New York Appellate Court Reverses Award of Attorneys' Fees to Insured That Prevailed in Action Against Insurer

In New York, it has long been the law that, in an insurance coverage lawsuit brought by an insured against its insurer, attorneys' fees and other litigation expenses generally may not be recovered by the prevailing party unless such an award is authorized by agreement between the parties or by statute or court rule. See Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12 (1979) ("such a recovery may not be had in an affirmative action brought by an [insured] to settle its rights . . . 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 its policy obligations").

Recently, however, a trial court in Erie County, New York granted a construction company its attorneys' fees incurred in successfully suing its commercial auto insurer for a wrongful denial of a property damage claim. The insurer appealed, and the Appellate Division, Fourth Department reversed and granted summary judgment dismissing the claim of attorneys' fees. The Court, citing the general rule above, held that the trial court erred in awarding attorneys' fees because there was nothing in the insurance policy nor any statute or court rule authorizing such an award. Zelasko Constr., Inc. v. Merchs. Mut. Ins. Co., ___ A.D.3d ___, 2016 NY Slip Op 06328 (4th Dep't, September 30, 2016).

Significantly, the Court rejected the insured's contentions that the New York Court of Appeals' decisions in Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 10 N.Y.3d 187 (2008), rearg denied 10 N.Y.3d 890, and Panasia Estates, Inc. v. Hudson Ins. Co., 10 N.Y.3d 200 (2008), warranted a different result. In Bi-Economy and Pasasia Estates, the Court of Appeals held that an insured may be entitled under certain circumstances to "consequential damages" for breach of an insurance policy, in excess of the policy limits. In Zelasko, the Court held, there was no support for the insured's allegation that the insurer breached its implied covenant of good faith and fair dealing by not investigating the claim before denying it, or that the insurer otherwise acted in bad faith. Further, the Court found no justification for a conclusion that an award of attorneys' fees was within the contemplation of the parties "as an intended or foreseeable consequence of any breach," at the time the policy was issued, as set forth in the Bi-Economy and Panasia Estates decisions.

To date, no appellate court in New York has held that the Court of Appeals' decisions in Bi-Economy and Panasia Estates permit an insured's recovery of its attorneys' fees. In the Zelasko decision, the Fourth Department expressly rejected this theory under the facts of this case and upheld the principle that attorneys' fees generally are not recoverable in this context, citing similar decisions by the Second Department. See e.g., Pandarakalam v. Liberty Mut. Ins. Co., 137 A.D.3d 1234 (2d Dep't 2016). Practitioners should continue to monitor whether courts in New York permit recovery of attorneys' fees to an insured, particularly where bad faith is alleged.