The Seventh Circuit held that a policy covering attorneys' fees included the multiplied amount awarded by a trial refusing to apply a policy exclusion for "the multiplied portion of multiplied damages."

The underlying suit involved a merger transaction. Shareholders of Amicas, Inc. objected to a third-party purchase at $5.35 per share. A Massachusetts state court granted a preliminary injunction against the sale. Merge Healthcare, Inc. then made a tender offer of $6.05 per share, which was accepted by Amicas' board. The alleged stall tactics yielded Amicas shareholders a gain of $26 million.

As part of the derivatives claim against the company, the shareholders' lawyers sought attorneys' fees based on the difference between the two bids. Amicas paid the fees and sought coverage from Carolina Casualty Insurance.

In the underlying proceeding the state court awarded plaintiff's counsel a total of $3.15 million. The amount was calculated using a lodestar of $630,000 (or 1,400 hours at $450 per hour) multiplied by five. According to the court, the multiplier represented the risk of nonpayment and the "exceptionally favorable result" achieved by the attorneys for the shareholders.

Carolina Casualty filed suit in Illinois federal court arguing that under the terms of its coverage it was required to pay only the $630,000 lodestar. The insurer relied on an exclusion stating that "Loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, any amount for which the Insureds are not financially liable or which are without legal recourse to the Insureds, or matters which may be deemed uninsurable under the law pursuant to which this Policy shall be construed."

Carolina Casualty argued, therefore, that the phrase "multiplied portion of multiplied damages" meant the remaining $2.52 million portion of the award that resulted from the multiplier was not covered.

The 7th Circuit held that attorneys' fees did not constitute "damages" unless defined otherwise in the policy.

Finding no definition, the court looked to the likely intent behind the provision, which it determined was an attempt to exclude damages for moral hazards. The list of excluded damages "includes punitive damages and criminal penalties [and] covers a category of losses that insurers regularly exclude to curtail moral hazard – the fact that insurance induces the insured to take extra risks."

The court held that "[a]dversaries' attorney fees in commercial litigation are not remotely like punitive damages, trebled damages, or criminal fines and penalties," and were not otherwise a moral hazard.

The court interpreted the clause in favor of the policyholder, finding that the case law supported the carrier's overly broad definition of damages. In essence, the court found the insurers' interpretation of the exclusion was a sleight of hand because the lodestar was merely a different way of applying an equation to calculate attorney fees to achieve the same result. Since that method was clearly not excluded, it made no sense to ratify the carrier's interpretation. The rule that exclusions are narrowly construed demonstrated again the power of general principles of policy interpretation.

To read the decision in Carolina Casualty Insurance Co. v. Merge Healthcare Solutions, Inc., click here.

Why it matters: This case demonstrates one example in which an insurance policy seeks to limit coverage for "loss" or "damages" but fails to define the terms. The effort by the carrier to expand the limitation on "damages" to attorney fees ran counter to all of the basic general principles of insurance policy interpretation. Coverage is broadly defined and, in contrast, exclusions are narrowly applied. Failing to define the term the carrier sought to limit allowed the insured to succeed as long as its proffered interpretation was itself reasonable.