By: Thomas S. Tripodianos Published: June 2011

Is an insured entitled to attorney fees incurred in litigating and defending against an insurer's "late notice" claim, raised for the first time as an affirmative defense in litigation?

Question. Is an insured entitled to attorney fees incurred in litigating and defending against an insurer's "late notice" claim, raised for the first time as an affirmative defense in litigation?

Answer. No.  Insured was not entitled to attorney fees incurred in litigating and defending against insurer's "late notice" claim.

Upon the Carrier disclaiming coverage, the burden shifts to Insured to either file a coverage action or to accept the Carrier's basis for the disclaimer and forgo the costs of litigation.

Here, Insured commenced a declaratory judgment action seeking defense and indemnification from Carrier under a comprehensive general liability (CGL) policy. In the context of that action Carrier raised for the first time a "late notice" claim, as an affirmative defense. Insured seeks attorneys' fees for litigating and successfully defending the late notice issue.

The longstanding "American rule" precludes a prevailing party from recouping legal fees from the losing party except where authorized by statute, agreement or court rule.

Under New York law, Carrier can only cast Insured in defensive posture by naming Insured as defendant in an action. Insured would have been placed in a defensive posture if the Carrier commenced a declaratory judgment action against Insured to relieve Carrier from defense obligations under the policy. If Insured prevailed in such an action it may have recovered attorney fees necessarily incurred as result of its defense of that action.

Here Insured commenced its own declaratory judgment action to settle rights to defense under the policy. Insured argues that New York recognizes an exception to the American Rule, permitting insureds to recover attorneys' fees where the 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.

Under the circumstances the late notice defense to support insurer's declaratory judgment prayer for relief was "mirror image" of insured's declaratory judgment action, even though defense was not previously asserted in insurer's declination letter and therefore does not fall within the exception.

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