Mass. SJC Denies Insurer’s Attempt to Net Attorney’s Fees Gamache Exception to American Rule is For Insureds, Court Says

The Standard
In the case of John T. Callahan & Sons, Inc., et al v. Worcester Insurance Company, 453 Mass. 447, 902 N.E.2d 923 (2009), David F. Hassett successfully argued to the Supreme Judicial Court that an insurance company bringing a declaratory judgment action should not recover attorney’s fees and expenses incurred in establishing another insurer’s duty to defend and indemnify under the terms of the policy. The case was recently highlighted in the following article from The Standard:

Boston – An insurer cannot retrieve attorney’s fees related to establishing another insurer’s duty to defend, according to a recent decision from the Massachusetts Supreme Judicial Court.

In John T. Callahan & Sons, Inc. v. Worcester Insurance Company, the Court determined that the Case [sic] law supports an insured’s right to attorney’s fees and expenses, the Court observed, citing the 1997 case of Preferred Mutual v. Gamache. The case established an exception to the “American Rule” which states that all parties are responsible for their own litigation costs.

“What happens when the party incurring attorney’s fees and expenses to establish the insurer’s obligation to defend is not the insured but a different insurer that has defended and provided coverage to the insured?” stated Justice Margot Botsford in the Court’s opinion. “That is the question raised in this case. We answer that the exception to the American Rule in Gamache and its progeny does not extend to allow the prevailing insurer recovery of its attorney’s fees associated with an action brought to establish the defense and coverage responsibility of another insurer.”

In the Callahan case, the plaintiff, a general contractor, was sued by an injured subcontractor. The subcontractor alleged negligence by Callahan and another subcontractor, New England Air Conditioning Service (NEAC). Callahan had a general liability insurance policy with Zurich American Insurance Company. Also affecting the case was the fact that Callahan was an additional insured under NEAC’s general liability policy issued by the defendant Worcester Insurance Company.

Callahan asked both Zurich and Worcester to defend and indemnify it against the negligence claim. Zurich agreed and assumed the defense. NEAC and its insurer rejected the claim. Callahan ultimately settled with the injured subcontractor and contributed $75,000 to the settlement.

However, prior to the settlement, Zurich and Callahan sued Worcester Insurance in Superior Court, seeking a declaratory judgment regarding the insurer’s requirement to defend and indemnify Callahan. The plaintiffs also alleged a Chapter 93A violation.

The Superior Court judge found that Worcester, while not liable under 93A, was responsible for some of Callahan’s defense and should pay half the settlement amount and half the attorney’s fees and expenses of the defense. Following this determination, Callahan and Zurich sought attorney’s fees associated with the declaratory judgment action, but were denied, based on the lower court’s assertion that it was Zurich that sought the fees and the American Rule exception enunciated in Gamache is “for consumers” and should not apply to Zurich. The SJC took up this case on its own accord.

Back to Tradition

“Our traditional and usual approach to the award of attorney’s fees for litigation has been to follow the ‘American Rule’: in the absence of statute, or court rule, we do not allow successful litigants to recover their attorney’s fees and expenses,” stated Botsford. “The principle set out in Gamache, entitlement of an insured to recover attorney’s fees associated with establishing an insurer’s duty to defend under the policy, was a limited exception to that general rule.”

The Gamache exception is appropriate because of the “special relationship” between an insured and insurer forged through the insurance policy.

“The assumption of responsibility for the insured’s defense in litigation is one of the core purposes for which liability insurance is purchased; allowing recovery of attorney’s fees was necessary to give the insured the full benefit of the insurance contract,” added Botsford. “But we have also emphasized that even between insurer and insured, the exception to the American Rule has strict limits. Thus, for example, we refused to extend Gamache to permit an insured to recover attorney’s fees incurred in connection with an action to establish an insurer’s indemnity (as opposed to defense) obligation.”

The two insurers in this case had no contractual relationship and no link apart from the fact that they shared an insured, the Court stated. The declaratory judgment action did not allow Zurich to make a breach of contract claim, but it could be reimbursed by Worcester for its refusal to join in the defense and settlement for the underlying claim.

“Zurich contends that the attorney’s fees must be awarded here because Gamache establishes that Callahan, as the insured, is entitled to them,” said Botsford. “The undisputed fact, however, is that Callahan did not incur these fees; Zurich did. Gamache does not stand for the proposition that an insured should recover attorney’s fees associated with establishing an insurer’s duty to defend even when the insured did not pay those fees.”

Zurich further argued that to not allow retrieval of the fees “rewards” Worcester. The Court disagreed.

“The policy underlying the Gamache exception to the American Rule is not to punish wrongdoers or to reward those who act responsibly,” said the Court. “Rather, it is a policy designed to protect the insured’s right to receive the full benefit of its liability insurance contract. Through the successful declaratory judgment action, Callahan did receive that benefit at no cost to itself, thanks to Zurich. But Zurich also received a separate and very real benefit from the action: the requirement that Worcester reimburse Zurich for one-half the settlement amount and one-half the attorney’s fees. Application of the American Rule to Zurich in this context deprives the insured, Callahan, of nothing, and comports with established practice.”