was sufficiently developed, “Mlekush initiated legal action prematurely and, therefore, was not ‘forced to assume the burden of legal action.’”

However, the Montana Supreme Court did not see it so simply: “Consistent with our precedent, a district court must consider the entirety of the litigation in determining whether, and to what extent, an insured was forced to assume the burden of legal action in order to recover the full benefit of the insurance contract.”

Turning to this totality of the circumstances requirement, the court looked at a lot of factors: “Mlekush filed her complaint in January 2013. Farmers answered on February 26, 2013, admitting that McGoldrick was negligent and acknowledging Mlekush’s potential entitlement to UIM benefits. The jury returned its verdict approximately seventeen months later, in July 2014. During that seventeen-month period, Mlekush continued to receive medical treatment for her injuries, including additional surgery, and incurred wage loss from missed time from work. The District Court noted that, as Farmers continued to collect additional information, it extended increasing settlement offers to Mlekush. In denying Mlekush’s motion for attorney fees, however, the District Court did not consider—and the record does not reflect—information such as the amounts of the settlement offers, when they were made during the course of the litigation, whether they required a full and final release, what Mlekush's responses to the offers were, and what relationship, if any, the increasing settlement offers bore to Mlekush's increasing economic damages. The record also does not reflect whether Mlekush made demands for advance payments or requested partial payments during the pendency of the litigation which were denied. In her brief on appeal, Mlekush repeatedly references Farmers’ October 7, 2013 offer of judgment for $60,000; this, likewise, is not in the record. The record was not developed below, and the District Court did not consider these factors because it found dispositive the facts that Farmers did not deny Mlekush’s UIM coverage and Mlekush filed her complaint before the evidence was sufficiently developed. If that was all the analysis required, the District Court’s conclusion would be correct. Determining whether an insured was forced to assume the burden of legal action to obtain the full benefit of the insurance contract, however, requires more than focusing on one static point in the litigation process.”

The high court remanded for a determination whether Farmers “forced Mlekush to assume the burden of legal action to obtain the full benefit of her UIM policy, thus entitling her to attorney fees under the insurance exception.”

No doubt courts that automatically award attorneys fees to a prevailing insured are not inclined to see the matter drawn out by such fact-based collateral litigation.

 

 
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