In a recent decision, the Supreme Judicial Court of Massachusetts ruled that an insurer, in contrast to an insured, cannot obtain attorney’s fees incurred in successfully establishing another insurer’s duty to defend. John T. Callahan & Sons, Inc. v. Worcester Ins. Co., SJC-10180 (March 19, 2009).

Callahan, a contractor on a construction project, was sued when an employee of a subcontractor was injured. Callahan sought a defense both from its own CGL insurer and from another subcontractor’s insurer, arguing that it was an additional insured under the subcontractor’s policy. The subcontractor’s insurer denied coverage and refused to defend. Callahan and its insurer then brought an action for declaratory judgment against the subcontractor’s insurer, represented by attorneys paid entirely by Callahan’s insurer, and successfully obtained summary judgment against the subcontractor’s insurer.

The Superior Court judge refused, however, to award the contractor’s insurer its attorney’s fees expended in pursuing the declaratory judgment. The contractor’s insurer appealed, arguing that under Preferred Mut. Ins. Co. v. Gamache, 426 Mass. 93, 98 (1997), an insurer who wrongfully refuses to defend must pay attorney’s fees incurred in subsequent coverage litigation brought to enforce that right.

As the Supreme Judicial Court notes in Callahan, the rule established by Gamache represents an exception to the “American Rule,” which says that each party in a litigation must pay its own attorneys no matter who is victorious in the litigation (in the absence of a statute providing otherwise). Under Gamache, an insured is entitled to attorney’s fees associated with establishing its insurer’s duty to defend. The court in Callahan explains that this exception was instituted “because of the special relationship between the insured and its insurer arising out of the insurance policy, and because the assumption of responsibility for the insured’s defense in litigation is one of the core purposes for which liability insurance is purchased,” and therefore “allowing recovery of attorney’s fees was necessary to give the insured the full benefit of the insurance contract.”

These justifications do not apply, notes the Callahan opinion, when it is another insurer seeking the recovery of attorney’s fees, as the two insurers have no contractual or “special” relationship with each other, even if one might have a right of contribution against the other. The contractor’s insurer argued that Gamache also sought to prevent the insurer from being rewarded for its wrongful refusal to defend, but the Court rejected this as a rationale for Gamache, the purpose of which was “not to punish wrongdoers or to reward those who acted responsibly.” Rather, the reason for the Gamache rule is “to protect the insured’s right to receive the full benefit of its liability contract.” Since it was not the insured, but another insurer that was seeking to recover attorney’s fees, the general American Rule was properly applied.

For a copy of the decision, please click here.