It is a general principle of our civil litigation system that, when it comes to one party’s obligation to pay another’s attorney’s fees, the so-called American rule applies.  This means that the loser is not obligated to pay the attorney’s fees incurred by the prevailing party.  Of course, like all general principles, there are exceptions.  See Alaska.  The most commons exceptions nationally are where attorney’s fees are authorized by a contact between the litigating parties.  Another calls for the loser to pay the winning side’s attorney’s fees when such obligation is statutorily proscribed.  This is often seen in laws authorizing suits for violation of civil rights, intellectual property rights and consumer protection.

Whether an insured’s obligation to pay an award of attorney’s fees is covered under a commercial general liability policy is a question with mixed results.  That was the question before the Supreme Judicial Court of Massachusetts in Vermont Mutual Insurance Company v. Poirier.  While some courts around the country have addressed the issue, plenty of states have not spoken on it. 

With Poirier coming from a state high court, not to mention the statute authorizing attorney’s fees being more popular than Tom Brady, the decision was an easy one for including it as one of the year’s ten most significant coverage decisions.  Not to mention that the issue was also the subject of a revision to ISO’s 2007 commercial general liability form.  However, very few courts have addressed that revision.  Poirier did.  The decision has the makings of one that courts nationally turn to for guidance when addressing the availability of CGL coverage for prevailing party attorney’s fees.

The facts giving rise to the coverage issue are simple.  Paul and Jane Poirier operated a Servpro cleaning business.  In 1999 [I’m not sure how this case goes back so far], Douglas and Phyllis Maston hired the Poiriers’ company to clean up a sewage spill in their basement.  Although the Servpro workers warned Phyllis to stay out of the basement while they applied cleaning products, they did not warn her that, until the disinfectants dried, being in the basement could be dangerous.  Phyllis continued cleaning the basement and developed respiratory problems, which her doctors determined were caused by her exposure to the cleaning products used by Servpro.

The Mastons sued the Poiriers for breach of contract, negligence and violations of Massachusetts’s statute G. L. c. 93A based on breaches of the warranty of merchantability and the warranty of fitness for a particular purpose.

A trial judge awarded damages to Phyllis for her injuries as well as concluding that Servpro violated section 93A.  Vermont Mutual, the Poiriers’ liability insurer, paid the Mastons nearly $700,000 for their damages.  However, the insurer refused to pay approximately $250,000 in attorney’s fees and costs that the court awarded on account of its determination that Servpro violated section 93A. 

Vermont Mutual commenced an action seeking a determination that it had no obligation to pay the attorney’s fees and costs.  The trial court concluded that coverage for the attorney’s fees was owed as they qualified as “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury.’”

Vermont Mutual appealed and the dispute reached the Supreme Judicial Court of Massachusetts.  The state’s top court reversed. 

The court set out the dispute as one clearly involving the interpretation of policy language:

“There is no disagreement that the attorney’s fees are ‘sums that the [Poiriers became] legally obligated to pay.’  Likewise, there is no dispute that the attorney’s fees themselves are not ‘bodily injury,’ either under the definition in the policy or according to the plain meaning of the term. . . . The disagreement stems from the words connecting the two — whether the insureds were liable for the attorney’s fees “as damages because of” Phyllis’s bodily injury.” (emphasis in original).

To decide, the court turned to where you would expect: the text of section 93A, which outlaws “[u]nfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce.”

The statute’s private right of action section provides that one establishing a violation shall “in addition to other relief provided for by this section and irrespective of the amount in controversy, be awarded reasonable attorney’s fees and costs incurred in connection with said action.”

Based on the aforementioned language of the statute, and other provisions, the court concluded that attorney’s fees are “a separate form of relief distinct from the award of damages.”  Applying this statutory conclusion to the policy language, the court held that coverage for the attorney’s fees awarded against the Poiriers was precluded:

“Consequently, even under G. L. c. 93A, damages and attorney’s fees for pursuing the c. 93A action are decoupled and treated differently.  They serve two different purposes — damages are to compensate for the injury, and awards of attorney’s fees are to deter misconduct and recognize the public benefit of bringing the misconduct to light. ***

“We therefore conclude that the insurance policy provision covering damages caused by bodily injury does not cover the award of attorney’s fees under G. L. c. 93A.  Damages and attorney’s fees are conceptually different, and are so recognized under that chapter. The insurance contract here only provides for the recovery of ‘damages.’  Therefore, attorney’s fees awarded pursuant to G. L. c. 93A are not recoverable as damages under the insurance contract.”

The court also rejected the Poiriers’s argument that coverage was owed because the Supplementary Payments section of the policy includes “[a]ll costs taxed against the insured.”  However, “costs,” the court concluded, do not include attorney’s fees as the policy language applies to “costs ‘taxed’ against the insured in the suit, conveying the narrower, technical meaning of court-related or nominal costs recoverable as a matter of course to prevailing parties, governed under Massachusetts law.”    

Interestingly, it was pointed out that a subsequent version of ISO’s standard commercial general liability policy amended the Supplementary Payments section to state that costs “do not include attorneys’ fees or attorneys’ expenses taxed against the insured.”  This, however, did not create coverage under a policy lacking such language.  “Absence of an express exclusion,” the court concluded “does not operate to create coverage, even if other policies contain an express exclusion.” 

It is not difficult to see Poirier becoming a go-to case for insurers seeking to preclude coverage for statutory-based attorney’s fees that its insured is ordered to pay to a prevailing party.  It will be especially useful if, as with section 93A, the statute treats damages and attorney’s fees differently.

Of note, as addressed by the Poirier court, the Supplementary Payments section was amended in the 2007 edition of ISO’s standard commercial general liability policy.  The policy was changed to state that Supplementary Payments include “all court costs taxed against the insured in the ‘suit.’  However, these payments do not include attorneys’ fees or attorneys’ expenses taxed against the insured.”  (italicized text added).

ISO describes the change as follows in its October 24, 2006 filing circular addressing various revisions to the 2007 CGL form (LI-GL-2006-255): “The intent of the provision is to provide coverage for court costs taxed against the insured and not to provide coverage for the plaintiff’s attorneys’ fees or expenses taxed against the insured.  Currently, the Insuring Agreement Section of the CGL coverage form provides coverage for these plaintiff’s attorneys’ fees or expenses, only indirectly as the attorney is paid out of the damages collected by the plaintiff.”  ISO states that the change has “no impact on coverage.”  (emphasis in original).