A federal court in Texas found that attorneys’ fees awarded to a manufacturer for defense of a suit for indemnity by a retailer are not “damages” covered by a CGL policy. Mid–Continent Cas. Co. v. Petroleum Sols., Inc., 2016 WL 7491858 (S.D. Tex. Dec. 30, 2016).

The insured was sued by a customer for whom the insured installed an underground fuel tank from which fuel had leaked. The installer’s insurer denied coverage because the fuel leak was caused by a faulty flex connector made by the manufacturer of the component parts. The customer sued the insured for breach of express and implied warranties, and the insured sued the manufacturer for statutory indemnity. The manufacturer counterclaimed against the insured for fees incurred in defense of the insured’s action and in prosecution of its claim against the insured. The manufacturer offered to dismiss its counterclaim, but only if the insured would dismiss its claim with prejudice. The insured instead dismissed its claim against the manufacturer, without prejudice, and the manufacturer pursued its counterclaim.

The jury found against the insured for the customer’s claim and also awarded attorneys’ fees, costs and expenses to the manufacturer. The insured’s insurer denied coverage for the manufacturer’s counterclaim, taking the position that the award for attorneys’ fees are not “damages” covered by its CGL policy. The insurer previously had argued that the damages were not covered on the theory that the insured’s rejection of the offer mutually to dismiss the claims was a breach of the cooperation clause. The court refused to extend the cooperation clause to that extent in a liability case. See, September 2016 issue of the Insurance Law Report. The court held that attorneys’ fees are not “damages” because they were incurred in prosecution of its counterclaim against the insured, as contrasted with fees awarded to the manufacturer in the defense of a product liability suit, which would be considered an element of “damages.”