Defining Damages in a CGL Policy – Do Attorney’s Fees Make the Cut?
Given the broad nature of most commercial general liability (CGL) policies, it’s not surprising that creative attorneys continue to press new arguments about costs and fees that should (or should not) be covered. In most CGL policies, the insuring agreement says the carrier will pay “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies…” Problematically, many policies don’t define the term “damages,” which leaves wiggle room for arguments that attorney’s fees qualify as sums the insured must pay “because of” bodily injury or property damage that is covered under the policy.
Before changes in the standard ISO form, many companies argued that they should be awarded attorney fees as damages under the Supplementary Payments provisions, which allows the insured to collect money for certain expenses over policy limits. These provisions stated that the insurer would pay “All costs taxes against the insured in the ‘suit’ ” that triggers a duty to defend. However, after a standard modification clarifying that these payments do not include attorneys’ fees, insureds were forced to make new arguments to recover these damages – hence, many began arguing that fees were damages that arose “because of” covered losses that resulted in third parties suing the insured.
In Mid-Continent Casualty Co. v. Petroleum Solutions, Inc., 2016 WL 5539895 (S.D. Tex. 2016), the Southern District examined whether attorney’s fees could be considered “damages” as part of CGL coverage for a lawsuit involving a products liability claim. Mid-Continent insured Petroleum Solutions, a company that installed and sold fuel storage systems. After one of its systems leaked 20,000 gallons of oil, a customer alleged that Petroleum Solutions sold him a defective product. Mid-Continent defended Petroleum Solutions under a reservation of rights, and at trial Petroleum Solutions argued that the leak was due to the defective manufacture of another component by Titeflex, whom Petroleum solutions and the customer both sued. Titeflex denied it was liable and successfully counter-sued Petroleum Solutions for indemnity under Texas’ “innocent seller” provision of the Texas Civil Practice and Remedies Code Section 82.002. Under this provision, innocent sellers of a defective product have a cause of action against a manufacturer for “any loss” arising out of a products liability action, and specifically states that “loss” includes court costs and reasonable attorney fees. Additionally, the statute states that a seller is entitled to recover court costs and attorney’s fees incurred in enforcing its right to indemnification.
The court concluded that Mid-Continent’s policy covered any attorney’s fees incurred damages Titeflex suffered as a “loss,” but not damages it incurred in pursuing its remedies for that loss. The court concluded the fees for the former were compensatory “damages” under Texas law. The fees for pursing an indemnity action against the manufacturer, however, were not compensatory, but rather a fee-shifting statute. This conclusion was based on the court’s interpretation of In re Nalle Partnership, 406 S.W.3d 168 (Tex. 2013). That case concluded that attorney’s fees could be considered compensatory damages only where they were an element of damages for a particular cause of action; not, for instance, where fees were awarded by statute to the winner of a breach of contract action. Although the innocent seller statute created a cause of action specifically stating that attorney’s fees were included in recoverable damages, the fees expended to prosecute that cause of action were recoverable merely as a fee-shifting device under Texas law and were “ancillary to the substantive indemnification cause of action.”
In other words, Mid-Continent makes clear that precluding coverage for attorney’s fees is not a matter of simply re-wording the Supplementary Payments provision of a CGL policy. Using the Texas definition of “damages,” attorney’s fees are recoverable for any “substantive” cause of action for which they form part of the elements of damage. Keeping this in mind is advisable both to insureds, who may want to consider the effect this would have on their policy limits in businesses where products liability actions are common, and insurers, who should consider these fees as part of the potential recovery when considering Stowers demands and evaluating cases.