Be Careful What You Wish For - Successful Litigation That Eliminates Potentially Covered Claims May Deprive the Insured of Insurer Defended Litigation Costs
Vansteen Marine Supply, Inc. v. Twin City Fire Ins. Co., No. 13-05-00231-CV, 2008 WL 599850 (Tex. App. - Corpus Christi March 6, 2008) (Valdez)
Hartford agreed to defend libel and defamation claims in a suit seeking a declaration that a non-competition clause was void and that the former president of Vansteen was entitled to damages from the company. Following a grant of summary judgment on the defamation and libel issues, the insurer sent a notice that it was withdrawing its defense obligation. The court also determined that there was no right to receive affirmative prosecution costs despite the insured’s arguments that they were also defensive of the suit against it. This because requiring a duty to defend which would envision payment of such attorneys’ fees would rewrite the insurance policies that the parties signed. Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983); Witkowski v. Brian, Fooshee & Yonge Props., 181 S.W.3d 824, 830 (Tex. App. - Austin 2005, no pet.).
Had the attack on the liable/defamation claims awaited the conclusion of trial, the defense activities would arguably have dovetailed with the affirmative relief sought and entitled the insured to obtain an insurer funded trial. While some inconvenience may have attended the continued presence of the defamation claims throughout, absent evidence that it would have lead to a different result therein, delaying a motion to eliminate them until the trial concluded would have been preferable from an insurance coverage maximization perspective. Absent a dismissal of the liable and defamation claims, these affirmative prosecution costs, to the extent prove to also dovetail with defense costs, would have been recoverable. See
Adobe Systems Inc. v. St. Paul Fire and Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492 (N.D.Cal., 2007) (“The Court finds persuasive the reasoning in IBP, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, which held that even though an insured initiates a lawsuit, that fact does not automatically preclude coverage for defense-type legal fees and expenses where the insured is resisting a contention of liability for damages. 299 F.Supp.2d 1024, 1031 (D.S.D.2003) (citing Simon v. Maryland Cas. Co., 353 F.2d 608, 613 (5th Cir.1965) (holding that sub-contractor insured was entitled to recover legal fees and expenses from insurer for bringing a declaratory judgment action asserting it was not negligent and was entitled to be paid funds withheld by the general contractor, despite a ‘defense’ clause in policy); Potomac Elec. Power Co. v. California Union Ins. Co., 777 F.Supp. 980, 984-85 (D.D.C.1991) (finding that an affirmative suit brought by an insured is not per se unrecoverable as a defense cost)).”) Id. at *9.Even without an affirmative counterclaim, a motion designed to eliminate from potential coverage, the only claim on which a defense rests, can be problematic for the insured. Thus, Winklevoss’ counsel in Lynchval Systems Inc. v. Chicago Consulting Actuaries, Inc., No. 95 C 1490, 1998 WL 151814 (N.D.Ill. March 27, 1998) brought a successful motion to eliminate the express count for trade libel, which lawsuit Federal, previously defended. The court subsequently determined (when Federal’s withdrawal was challenged) that absent that claim, there was no basis for potential coverage under that pleading. Winklevoss Consultants, Inc. v. Federal Ins. Co., 991 F. Supp. 1024 (N.D. Ill. 1998).
A subsequent case, Winklevoss Consultants, Inc. v. Federal Ins. Co., 11 F. Supp. 2d 995 (N.D. Ill. 1998) reversed that result by finding that a distinct false advertising claim in subsequent pleading contained fact allegations of disparagement sufficient to trigger a defense. The court, however, refused to relate back that defense to the date of the earlier pleading. There were no true pleaded facts raising the potential coverage that came to Federal’s knowledge before tender of the second amended complaint which contained the pertinent coverage triggering allegations.
