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June 30, 1981


The opinion of the court was delivered by: SWEET

This is a diversity action by Scali, McCabe, Sloves, Inc. ("Scali") against The North River Insurance Company ("North River") seeking compensatory and punitive damages under an insurance policy ("the policy") in which the latter agreed to indemnify and defend the former against certain actions for damages in libel. Scali's claim here involves its defense of a libel action brought against it in state court in 1976, Dictaphone Corporation v. Sloves, et al., Index No. 04684/76. After this federal suit was instituted, North River reimbursed Scali for the money it paid in settlement of that action. Scali now moves for partial summary judgment against North River on that portion of this action which seeks recoupment of legal fees and costs incurred by Scali in the defense of the state court libel action. In all but one particular, the motion is granted. The court's findings of fact, based on the affidavits and documents submitted in connection with this motion, and conclusions of law follow.

The insurance policy under which Scali seeks reimbursement from North River was issued to Scali in January, 1976. That policy obligated North River "to defend, subject to the conditions, exclusions and limits provided for ..., any action instituted against the insured, together with the payment of reasonable attorneys' fees incurred in the defense thereof ...." As mentioned above, Scali was sued for libel in New York state court in an action commenced on March 9, 1976. The underlying claim in that state court action is irrelevant here.

The Chairman of Scali, Marvin Sloves ("Sloves"), retained Paul, Weiss, Rifkind, Wharton & Garrison ("Paul, Weiss") to defend Scali in the libel case. Paul J. Newlon ("Newlon"), a member of Paul, Weiss, was initially in charge of handling the case on Scali's behalf. He promptly notified Scali's insurance agent of the suit; that notice was given before Scali answered or otherwise appeared in the case. The agent, in turn, notified North River's corporate parent, Crum & Forster, *fn1" of the pendency of the suit, and forwarded to it papers relating to the case.

 Some two months later, on May 18, the insurance company replied, in a letter in which it reserved its rights under the policy, stated that it had instituted an investigation of the matter, and requested that Paul, Weiss "refrain from pursuing discovery motions" until the resolution of the coverage questions. In the meantime, however, Paul, Weiss, having heard nothing from the insurance company, had already begun to defend Scali in the state court action, albeit without authorization from the insurance company. In response to the May 18 letter, by letter of May 20, 1976, Newlon promised that Paul, Weiss and its client Scali would cooperate with the insurance company's investigation, and informed the company of developments in the state court action during the period of North River's silence. Those developments included certain completed proceedings on discovery motions and the issuance of a court directive that discovery go forward on May 26. Newlon's letter further stated: "Unless we hear from you to the contrary, we intend to go forward with this discovery according to the agreed schedule." The insurance company did not respond. Discovery proceeded.

 In June, a Paul, Weiss associate met with the insurance company's investigator and requested a prompt determination of the coverage question. He advised the investigator that discovery would go forward.

 In September, having heard nothing from the insurance company since the May 20 letter mentioned above, Newlon wrote to them once again. He reiterated his request for a speedy resolution of the coverage issue, said that until one was reached "we ... will continue to take such steps as we deem appropriate in defending the action," and apprised the company of further developments in the case, including continued discovery. A week later, Scali's insurance agent also wrote to the insurance company protesting the latter's unresponsiveness and asserting the necessity of Scali's proceeding with its defense of the state court action despite the company's silence.

 In October, the insurance company requested Paul, Weiss to contact its attorney. A Paul, Weiss associate did so. In November, the company's attorney asked for materials relating to the state court action. Those materials were delivered to him that same month, along with a cover letter indicating that discovery would be proceeding "in the very near future." Having heard nothing in response, Paul, Weiss wrote to the attorney in January, once again asking for action and apprising him of the discovery schedule.

 In May of 1977, a full year after its first acknowledgment of Paul, Weiss' correspondence regarding the state litigation, the insurance company and its counsel met with Paul, Weiss. They undertook that within two weeks of receipt of transcripts of depositions in the Dictaphone litigation the coverage question would be resolved. The transcripts were delivered on May 24, 1977. It was not until November 10, 1977, however, that the insurance company finally wrote to Scali, acknowledging that the claim, with certain exceptions, was covered by the policy.

 The November 10 letter contains the following two paragraphs:

Your attorneys did not move to stay proceedings as we requested on May 18, 1976. It is our opinion that any legal expenses you incurred as a result of your attorneys' actions after they had appeared and answered would not be covered under our policy of insurance. This previously stated Condition of the policy was clearly violated by your actions.
We will pay for all necessary legal expenses which accrue after this date and which would include the costs of answering the summons and complaint on behalf of both defendants, and the estimated cost of a motion to stay proceedings arising from the pending action.

 Newlon responded on behalf of Scali on January 31, 1978, in a letter in which he protested the insurance company's disavowal of liability for most pre-November 10 legal fees. Newlon pointed out that the insurance company had never requested Paul, Weiss to move to stay all proceedings, and that the company's indecision regarding coverage would have provided no legal basis for doing so. Newlon further observed that the insurance company had never questioned the steps taken in defense of the suit.

 On April 19, the insurance company responded. It expressed interest in the possibility of settlement, and indicated its willingness to pay up to $ 10,000 if a settlement could be worked out. Paul, Weiss replied that it would renew its theretofore fruitless efforts to arrive at a settlement, and brought the insurance company up to date on the progress of the litigation.

 The case was placed on the trial calendar, and remained there for some time as settlement negotiations were pursued. Dictaphone asked $ 35,000; Scali offered only the $ 10,000 that the insurance company had expressed its willingness to pay. The negotiations failed in June of 1979. The insurance company, though advised of these events, did not suggest that the $ 35,000 figure be accepted. In rejecting that offer, Scali relied upon the insurance ...

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