Pursuing a claim for coverage when there is an underlying lawsuit for damages is difficult for any policyholder. They paid for insurance and expect it to defend them in the case. It is a shock to many when the insurer seeks to walk away from coverage while the underlying lawsuit remains active. The recourse is for the insured or insurer to race to court to file a declaratory judgment action over whether there is coverage. When possible, insureds often throw in bad faith, in an effort to recoup attorney fees for needing to pursue a declaratory judgment action to secure coverage. However, in some states the mere fact of winning the coverage case is enough.

Just this week the Fourth Circuit Court of Appeals issued a very interesting opinion. This federal appellate court handles appeals from the district courts in Maryland, Virginia, West Virginia, North Carolina and South Carolina. This appeal, Graham v. National Union Fire Insurance Company of Pittsburgh, PA, 2014 WL 350147 (4th Cir. Feb, 3, 2014), came out of West Virginia. The case arose when the executive director of two nonprofit agencies was sued by the state of West Virginia to remove him and disgorge what the government saw as excessive salaries. One agency tendered the matter to National Union (an AIG company) to defend its officer, Robert Graham. The insurer denied any duty to defend. Graham ended up hiring personal counsel to represent him.

Once the underlying case was resolved, Graham took on insurance giant AIG. He initially sued to obtain reimbursement by the insurer for his attorney’s fees to defend the underlying case. He lost at the trial level but won on appeal. When National Union inquired as to what were the attorney’s fees it owed, Graham added that he also wanted prejudgment interest on the fees and $368,788.74 for “aggravation and inconvenience” in having to sue the insurer to secure the funds. Unable to agree, off to court the parties went for a second time. Graham again lost this round at the trial court as to both issues. Apparently having previously won on appeal this insured was not about to stop. Graham once again appealed to the federal appellate court.

While the Fourth Circuit ruled that Graham was not entitled to prejudgment interest, it did give him a victory on the unusual claim for aggravation and inconvenience. In West Virginia, an insured is entitled to attorney’s fees if he prevails in a declaratory judgment action in securing coverage. This award is given even without a showing of bad faith on the part of the insurer. In short, if the insurer guesses wrong as to its duties under the policy and loses in an action over coverage, then it owes its policyholder for having successfully litigated the issue. An earlier state court case also had allowed an award for aggravation and inconvenience in a first-party coverage matter, so naturally National Union argued in Graham’s case that the distinction was that this was a third-party matter.

The Fourth Circuit, in dismissing this distinction, noted, “From the insured’s prospective, he is bound to suffer the same aggravation and inconvenience regardless of how the insurer breaches the policy: either by unjustifiably refusing to provide a defense against liability or by wrongfully withholding indemnification from property loss.” The court found the distinction illogical between allowing the award of such consequential damages in first-party matters but not third-party coverage disputes. Thus, it ruled aggravation and inconvenience were proper in either type of case.

This is a tremendous victory for policyholders in West Virginia. The logic of allowing such an award is common sense and other jurisdictions would be wise to consider adopting the same rule. Insureds who paid for coverage in the form of premiums should be entitled to compensations for having to secure such coverage in court. Graham’s persistence paid off for himself and has established a strong precedent for future policyholders that are wrongfully denied coverage in West Virginia, and hopefully elsewhere.