Fourth Department Rejects Attorneys' Fees Claim for Defending Insurer's Appeal -- Not So Mighty Midgets

EMPLOYER'S LIABILITY – RIGHT TO INDEPENDENT COUNSEL – ATTORNEYS' FEES
Thomas Johnson, Inc. v. State Ins. Fund
(4th Dept., decided 11/13/2009)

Since at least 1979, the New York rule regarding the recoverability of attorneys' fees in declaratory judgment actions has been that it is only when the insured is "cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations" and wins the DJ action that the insured may recover its attorneys' fees.  The seminal case pronouncing that rule is the New York Court of Appeals' decision in Mighty Midgets v Centennial Ins. Co., 47 NY2d 12 (1979), and the rule has come to be known simply as the "Mighty Midgets rule".  Generally speaking, the recoverability of attorneys' fees depends on which of the two parties -- insured or insurer -- commences the DJ action:  if the insured commenced it, no attorneys' fees regardless of the outcome; if the insurer commenced it and loses, attorneys' fees can be awarded. 

Some inventive counsel, including the plaintiff's law firm in this DJ action, have argued that even in cases such as this where the insured was the one to initiate the DJ action, the insured should be able to recover its attorneys' fees for defending against the insurer's counterclaim (which is unnecessary in a DJ action since the court is obligated to declare the rights and responsibilities of all parties to the DJ action), motion for summary judgment, or appeal of an adverse order or judgment. In this case, the defendant State Insurance Fund unsuccessfully appealed from the lower court's judgment declaring that the insured was entitled to an attorney of its own choosing, at SIF's expense, in an underlying personal injury action.

Counsel for the plaintiff then sought to recover their fees for defending against the insurer's unsuccessful appeal and managed to convince Niagara Supreme that such fees were recoverable under the Midget Midgets rule because the insurer's appeal had cast plaintiff in a "defensive posture" vis-à-vis that appeal.  The SIF appealed the award of such attorneys' fees to the plaintiff insured, and the Fourth Department REVERSED, holding:

We agree with defendant that Supreme Court erred in granting judgment in plaintiff's favor declaring that defendant is obligated to pay all costs and fees incurred by plaintiff in the defense of an appeal taken by defendant from a prior judgment (Thomas Johnson, Inc. v State Ins. Fund, 50 AD3d 1544). The prior judgment, inter alia, granted that part of plaintiff's cross motion seeking summary judgment declaring that plaintiff is entitled to an attorney of its own choosing, at defendant's expense, in the underlying personal injury action. "[I]t is well settled that an insured may not be awarded attorney fees incurred in the prosecution of a declaratory [judgment] action against the insurer to determine coverage" (Penn Aluminum v Aetna Cas. & Sur. Co., 61 AD2d 1119, 1120), unless the insured was "cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations" (Mighty Midgets v Centennial Ins. Co., 47 NY2d 12, 21), and that is not the case here. Moreover, the fact that defendant took an appeal in a declaratory judgment action commenced by plaintiff is of no moment (see generally Crouse W. Holding Corp. v Sphere Drake Ins. Co., 248 AD2d 932, affd 92 NY2d 1017). We therefore modify the judgment accordingly.

No moment.  Same holding ostensibly should apply to fees for defending against insurer's counterclaims or defensive motions or cross motions for summary judgment in DJ actions in which the insured occupies the plaintiff's position. I have an insured-initiated DJ action heading to a jury trial in January in which the same law firm has made the same argument.  Must add this decision to my motion in limine.  Grazie.