New York Court Alters Rules On Attorney Fees In DJ Actions

A lower New York court has recently issued a decision which upset what was thought of as settled law in relation to an insured’s right to attorney fees in a DJ action. In the Utica v. Crystal Wall case, 2023 NY Slip Op 23362, the court ruled that if the insured is successful in defending against a DJ action that sought to disclaim the right to indemnify only, it could recover attorney fees. See attached decision.

Key to the court’s decision was a finding that the suit was a broad sided approach to limit any obligation to indemnify against the claims asserted and was filed at a very early stage of the underlying case, where facts had not been fully developed. One of the opening paragraphs in the decision emphasized this point, stating:

An insurance-coverage declaratory-judgment action is “premature”—and therefore subject to dismissal—”where the complaint in the underlying action alleges several grounds of liability, some of which invoke the coverage of the policy, and where the issues of indemnification and coverage hinge on facts which will necessarily be decided in the underlying action.”

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Utica effectively concedes that all but one of the requested declarations “depend on facts developed in the Underlying Action,” such that their declaratory-judgment claim is, to that extent, not ripe for resolution.

In our opinion, the court felt it was unreasonable to place the insured in the position to defend an against an action that could not be decided on all of the grounds asserted and, therefore, awarded attorney fees despite the fact there was no prior direct precedent for the decision. It is too early to determine whether there will be an appeal of the decision. The expenses associated with the DJ are not likely to be significant – the case was at the pleadings stage when the motion was filed. Utica might want to simply resolve the case and not poke the bears that sit on the First Department bench. The appellate courts in New York are not always insurer friendly and, when given the chance, might strengthen policyholder rights. That said, Utica might be concerned about the impact of the decision in other similarly filed cases.

The good news is that with respect to cases involving the pursuit of additional insured or priority of coverage cases, the decision does not have an impact. These cases typically involve a claim by one insurer vs another insurer. There are no fees to be reimbursed to an insured if the DJ is unsuccessful. We do not see the courts going so far as to create an “exception to the American rule” in insurer vs insurer suits.

To the extent that an insurer is in the posture of affirmatively disputing a party’s right to coverage, the decision does raise some concerns. However, if there is a complete denial of any duty to defend and indemnify, insurers rarely file a DJ action for the very reasons the court notes – that if an insured prevails in an action brought by an insurer on the duty to defend, the insurer bears the costs of the DJ action.  Typically, an insurer waits for push back from the insured or their filing of a DJ. In circumstances where a reservation of rights has been issued and the duty to indemnify is the issue, picking and choosing the right case to bring suit has been and remains the guidepost. The decision in the Utica case just accentuates this point. Parenthetically, we note that the court did not rule out the possibility of bringing a DJ action for stakeholder purposes in an appropriate case where the underlying factual issues will be resolved in a reasonably timely manner stating as follows:

Although a court lacks jurisdiction to issue a declaratory judgment absent a justiciable controversy, a court does have discretion, in appropriate circumstances, to stay an unripe declaratory-judgment action, instead of dismissing it altogether. (See Allstate Ins. Co. v Kemp, 144 AD2d 853, 854 [3d Dept 1988] [affirming order that stayed a premature declaratory-judgment action].) This court concludes, however, that staying Utica’s action would not be appropriate here. The underlying action is complex and slow-moving. It is unclear to this court—and Utica does not attempt to provide clarity—when the factual questions bearing on Utica’s potential duty to indemnify the Crystal Entities will be resolved in that action. This court declines to leave the current action in a holding pattern for an open-ended (and presumably lengthy) period. This action is therefore dismissed without prejudice to its renewal once it is no longer premature.

If the case is affirmed on appeal, it is unknow whether the next logical step is for courts to award attorney fees to an insured who prosecutes a DJ action and prevails on the duty to defend issue. We are aware that currently some federal courts are more receptive to this argument than state courts.  It would not surprise us if the NY state courts adopted this position down the road. We always though it odd that the if the insurer started a DJ action to disclaim the duty to defend and lost, it paid the insured’s attorney fee in defending the DJ but if the insured prevailed in its DJ on the same issue against the insurer, there was no obligation to pay the insured’s legal fees in prosecuting the DJ action.

We will continue to monitor the progress of this case and the related issue of the obligations of an insurer to pay legal fees in connection with a DJ action.