Chicago Ins. Co.  v. Lappin, 58 Mass. App. Ct. 769, 792 N.E.2nd 1018 (2003).

NELF supported Chicago Insurance Company in its successful appeal of a Massachusetts superior court decision holding Chicago responsible for legal fees of a claimant against an insured, Robert Lappin. Chicago insured Lappin, an attorney, against professional liability and malpractice. During the term of the insurance coverage Lappin’s secretary embezzled several million dollars from Lappin’s clients, who eventually sued Lappin. Chicago initially defended Lappin with a reservation of rights. Arguing that Lappin had made material misrepresentations in the application for insurance, Chicago subsequently rescinded the policy and ceased to defend him. Chicago then brought an action for declaratory judgment seeking court approval of the rescission of the policy and withdrawal of defense. Chicago joined the client-claimants as defendants as required by Mass. Gen. L. c. 231A, §8, which requires joinder of all “parties who have or claim any interest which would be affected by the declaration.” The superior court held that Lappin was entitled to defense and indemnification and thus was also entitled to the fees and costs he had incurred in defending the declaratory judgment action. Although Massachusetts follows the so-called “American Rule” requiring each party to bear its own attorney’s fees and costs, there is a narrow exception to that rule for fees and costs an insured incurs in successfully establishing an insurer’s obligation to defend him. In an unprecedented extension of this narrow exception, the superior court held that the client-claimants were intended third-party beneficiaries of the policy and thus also entitled to fees and costs they incurred in defending the declaratory judgment. Chicago appealed the decision. NELF filed an amicus brief in support of Chicago arguing that the court’s decision is contrary to all known precedent in Massachusetts regarding an insurer’s liability to claimants for attorney’s fees. NELF also argued that the rationales that justify the limited exception to the American Rule—the “special relationship” between insured and insurer and the insured’s payment of premiums to the insurer—do not exist in this fact pattern.  The Appeals Court agreed, saying, “[A] fee award to an insured who successfully establishes the insurer's duty to defend serves to ensure that the insured will not in practice lose through enforcement that which he should have had as of contractual right--the right to be free of the expense of defending suits brought against him. A fee award to the Wallaces would serve no such beneficial function. As owners of those claims against which Lappin was to be defended, the Wallaces certainly cannot be said to be beneficiaries, intended or otherwise, of Chicago's promise to defend. Their award must be vacated.” (citation omitted).