Insurer must pay policyholder's legal fees in duty-to-defend case

A federal judge’s decision analyzed complicated Massachusetts insurance law as interpreted by courts.

In the July 2015 case of Preferred Mutual Insurance Company v. Lodigiani, the court awarded $43,712 in attorney's fees to an insurance policy holder who incurred fees defending a lawsuit by its insurance company. In that suit, the insurer had asked the court to either declare that the policy had been rescinded or that the policy would not cover any losses incurred by the insured party as the result of a fire at a site where the policyholder had provided plumbing services.

The case was decided in the U.S. District Court in Massachusetts by applying Massachusetts law.

The declaratory judgment action by the insurer was filed during the pendency of the underlying suit in which the policyholder was sued for alleged culpability pertaining to the destruction caused by the fire and before that suit had been resolved. The insurance company was defending the insured plumber in the underlying litigation under a duty-to-defend provision in the policy at the same time that it was seeking relief from another court in the form of a declaration to determine policy rescission and clarify scope of coverage.

The court found that the claim for attorney's fees came down to whether the insurer's declaratory judgment request involved a duty-to-defend or a duty to indemnify question and the court expounded upon the difference.

The duty to defend involves a policy provision that requires an insurance company to pay the costs of defending the insured party in any lawsuit against it seeking damages for loss of the kind covered by the policy. In a lawsuit between an insurer and insured party over the duty to defend in a policy, if it is found that the duty to defend exists, the insured is entitled to reasonable legal fees from the insurance company, under Massachusetts law.

The court clarified that if the dispute was over whether the insurer had a duty to indemnify, meaning pay for any covered loss the insured eventually incurred, such as a judgment against the policyholder for which the policy provided coverage, then the insured is not entitled to legal fees.

Based on Massachusetts case law, the court found that whether the issue was a duty to defend or a duty to indemnify depended on the "timing" of the declaratory judgment action. Since the underlying dispute was not yet decided, the declaratory relief action was found to be a duty-to-defend issue for which legal fees were available. The judge ruled that state case law did not require bad faith on the part of an insurer to incur liability for legal fees in this scenario.

Legal issues and disputes involving the duties to defend or to indemnify can be extremely complex. Any individual or business facing such a controversy should seek legal advice from an experienced commercial litigation attorney as soon as possible in order to understand what legal options are available and for vigorous advocacy.

The attorneys of the Boston law firm of Aceto, Bonner & Cole PC, represent individual and business clients throughout Greater Boston regarding coverage and insurance disputes.