Opposing Expansion of Insurance Companies’ Liability for Attorneys’ Fees to Claimants of the Insured
NELF supported Chicago Insurance Company in its 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 Arguing that Lappin had made material misrepresentations in his application for insurance, Chicago subsequently rescinded the policy and ceased to defend him.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 litigation to bear its own attorneys’ 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 flies in the face of all known precedent in Massachusetts regarding an insurer’s liability to claimants for attorneys’ fees. 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. This extension of liability to a class that never contracted for it and never paid premiums for it, NELF argued, would create uncertainty in the industry and increase premiums for all policyholders. On August 17, 2003 the appeals court issued an opinion overturning the award of attorneys’ fees to the claimants.
NELF supported Chicago Insurance Company in its 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 his 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 litigation to bear its own attorneys’ 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 flies in the face of all known precedent in Massachusetts regarding an insurer’s liability to claimants for attorneys’ fees. 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. This extension of liability to a class that never contracted for it and never paid premiums for it, NELF argued, would create uncertainty in the industry and increase premiums for all policyholders. On August 17, 2003 the appeals court issued an opinion overturning the award of attorneys’ fees to the claimants.
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