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Current Developments in the Commercial Divisions of the
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Posted: September 6, 2014

Insured Must Act Promptly to get Advancement of Defense Costs; Past Defense Costs Need not be Paid until any Coverage Litigation is Resolved

On August 27, 2014, Justice Kornreich of the New York County Commercial Division issued a decision in QBE Americas, Inc. v. ACE America Insurance Co., 2014 NY Slip Op. 51330(U), granting in part and denying in part a motion a summary judgment motion seeking advancement of defense costs.

This insurance coverage dispute arose from underlying litigations where consumers sued QBE for various improper mortgage practices. In this action, QBE sought indemnification from its insurers, including its primary insurers AIG and Darwin, and also sought defense costs from AIG and Darwin. QBE moved for summary judgment on its claim for defense costs.

The court divided the claims into three groups: “(1) litigation that has already settled or has been discontinued for which AIG and Darwin refuse to advance defense costs; (2) pending litigation for which AIG and Darwin refuse to advance defense costs; and (3) pending litigation for which Darwin has consented to advance defense costs and concluded litigation for which Darwin has agreed to reimburse past defense costs.”

For the first group, the court refused to award summary judgment. The applicable policies defined defense costs as part of the covered loss, so entitlement to defense costs was derivative of entitlement to coverage. Because fact issues existed as to entitlement to coverage, summary judgment was not available. The court also noted that, because the litigations were over, there was no urgent need to rule on defense costs. “Hence, there is no compelling reason why an insured should not wait to recover until a coverage determination is made because a claim for defense costs rises and falls with the underlying coverage claim . . . . Indeed, the pendency of litigation is the gravamen of a claim for the advancement of defense costs.”

For the second group, the court analyzed AIG and Darwin’s duties separately.

AIG’s policies required advancement of defense costs but did not impose a duty to defend on AIG. Accordingly, AIG was only required to advance defense costs attributable to covered claims. Furthermore, QBE had a $1.5m retention applicable to all loss, including defense costs, meaning that AIG was not required to advance anything until QBE had spent $1.5m of its own funds. “An application for the advancement of defense costs, where no duty to defend exists, must be denied where the insured does not establish, at a minimum, which claims in each pending lawsuit are subject to coverage and that the applicable retention for such claims has been exhausted.” (Emphasis in the original.) Because QBE did not prove that it had exhausted the $1.5m retention, its motion against AIG was denied, with leave to renew upon proper proof.

Darwin’s policies, on the other hand, contained an explicit duty to defend, which required Darwin to “advance all of QBE’s litigation costs so long as each lawsuit presents the possibility that any of the QBE entities or any of the claims asserted might be covered.” (Emphasis in the original.) Darwin was therefore obliged to advance future defense costs in any such action. However, relying on its previous reasoning, the court held that even in those cases, Darwin was not required to pay QBE’s past defense costs, only its future costs.

For the third group, where liability for defense costs was not in dispute, the matter was referred to a Special Referee to hear and report on the reasonable attorney fees owing.

For an attorney seeking to obtain advancement of attorney fees for a client in litigation, several lessons can be learned. First—and regardless of whether the insurer has a duty to defend or a duty to indemnify—the party must seek advancement as soon as possible. The court was quite explicit that QBE’s failure to get preliminary injunctions requiring advancement while the litigations were under way hampered QBE, because past defense costs need not be reimbursed before a final decision on coverage is made. In a practical sense, QBE’s failure to move for a preliminary injunction also elevated the burden of proof for payment of defense costs from “likelihood of success on the merits” to “actual success on the merits.” And second, when moving for advancement under a “duty to indemnify” policy, care must be taken to ensure that the claim is ripe, i.e. that all applicable retentions have been exhausted.

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