There is no shortage of coverage litigation over the meaning of the term “ultimate net loss.”  And that’s not too surprising.  The term is used frequently in policies, has a definition that varies and  is often used in excess policies, so its meaning sometimes comes up against policy language in an underlying policy.  For a good example of the last one, see Ohio Cas. Ins. Co. v. Patterson UTI Energy, No. 14-22-26 (Tex. Ct. App. Nov. 22, 2022), which I discussed in a recent CO blast.    

Starstone Ins. SE v. City of Chicago, No. 20-2475 (N.D. Ill. Sept. 26, 2022) is in that can be knotty category of the meaning of “ultimate net loss.”  In 2020, the City of Chicago paid $18,750,000 to settle a wrongful conviction case following a jury verdict.

The City was insured under a wrongful act/errors and omissions excess policy issued by Starstone Inc.  The policy had a $15,000,000 self-insured retention.  Starstone did not object to the settlement.  The city sought recovery from Starstone of the $3,750,000 in excess of the self-insured retention.  The parties agreed that at least $3,7500,000 of the settlement included plaintiff’s attorney’s fees and costs that were recoverable under statute.   

Starstone denied coverage, arguing that the policy did not cover costs, which include attorney’s fees.  As Starstone saw it, “costs” are not “damages,” and the policy only provides coverage for damages. 

As you would expect, the court immediately set out the relevant policy language.  The policy’s insuring agreement was simple:

“We shall pay you, or on your behalf, the ultimate net loss, in excess of the retained limit, that the insured becomes legally obligated to pay to compensate others for loss arising out of your wrongful act that takes place during the Policy Period and arises solely in performing or failing to perform duties of the public entity.”

Next up was the definition of “ultimate net loss:”

“[T]he sum actually paid or payable due to a claim or suit for which you are liable either by a settlement to which you and we agreed or a final judgment. Such sum will include proper adjustments for recoveries and salvage.”

As the court saw it, the flaw in Starstone’s argument was the policy language – not so much what it said; more what it didn’t say: “[T]he policy does not limit coverage to ‘damages’; rather, the policy expressly covers the ‘ultimate net loss,’ which by its terms includes ‘the sum actually paid’ in settlement.”

The court was also not persuaded by the insurer’s argument that the word “compensate,” as used in the insuring agreement, meant compensation to the tort plaintiff and not the fees to his counsel: “But fees and costs also compensate a wronged and prevailing party and are designed to make him whole. Compensating someone for a loss goes beyond damages; if that were not the case, the phrase ‘compensatory damages’ would be redundant.”

This stands in contrast to other decisions that have held that damages do not include attorney’s fees that must be paid to a prevailing party.  In other words, some courts have ruled that amounts sought to seek damages are not themselves damages.  I’ll have more on this next month in the Top 10 Coverage Cases of 2022