Patton Boggs Reinsurance Newsletter- March 2013: Utah Federal Court Denies Reinsurers' Recovery of Attorney Fees

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National Indem. Co. v. Nelson, Chipman & Burt, No. 2:07-CV-996 TS, 2013 WL 226881 (D. Utah Jan. 18, 2013).

A Utah federal court granted underlying defense counsel's motion for partial summary judgment against reinsurers, as subrogees of cedent and its insured, denying their right to recover attorney fees, as consequential damages. The cedent incurred attorneys' fees when it sought reimbursement from its insured for the settlement monies it paid over the policy limits on its behalf in the underlying action.

The dispute arose from an underlying litigation brought on behalf of a minor, injured during an adult softball tournament, which resulted in a verdict in excess of $6 million against the insured and other parties. Even after the cedent settled with the minor for a reduction in the award, the settlement was still in excess of the $2 million policy limit, and the insured refused to pay the amount in excess of the limits. The reinsurers, through its cedent, however, paid the full settlement amount.

The cedent subsequently sued its insured for reimbursement of the amounts it paid beyond the policy limits. The reimbursement question was certified to the Utah Supreme Court as an issue of first impression. The Supreme Court ruled that there was no extra-contractual right to restitution between an insurer and its insured, and denied reimbursement.

The reinsurers, as subrogees of the cedent and the cedent's insured, next brought malpractice claims against counsel retained by cedent in the underlying action to recover attorney fees as damages under the third-party litigation exception. The third-party litigation exception allows recovery of fees only in the limited situation where defendant's wrongful conduct foreseeably causes the plaintiff to incur attorney fees through litigation with a third party. Defense counsel subsequently moved for partial summary judgment to deny reinsurers recovery of their attorney fees.

In granting defense counsel's motion, the court held that defense counsel's actions did not fall within the third-party litigation exception to Utah's long-standing rule allowing recovery of attorney fees as consequential damages where provided by statute or contract. The court focused on the issue of foreseeability to answer the question of whether the reinsurers could recover as damages the attorney fees incurred by the cedent and its insured in determining cedent's reimbursement rights for the settlement monies paid to the minor.

The malpractice claims were based upon tort and contract causes of action. Under the tort allegations, the court held that the third-party litigation exception applies when the foreseeable and natural consequence of one's negligence is another's involvement in a dispute with a third party. For the reinsurers to recover attorney fees in tort under the third-party litigation exception, the court stated that it must be reasonably foreseeable that a contemplated loss resulting from counsel's allegedly negligent acts would be the attorney fees expended in a reimbursement action between cedent and its insured.

Moreover, if the loss of attorney fees was foreseeable, the court noted it would also have to infer that some of the other actions were foreseeable, including whether the cedent would settle with the minor for an amount in excess of policy limits, and subsequently bring a coverage action against its insured.

Similarly, under the breach of contract allegations, the court noted that in order for the reinsurers to recover attorney fees under the third-party litigation exception, it would have to infer that attorney fees expended in a reimbursement suit were reasonably foreseeable as the natural and usual course of events resulting from a breach of representation contract between an insurer and its retained counsel. The test for reasonable foreseeability was whether it could ". . . fairly and reasonably be said that if the minds of the parties had adverted to breach when the contract was made. . . ." loss of attorney fees would have been within their contemplation.

After careful analysis, the court held that no reasonable jury could return a verdict for the reinsurers' recovery of attorney fees under the third-party litigation exception in either tort or contract causes of action. The court reasoned that the coverage dispute, with its resultant attorney fees, was not the foreseeable natural consequence of counsel's alleged malpractice.

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