Sixth Circuit Holds Attorneys’ Fee Award Does Not Constitute Damages Under Professional Liability Policy

Kent Crocker | PropertyCasualtyFocus

The Sixth Circuit Court of Appeals affirmed an order granting summary judgment in favor of the insurer in Wesco Insurance Co. v. Roderick Linton Belfance LLP, holding that the award of attorneys’ fees was a “sanction” and thus was not covered damages under the Wesco professional liability policy.

This matter concerned an award of attorneys’ fees stemming from claims that were brought against schools under the Individuals with Disabilities Education Act (IDEA). The IDEA provides federal funds to states to ensure that students with disabilities receive an appropriate education tailored to their needs. When parents believe that a school has failed to live up to the IDEA’s expectations, they can raise their concerns via an administrative process. If that process fails, the IDEA provides parents a cause of action against schools to obtain judicial relief. However, if the suit against the school is frivolous or was filed for improper purposes, the IDEA has a fee-shifting provision that permits the school to recover its attorneys’ fees from the filing attorney.

Here, three attorneys jointly pursued four IDEA claims against four school districts in Ohio, alleging a failure to provide their student clients with an appropriate education. After significant administrative litigation, a hearing officer found for the school district in each proceeding. Two of the three attorneys then pursued one of the claims in court against the Akron School District. The trial court ruled in favor of the Akron School District, and the Sixth Circuit affirmed. The school districts then sued the firm that employed the attorneys, alleging that the claims were frivolous, and sought an award of attorneys’ fees pursuant to the IDEA’s fee-shifting provisions.

Wesco issued a professional liability policy to the law firm that employed the attorneys that was in effect during the IDEA proceedings. Wesco refused to defend and indemnify the attorneys and then sought a declaratory judgment that the policy did not apply. Wesco contended that the policy defined “damages” to exclude an award of “sanctions” under “federal” law. The district court granted summary judgment for Wesco, agreeing that the attorneys’ fee award for the school districts under the IDEA was a “sanction” and thus was not “damages” under the policy. Two of the three attorneys then appealed.

The Sixth Circuit reviewed the policy’s definition of “damages,” which stated that “damages” did not include, among other things, “civil or criminal fines, sanctions, penalties or forfeitures, whether pursuant to federal, state or local law, statute, regulation or court rule and injuries that are a consequence of any of the foregoing.” Ultimately, the Sixth Circuit held that because the school districts had shown the attorneys violated their duties not to file complaints that were “frivolous” or for an “improper purpose,” it was clear that the awarded attorneys’ fees constituted a “sanction” under the ordinary meaning of the term. Accordingly, the Sixth Circuit affirmed the district court’s ruling that an award of attorneys’ fees under the IDEA constituted a sanction that was not covered under the Wesco professional liability policy.


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Consequences of a Well-Pled Complaint

Deborah Trotter | Property Insurance Coverage Law Blog | February 1, 2019

The New York Supreme Court, Appellate Division, First Department “unanimously reversed, on the law, with costs, the motion denied and the claims reinstated,” the New York County Supreme Court trial judge’s order dated April 2, 2018, to the extent appealed from, which granted dismissal of Plaintiff D.K. Property, Inc.’s (“D.K.”) consequential damages (other than attorney’s fees) pled in its amended complaint.1 The dispute involves an “all-risk” commercial property policy issued by Defendant National Union Fire Ins. Co. of Pittsburgh, PA (“National Union”) and its denial of D.K.’s October 2014 claim for policy proceeds and benefits arising from damage to one of its buildings insured under the policy.

D.K. alleged in its complaint filed in February 2017 that National Union refused to pay or deny its claim, even after repeated inspections and documentation presented to support its claims, which it alleged amounted to a breach of contract and breach of the covenant of good faith and fair dealing. After being served the complaint, National Union filed a partial motion to dismiss D.K.’s demand for consequential damages for attorneys’ fees, costs, and expenses or disbursements alleging the complaint failed to contain allegations sufficient to support those claims. The trial court granted National Union’s partial motion to dismiss, without prejudice, to allow D.K. an opportunity to amend its complaint.

Plaintiff filed an amended complaint on July 14, 2017, containing greater detail in the allegations regarding National Union’s inadequate and unfair claim handling, unreasonable denial and requests, as well as the foreseeable attorneys’ fees, costs and expenses that National Union’s breach and conduct would reasonably require D.K. to incur to protect its rights. National Union again filed a partial motion to dismiss D.K.’s consequential damages demands alleged in its amended complaint.

Persuaded by a heightened pleading standard of specificity for consequential damages argued by National Union, the trial court dismissed the consequential damages demanded in D.K.’s count one of the amended complaint for breach of contract and count two for breach of the covenant of good faith and fair dealing, except for attorneys’ fees.2 See my colleague Jason Cieri’s post on April 11, 2018, concerning the trial court’s ruling.

D.K. appealed the trial judge’s ruling and argued that at the pleading stage, a claim for consequential damages, which do not flow directly from the breach does not require a detailed, factual description or explanation for why those damages are recoverable. The appellate court agreed with D.K. finding, “the motion court erred in dismissing the consequential damages claim, because plaintiff fulfilled the pleading requirement by specifying the types of consequential damages claimed and alleging that such damages were reasonably contemplated by the parties prior to contracting.3

The appellate court reasoned:

It is well settled law that on a motion to dismiss pursuant to pursuant to CPLR 3211(a)(7), the pleading is afforded a liberal construction, facts as alleged in the complaint are accepted as true, plaintiffs are afforded the benefit of every possible favorable inference, and the motion court must only determine whether the facts as alleged fit within any cognizable legal theory (see e.g. Leon v Martinez, 84 NY2d 83, 87–88 [1994]).

The complaint alleges that rather than pay the claim, defendant has made unreasonable and increasingly burdensome information demands throughout the three year period since the property damage occurred. Plaintiff contends that this was a tactic by defendant to make the claim so expensive to pursue that plaintiff would abandon it altogether. Plaintiff contends defendant’s investigatory process has taken so long and become so attenuated that the structural damage to the building has worsened. Among the consequential damages alleged are engineering costs, painting, repairs, monitoring equipment, and moisture abatement to address water intrusion, loss of rents, and other expenses attributable to mitigating further damage to the property.

Despite substantial documentation of the cause and extent of the damage to plaintiff’s building, not only by plaintiff’s engineer, but also an engineer that defendant hired, who inspected the building several times, defendant has persisted in demanding further, unnecessary monitoring, data collection, inspections, and reinspections. Although it has yet to pay the loss or deny the claim, defendant nonetheless sought to intervene as plaintiff’s subrogor under the policy when plaintiff sued the owner of the adjoining property. By doing so, defendant forced plaintiff to incur significant, unnecessary legal fees. A plaintiff may sue for consequential damages resulting from an insurer’s failure to provide coverage if such damages (“risks”) were foreseen or should have been foreseen when the contract was made (Bi-Economy Mkt, Inc. v Harleysville Ins. Co. of N.Y., 10 NY3d 187, 192 [2008]). Although proof of such consequential damages will ultimately rest on what liability the insurer is found to have “assumed consciously,” or from the plaintiff’s point of view, have warranted the plaintiff to reasonably suppose the insurer assumed when the insurance contract was made, a determination of whether such damages were, in fact, forseeable should not be decided on a motion to dismiss and must await a fully developed record (see Panasia Estates, Inc. v Hudson Ins. Co., 10 NY3d 200, 203 [2008]; see also Bi-Economy at 192). In other words, the inquiry is not whether plaintiff will be able to establish its claim, but whether plaintiff has stated a claim.4

The appellate court found D.K.’s amended complaint met the pleading requirements with respect to consequential damages, in both the first cause of action for breach of contract and in the second cause of action for breach of the covenant of good faith and fair dealing in the context of an insurance contract.5 And contrary to National Union’s claim, the appellate court found “[t]here is no heightened pleading standard requiring plaintiff to explain or describe how and why the “specific” categories of consequential damages alleged were reasonable and foreseeable at the time of the contract. (Panasia Estates Inc. v. Hudson Ins. Co., 68 AD3d 530, 530 [1st Dept 2009], aff’d 10 NY3d 200 [2008], citing Bi-Economy 10 NY3d at 192).”

In closing, the appellate court offered its guidance on issues raised, though not currently before it:

  • “An insured’s obligation to ‘take all reasonable steps to protect the covered property from further damage by a covered cause of loss’ supports plaintiff’s allegation that some or all the alleged damages were foreseeable (Benjamin Shapiro Realty Co. v. Agricultural Ins. Co., 287 AD2d 389, 389-390 [1st Dept 2011]”; and
  • In addressing National Union’s motion to dismiss plaintiff’s second count for breach of the covenant of good faith and fair dealing as duplicative of count one breach of contract, “[a]s noted by the Court of Appeals in Bi-Economy, a claim for breach of contract and one for bad faith handling of an insurance claim are not necessarily duplicative (id. At 191).”

The New York Court of Appeals has removed the spike strip thrust in the road in front of New York policyholder plaintiffs and provided them with an excellent road map for properly pleading consequential damages in New York—a great victory for policyholders, indeed!
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1 D.K. Property, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., Index 650733/17 (New York Supreme Court, Appellate Division, 1st Dept. Jan. 17, 2019).
2 D.K. Prop., Inc. v National Union Fire Ins. Co. of Pittsburgh, 59 Misc.3d 714, 74 N.Y.S.3d 469, 2018 N.Y. Slip Op. 28097 (Supreme Court, New York County April 03, 2018).
3 Id. (emphasis added).
4 Id. (emphasis added).
5 Id.

Total Loss and Constructive Total Loss in Florida

Chip Merlin | Property Insurance Coverage Law Blog | September 11, 2018

Total loss and constructive total loss concepts in Florida are often confused with automobile total loss situations and exclusions and coverages related to Ordinance or Laws. We recently were asked about building law and ordinances which required a building to be demolished per building codes. The cause of the damage was by a covered peril although like the vast majority of older buildings, there was pre-existing wear and tear to the structure.

Merlin Law Group’s very capable Ashley Harris recently stated in Florida Valued Policy Law & Hurricane Irma, these rules regarding total loss and constructive total loss:

First, a “total loss” could be what is referred to as an “actual total loss,” which occurs when a building “los[es] its identity and specific character as a building, and becomes so far disintegrated it cannot be possibly designated as a building, although some part of it may remain standing.” Greer v. Owners Ins. Co., 434 F.Supp.2d 1267 (N.D. Fla., 2006); (citing Lafayette Fire Ins. Co. v. Camnitz, 111 Fla. 556, 560, 149 So. 653, 654 (Fla. 1933)). Courts refer to this as the “identity test.”

Second, a “total loss” could be a “constructive total loss.” This requires an “unequivocal demolition order.” Magaldi v. Safeco Ins. Co. of America, 2009 WL 10668553 (S.D. Fla. Feb. 9, 2009) (“This court concludes that the majority view, requiring an unequivocal demolition order to establish “constructive total loss,” adopted in Netherlands Ins. Co. v. Fowler, 181 So.2d 692 (Fla. 2d DCA 1966) is the correct approach…”) Put differently, “[a] constructive total loss occurs when a building, although still standing, is damaged to the extent that ordinances or regulations in effect at the time of the damage actually prohibit or prevent the building’s repair, such that the building has to be demolished.

Ashley Harris’ post was very similar to the Memorandum of Law filed in trial court by the very able counsel in the Sebo v. Jacobson case, which stated:

[T]he valued policy law (“VPL”) as codified in § 627.702. Fla. Stat. (2004), is a valuation statute not a causation statute. The VPL was and is intended to prohibit an insurer from challenging whether the value of the insured property is less than the full amount of coverage as stated in the policy based on depreciation of values and other causes, in the event of a total loss. Fla. Farm Bureau Casualty Ins. Co. v. Cox, 967 So.2d 815 (Fla. 2007) citing American Ins. Co. of Newark. N.J. v. Robinson, 120 Fla. 674, 163 So. 17 (Fla. 1935). The VPL has no application other than to conclusively establish the property’s value when there is a total loss….

In determining a total loss, Florida uses two different tests. The first such test is the “identity test”. A building is considered a total loss when the building has lost its identity and specific character, and becomes so far disintegrated, it cannot be possibly designated as a building, although some part of it may remain standing . . . . The second test used to determine whether a building is a total loss is the “constructive total loss test”. A building may be deemed a constructive total loss when the building, although still standing, is damaged to the extent that ordinances or regulations in effect prohibit or prevent the building’s repair, such that the building has to be demolished.1

Another Florida case, Regency Baptist Temple v. Insurance Company of North America,2 found the same:

The present case should also be distinguished from cases in which an ordinance or regulation prevents repair of a damaged building. In those cases courts have declared the building a “constructive total loss” and held the insurer liable for the building’s entire value. E.g., Feinbloom v. Camden Fire Ins. Co., 54 N.J.Super. 541, 149 A.2d 616 (1959) . . . .

Building law and ordinances that prevent the reconstruction of structures or require them to be torn down are constructive total losses in Florida.

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1 Sebo v. Jacobson, No. 11-2007-CA-000054-0001-XX, 2011 WL 13127538 (Fla. Cir. Ct. Memorandum of Law filed Feb. 23, 2011).
2 Regency Baptist Temple v. Ins. Co. of North America, 352 So.2d 1242 (Fla. 1st DCA 1977).