United States District Court, S.D. New York
August 16, 2004.
FOLKSAMERICA REINSURANCE COMPANY, successor-in-interest of MONEY REINSURANCE CORPORATION, Plaintiff,
REPUBLIC INSURANCE COMPANY, Defendant.
The opinion of the court was delivered by: ANDREW PECK, Magistrate Judge
OPINION AND ORDER
Plaintiff Folksamerica, a reinsurance company, brought this
action against insurer Republic, seeking a declaratory judgment
that Folksamerica should be released from its obligation to
reinsure Republic due to Republic's alleged failure to provide
notice as mandated by the reinsurance certificates. See
Folksamerica Reins. Co. v. Republic Ins. Co., 03 Civ. 0402,
2003 WL 22852737 at *2 (S.D.N.Y. Dec. 2, 2003) (Baer, D.J.),
supplemented by 2004 WL 1043086 (S.D.N.Y. May 6, 2004) (Baer,
D.J.). By Opinions dated December 2, 2003 and May 6, 2004, Judge
Baer granted summary judgment for defendant Republic, holding
that Republic had not violated the reinsurance certificates and
thus that Folksamerica was required to honor its reinsurance
obligations. See id. (See also Dkt. Nos. 73 & 129: 12/2/03
& 5/6/04 S.J. Opinions by Judge Baer.) Folksamerica's appeal to
the Second Circuit (Dkt. No. 133) is pending. Presently before the Court is Republic's motion for attorneys'
fees (Dkt. No. 134), which Judge Baer referred to me (see Dkt.
No. 96: Referral Order).
For the reasons set forth below, Republic's motion for
attorneys' fees is DENIED.*fn1
Folksamerica, a reinsurance company, commenced this declaratory
judgment action against Republic, an insurance company, asserting
that Folksamerica was released from its obligation to reinsure
Republic "due to Republic's alleged failure to provide `notice,'
as mandated by the [Thorpe and Clemtex reinsurance]
Certificates." Folksamerica Reins. Co. v. Republic Ins. Co.,
2003 WL 22852737 at *2. Judge Baer's December 2, 2003 Opinion
granted Republic's motion for summary judgement against
Folksamerica with regard to its obligations under the Clemtex
policy certificates, i.e., held that Folksamerica was obligated
to reinsure Republic. Id., 2003 WL 22852737 at *13-14.*fn3 On May 6, 2004, Judge Baer's Supplemental Opinion & Order
granted Republic's motion for summary judgement against
Folksamerica with regard to the Thorpe reinsurance certificates,
and held that Folksamerica was obligated to reinsure Republic on
the Thorpe certificates. See Folksamerica Reins. Co. v.
Republic Ins. Co., 2004 WL 1043086 (S.D.N.Y. May 6,
Republic now seeks attorneys' fees from Folksamerica that it
has incurred in this declaratory judgment action commenced by
I. ATTORNEYS' FEES: FEE-SHIFTING AND THE NEW YORK MIGHTY
"`Under the American Rule[,] it is well established that
attorney[s'] fees are not ordinarily recoverable in the absence
of a statute or enforceable contract providing therefore.'"
United States Fid. & Guar. Co. v. Braspetro Oil Servs. Co.,
369 F.3d 34, 74 (2d Cir. 2004) (quoting Summit Valley Indus.,
Inc. v. United Bd. Of Carpenters & Joiners, 456 U.S. 717, 721,
102 S.Ct. 2112, 2114 (1982) (& cases cited therein)). However,
"New York courts have carved out a `narrow exception' to the
general `American' rule that a prevailing party cannot recover
attorneys' fees." U.S. Underwriters Ins. Co. v. City Club
Hotel, LLC, 369 F.3d 102, 110 (2d Cir. 2004). While "[i]t is the
rule in New York that such a recovery [of attorneys' fees] may
not be had in an affirmative action brought by an assured to
settle its rights," an exception exists "when [an insured] has
been cast in a defensive posture by the legal steps an insurer
takes in an effort to free itself from its policy obligations."
Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12,
21, 416 N.Y.S.2d 559, 564 (1979); see also, e.g., National
Grange Mut. Ins. Co. v. Udar Corp., 98 Civ. 4650, 2002 WL
373240 at *1 (S.D.N.Y. Mar. 8, 2002) ("That [New York] exception
[to the rule that litigation costs are not recoverable] applies
when an insurance policyholder has been cast in a defensive
posture by its insurer in a dispute over the insurer's duty to
defend the policyholder.") Cowan v. Ernest Codelia, P.C., 98
Civ. 5548, 2001 WL 30501 at *3 (S.D.N.Y. Jan. 12, 2001) ("It
seems anomalous for the entitlement of fees to turn on the fortuity of whether a party to
an insurance contract is cast as the plaintiff or defendant.
Nevertheless, courts reason that this rule is justified because
it creates the narrowest possible exception to the principle that
parties generally bear their own costs in litigation."), aff'd,
No. 02-6035, 50 Fed. Appx. 36, 2002 WL 31478922 (2d Cir. Nov. 1,
2002). Thus, "an insured who prevails in a declaratory action
brought by an insurance company seeking to deny a duty to defend
and indemnify is allowed to recover fees expended in defending
against that action." U.S. Underwriters Ins. Co. v. City Club
Hotel, LLC, 369 F.3d at 110.
Some courts further restrict the Mighty Midgets exception
allowing recovery of attorneys' fees to cases where the insurance
company both fails to defend the insured in the underlying
litigation and also brings the declaratory judgment action. As
Judge Chin stated: "That exception, applicable in declaratory
judgment actions, provides that an insured may recover attorneys'
fees in an action against an insurer, `but only when he has been
cast in a defensive posture by the legal steps an insurer takes
in an effort to free itself from policy obligations.' [quoting
Mighty Midgets]. . . . Subsequent case law has clarified that
the Mighty Midgets rule applies only where the dispute involves
the insurer's duty to defend." Mount Vernon Fire Ins. Co. v.
Congregation Kehilath Yakov, Inc., 95 Civ. 7973, 1999 WL
1072484 at *1-2 (S.D.N.Y. Nov. 29 1999) (citing cases); see
also. e.g., Protection Mut. Ins. Co. v. Silgan Plastics
Corp., 96 Civ. 4493, 2000 WL 1277358 at *1 (S.D.N.Y. Sept. 7,
2000) ("[T]he cases supporting an award of attorney's fees to an
insured appear to be confined to those situations in which the
insurer refuses to fulfill its duty to defend."); National Union
Fire Ins. Co. v. The Stroh Cos., 98 Civ. 8428, 2000 WL 640665
at *1 (S.D.N.Y. May 17, 2000) ("The Second Circuit has made clear that this principle of
New York law is applicable only where an insurer has a duty to
defend under the policy at issue.")
The most recent Second Circuit case dealing with the Mighty
Midgets rule is U.S. Underwriters Ins. Co. v. City Club
Hotel, LLC, 369 F.3d 102 (2d Cir. 2004). In that case, Judge
Calabresi explained that the issue of attorneys' fees in
insurance disputes "involves an important, unsettled, and
determinative question of state law, which we certify to the New
York Court of Appeals." U.S. Underwriters Ins. Co. v. City
Club Hotel, LLC, 369 F.3d at 110. The Second Circuit discussed
the Mighty Midgets exception and its interpretation and
application at length. U.S. Underwriters Ins. Co. v. City Club
Hotel, LLC, 369 F.3d at 110-12. The Circuit noted that while
"Mighty Midgets states the exception in broad terms[,] . . .
lower federal and state courts have consistently disagreed about
whether the exception applies in cases where the insurer, who
sought a disclaimer of liability and lost, had earlier discharged
its duty to defend the insured in the underlying action. This
issue was not discussed in Mighty Midgets." U.S. Underwriters
Ins. Co. v. City Club Hotel, LLC, 369 F.3d at 110.
The Second Circuit continued:
Most federal district courts have expressed concern
that allowing fees under these circumstances would
create an incentive for the insurer to refuse to
defend in the underlying suit, thereby leaving it up
to the insured to bring a declaratory action seeking
coverage. Under Mighty Midgets, an insured, even
though it prevails, is not entitled to attorneys'
fees in any declaratory action that it initiates. An
insurance company focused on avoiding attorneys' fees
might therefore refuse to defend in the underlying
state suit and force the insured to bring the
For this reason, a number of district courts have
concluded that, in a case in which it was clear that
the insurer had discharged its duty to defend in the
underlying action, the [New York] Court of Appeals would retreat
from its categorical statement in Mighty Midgets
and would not award attorneys' fees to the insured.
Several Appellate Divisions and at least one federal
district court, however, have concluded that Mighty
Midgets requires the awarding of fees whenever the
disclaimer declaratory action has been brought by the
insurer that it does so, that is, even where an
insurer does not breach its duty to defend in the
This division in interpreting New York law between
the majority of New York lower courts, and the
majority of federal district courts (which could not
seek guidance from the New York Court of Appeals
through certification of the question, 22 N.Y.C.R.R.
§ 500.17), has created an unusual, and undesirable,
degree of uncertainty in cases of this sort. . . .
U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 369 F.3d
at 110-11 (citations & fns. omitted).
The case before this Court now involves reinsurance law, as
opposed to the primary insurance law discussed in the cases cited
above. The Court looks to these primary insurance cases for
guidance because, as both parties concede, there exists no
reinsurance case law on point.
II. APPLICATION OF THE MIGHTY MIDGETS DOCTRINE TO THIS CASE
In their briefs, Folksamerica and Republic agree that Mighty
Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12,
416 N.Y.S.2d 559 (1979), and its progeny is the relevant case law
needed to assess whether Republic is entitled to attorneys' fees.
(See Dkt. No. 136: Republic Br. at 4; Dkt. No. 140:
Folksamerica Br. at 2; Dkt. No. 143: Republic Am. Rep. Br. at 1.)
However, their interpretation of the Mighty Midgets rule and
its applicability to the facts of this case are at odds. Republic
stresses that the language used in Mighty Midgets is "very
broad." (Republic Br. at 5; Republic Am. Reply Br. at 4.)
Republic further argues that "even if the Mighty Midgets rule
only applies where defense costs are at issue, the Certificates
involved in this case expressly cover Republic's defense
expenses." (Republic Br. at 6; Republic Am. Reply Br. at 1-2,
6-8.) Folksamerica, in contrast, argues that Mighty Midgets is a
"narrow exception" to the American rule that prohibits
fee-shifting, and points out that "the Mighty Midgets rule
applies only where the dispute involves the direct insurer's duty
to defend." (Folksamerica Br. at 6-7, 9.) Folksamerica also notes
that "[n]o New York court has addressed the issue of whether the
Mighty Midgets rule entitles a cedant to recover its attorneys'
fees and expenses incurred in a declaratory judgment action
brought by a reinsurer seeking to establish its contractual
rights under a reinsurance contract." (Folksamerica Br. at 7 n.
6.) Republic, in response, maintains that "the Mighty Midgets
case extends the direct insurer's defense-related obligations to
cover the insured's defense expenses in an unsuccessful
declaratory judgment action brought by the insurer" and that
"[t]here is no reason why the same rule should not apply to a
reinsurer's defense-related obligations which, like those of the
direct insurer, are discharged by the payment of money."
(Republic Am. Rep. Br. at 1-2.)
This Court's decision would be easier, of course, if it had the
benefit of the New York Court of Appeals' decision on the
questions certified by the Second Circuit, but the New York Court
of Appeals has not yet ruled.
For policy reasons, the Court agrees with those decisions that
limit the Mighty Midgets exception to cases where the insurance
company has a duty to defend the insured and did not do so. This
encourages insurance companies to honor the duty to defend even
while seeking to clarify (by declaratory judgment action) their
responsibility under the policy. Since Folksamerica did not have
a duty to defend here but merely to reinsure the amount
Republic had to pay on the underlying claim including the amount
Republic had to pay to defend the insured the "narrow" Mighty
Midgets exception should not apply. Moreover, in a dispute between an insured and its primary
insurer, the policy behind Mighty Midgets appears based in part
on the fact that the insured (often an individual) will not have
the practical ability to negotiate the terms of the insurance
agreement but must accept the insurer's form policy. See Lee R.
Russ, 1 Couch on Insurance Law, § 12:3 (3d ed. 2004)
("Insurance contracts are contracts of adhesion between parties
not equally situated . . ."). In the reinsurance context, the
insurer and reinsurer are both corporations and can presumably
have more ability to negotiate terms. An insurance company that
wants to be able to recover its attorneys' fees in the event of a
declaratory judgment action by the reinsurance company (or indeed
even in a suit brought by the insurance company against the
reinsurer, for which the insurance company could not get
attorneys' fees under Mighty Midget) can negotiate to include
such an attorneys' fee provision in the reinsurance agreement.
"The inherent differences between insurance and reinsurance
should preclude some circumstances where the term `insurance'
should not include reinsurance. . . . See, e.g., . . .
British Ins. Co. v. Safety Nat'l Cas. Corp., 146 F. Supp.2d 585,
593 (D.N.J. 2001) (declining to add terms to reinsurance
agreement not explicitly stated in the agreement because
reinsurance contracts are not adhesion contracts and are
bargained for at arms length by sophisticated entities) . . ."
Steven Plitt, Daniel Maldonado & Joahua D. Rogers, 1 Couch on
Insurance Law, § 9:6 (3d ed. 2004). Under New York law, where
the parties' contract provides for attorneys' fees, the courts
will award such fees.*fn7 CONCLUSION
For the reasons stated above, Republic's motion for attorneys'
fees is DENIED (but Republic is awarded its photocopying costs
as discussed at page 2 fn.1 above).
FILING OF OBJECTIONS TO THIS OPINION AND ORDER
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal
Rules of Civil Procedure, the parties shall have ten (10) days
from service of this Opinion to file written objections. See
also Fed.R.Civ.P. 6. Such objections (and any responses to
objections) shall be filed with the Clerk of the Court, with
courtesy copies delivered to the chambers of the Honorable Harold
Baer, Jr., 500 Pearl Street, Room 2230, and to my chambers, 500
Pearl Street, Room 1370. Any requests for an extension of time
for filing objections must be directed to Judge Baer. Failure to
file objections will result in a waiver of those objections for
purposes of appeal. Thomas v. Arn, 474 U.S. 140,
106 S.Ct. 466 (1985); IUE AFL-CIO Pension Fund v. Herrmann,
9 F.3d 1049, 1054 (2d Cir. 1993), cert. denied, 513 U.S. 822, 115 So.
Ct. 86 (1994); Roldan v. Racette, 984 F.2d 85, 89 (2d Cir.
1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.), cert.
denied, 506 U.S. 1038, 113 S.Ct. 825 (1992); Small v. Secretary of Health & Human Servs.,
892 F.2d 15, 16 (2d Cir. 1989); Wesolek v. Canadair Ltd.,
838 F.2d 55, 57-59 (2d Cir. 1988); McCarthy v. Manson,
714 F.2d 234, 237-38 (2d Cir. 1983); 28 U.S.C. § 636(b)(1); Fed.R. Civ.
P. 72, 6(a), 6(e).