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FOLKSAMERICA REINSURANCE CO. v. REPUBLIC INS. CO.

United States District Court, S.D. New York


August 16, 2004.

FOLKSAMERICA REINSURANCE COMPANY, successor-in-interest of MONEY REINSURANCE CORPORATION, Plaintiff,
v.
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

  FACTS*fn2

  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, 2004).*fn4

  Republic now seeks attorneys' fees from Folksamerica that it has incurred in this declaratory judgment action commenced by Folksamerica.*fn5 ANALYSIS

  I. ATTORNEYS' FEES: FEE-SHIFTING AND THE NEW YORK MIGHTY MIDGETS EXCEPTION*fn6

  "`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 declaratory action.
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 underlying suit.
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).

  SO ORDERED.


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