California Federal Court Holds Attorney’s Fees are Covered Damages under a D&O Policy
In U.S. Liability Ins. Co. v. A&B Market plus, Inc., 2019 WL 2107808 (S.D. Cal. May 14, 2019), the United States District Court for the Southern District of California held that attorney’s fees awarded in connection with a derivative action for equitable and declaratory relief are covered damages under a D&O Policy.
A&B was a corporate member of Neighborhood Market Association (“NMA”). A&B and other members of NMA successfully brought a derivative action on NMA’s behalf against Mark Arabo, NMA’s president, and other board members, for breach of fiduciary duty. The members were awarded declaratory and equitable relief, and attorney’s fees.
NMA was insured under a D&O policy issued by United Sates Liability Insurance Company (“USLIC”). USLIC defended NMA and Mr. Arabo in the derivative action under a reservation of rights. After the judgment was issued in the underlying case, USLIC filed suit against NMA and Mr. Arabo seeking a declaration that it had no obligation to indemnify NMA for the attorney’s fees because they were not covered damages under the policy. NMA filed a counterclaim for breach of contract and sought a declaration that the fees were covered. The parties filed motions for summary judgment.
USLIC argued that California law treated attorney’s fees as costs and the attorney’s fees award was not covered because the policy restricted coverage to damages. NMA countered by arguing that the policy was ambiguous because damages was undefined and, as a result, should be interpreted according to a layperson’s understanding. The Court, relying on a dictionary definition that defined damage to include “cost, expense, and charge,” was persuaded that a layperson would regard attorney’s fees as damages under the policy.
In reaching its determination, the Court concluded that it was reasonable for an insured to expect coverage for awards of attorney’s fees if the award is traceable to a covered wrongful act, citing Health Net, Inc. v. RLI Ins. Co., 206 Cal. App. 4th 232 (2012). Moreover, the Court opined that construing attorney’s fees as damages gave meaning to the policy as a whole; the policy defined Claim as “any proceeding … before any governmental body legally authorized to render an enforceable judgment or order for money damages or other relief against such Insured alleging that the Insured has committed, or is responsible for, a Wrongful Act.” The Court explained that for “other relief” to have any meaning it had to contemplate covering attorney’s fees: logically, the only way USLIC could “pay” for a proceeding not involving money damages is if it was responsible for costs and expenses like the costs associated with complying with injunctive relief and attorney’s fees.
The Court distinguished the instant policy from other case holdings involving policies that included supplementary payment provisions which obligated the insurer to “pay all costs taxed against the insured in a suit seeking damages.” In the Court’s view, the explicit distinction drawn between damages and “costs taxed against the insured” in those policies made those cases inapposite.
Accordingly, the Court granted summary judgment in favor of NMA on their claims for declaratory judgment and breach of contract.