Insureds may find themselves liable to pay a plaintiff’s attorney’s fees in various contexts, whether by virtue of a statute or contractual provision. If prevailing party attorney’s fees are awarded, a question arises as to whether the fees are covered by the liability insurer defending the suit.
There is no consensus across US jurisdictions on whether, and to what extent, attorney’s fees are coved under a liability policy. However, decisions typically fall in one of three categories: (a) the fees do not qualify as “damages” within the scope of the policy’s insuring agreement and are, therefore, outside the purview of coverage; (b) the fees are covered “damages” within the scope of the insuring agreement; or (c) the fees are not “damages” within the scope of the policy’s insuring agreement, but are covered under a supplementary payments provision affording coverage, outside of limits, to “costs taxed against the insured.” Each category is addressed here.
Several jurisdictions hold that legal fees do not qualify as damages. See e.g., Alea London Ltd. v. Am. Home Services, Inc., 638 F.3d 768, 780 (11th Cir. 2011) (“Under plain language interpretation, AHS's argument [that attorneys' fees are covered as] ‘expenses of litigation’ … runs contrary to the ‘ordinary and legal meaning’ of the Policy's terms[,] … attorneys' fees, even where recoverable, are not typically included within the ordinary species of damages [under Georgia Law].”); Vermont Mut. Ins. Co. v. Poirier, 189 N.E.3d 306 (Mass. 2022).
For instance in Vermont Mut. Ins. Co. v. Poirier, the Supreme Judicial Court of Massachusetts reversed a lower court ruling that the attorney’s fees are covered. Poirier, 189 N.E.3d 306. In that case, Vermont Mutual paid the substantive damages award under a “Businessowners Liability Coverage Form” and filed a declaratory judgment action to determine whether it was also required to pay the attorney’s fee award under G. L. c. 93A, § 9 (4). Id. at 308-10. Though the court largely focused on the statutory reasoning for the fee award, the court found that such fees are not covered as “damages” within the scope of the insuring agreement, which afforded coverage to “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury.’” Id. at 313.
In finding that these statutory attorney’s fees are not covered “damages,” the court noted that attorney’s fees and damages are conceptually different and serve two different purposes. The purpose of “damages are to compensate for the injury,” while statutory attorney's fee awards are designed “to deter misconduct and recognize the public benefit of bringing the misconduct to light. Id. at 312. Accordingly, the court found that the fees “are not recoverable as damages under the insurance contract” Id. at 313.
Conversely, several other courts have found that “an award of attorneys' fees is indistinguishable from a damages award for coverage purposes,” and are, therefore, covered. Hyatt Corp. v. Occidental Fire & Cas. Co. of N.C., 801 S.W.2d 382, 393 (Mo. Ct. App. 1990); City of Ypsilanti v. Appalachian Ins. Co., 547 F. Supp. 823 (E.D. Mich. 1982).
For example in City of Ypsilanti v. Appalachian Ins. Co., a federal district court found that attorney’s fees awarded under a civil rights statute qualified for coverage under a “Law Enforcement Officers Comprehensive Professional Liability Insurance” policy because “a reasonable person in the position of the Insured would believe that the words ‘all sums which the Insured shall become legally obligated to pay as damages’ would provide coverage for all forms of civil liability, including attorney[‘s] fees.” City of Ypsilanti, 547 F. Supp. at 828. In particular, the court found that “[i]t is reasonable to say that an attorney[‘s] fee award in a civil rights suit is a form of ‘damage’ which the defendant contracted to cover,” and if the parties intended to exclude these fees “[i]t would have been simple enough to exclude [them].” Id. Because the fees were not excluded, the ambiguity surrounding coverage for attorney’s fees remained and would be resolved against the Insurer and in favor of providing coverage to the insured. Id.
Finally, there is a grouping of states where courts have taken a middle approach and have found that, while a prevailing fee award is not covered as “damages,” they may be covered as “costs taxed against the insured” under the supplementary payment provision. Mid-Continent Cas. Co. v. Treace, 186 So. 3d 11, 12 (Fla. 5th DCA 2015) (“all court costs” could be read to include attorney's fees, especially since there was no definition of that term in the policy.”); Wallace v. Nautilus Ins. Co., 18-CV-747-LM, 2019 WL 3302172, at *8 (D.N.H. July 23, 2019) (“several courts have interpreted the phrase [‘costs taxed’] under other state law to include an award of attorneys’ fees.”); Littlefield v. McGuffey, 979 F.2d 101, 105 (7th Cir. 1992) (absent an exclusion, attorney’s fees may be covered as “costs.”). But see Alea London Ltd., 638 F.3d at 780 (“[t]he ordinary and legal meaning of ‘costs’ under Georgia law does not include attorneys' fees.”). To the extent the fees are covered as a supplementary payment, they are typically paid outside, i.e. in addition to, the policy limits.
It is important to note; however, that although attorney’s fees may be covered under the supplementary payments provision, courts have indicated that exclusionary language will be enforced as written. As one court noted, “[i]f an insurer does not wish to underwrite attorney's fees charged against its insureds, it need only add … the four words ‘exclusive of attorney's fees’ … after the word ‘costs.’” Littlefield, 979 F.2d at 105; Treace, 186 So. 3d at 12 (“the insurer did not, but could have, defined ‘court costs’ to specifically exclude attorney's fees.”). In fact, the current ISO Commercial General Liability Form and many other liability forms now expressly state that the supplementary payments provision only applies to “court costs” and preclude attorney’s fees from the provision.
Comment
Although attorney’s fees may not qualify for coverage under the insuring agreement as “damages,” it may fall within a policy’s supplementary payments provision and be payable outside of policy limits, as a “costs taxed against an insured.” To the extent insurers wish to avoid coverage for attorney’s fees, the policies should be clear that attorney’s fees are not covered whether as “damages” or under a supplementary payments provision.
