Court Awards Insureds Attorneys’ Fees in Dismissed Declaratory Judgment Action

Feb. 21, 2024

Tae Andrews & Jeffrey L. Schulman

New York law has long held that an insured can recover attorneys’ fees as a result of being placed in a defensive posture in its insurer’s declaratory judgment action seeking to avoid its policy obligations. A recent victory for insureds covered under general liability policies is on appeal to the Appellate Division, First Department involving an insurer’s duties to defend and indemnify. The issue is whether an insurer that acknowledges its duty to defend, but disputes its duty to indemnify, is similarly liable for the insured’s attorneys’ fees incurred in the defense of that action. The Supreme Court, New York County ruled in the insureds’ favor in Utica Mut. Ins. Co. v. Crystal Curtain Wall Sys. Corp., representing a key procedural victory for insureds under New York law.

The Facts

The insurers filed a declaratory judgment action against their insured subcontractors. The insurers acknowledged their defense obligation but sought a declaration that they had no duty to indemnify the subcontractors in the underlying action, which alleged negligent installation of window and curtain wall systems. The insureds moved to dismiss for lack of subject-matter jurisdiction, arguing that the underlying action was not ripe or justiciable because it had not yet resulted in a settlement or judgment.

Key Takeaways

The Supreme Court, New York County granted the motion, holding that declaratory relief was not ripe or justiciable. The court also held that whether certain policy exclusions (including the “Your Work” and “Your Product” exclusions) applied to bar coverage for the underlying action turned on unresolved factual questions, such as whether the alleged damage to the curtain wall stemmed from defective design or installation of the wall itself, or from defective work on other components of the building performed by others. Because a determination of whether the exclusions applied depended on further fact-finding, the court held that the insurers’ declaratory-judgment claims were premature. In addition, the court dismissed the insurers’ action, holding that a stay was inappropriate because the underlying action was complex and resolution of the underlying fact issues would take time. The court also awarded coverage action attorneys’ fees to the insureds, resolving a novel question of New York law. It held that an insured “is entitled to attorney fees when it prevails in the defense of an action brought by an insurer to challenge only the insurer’s duty to indemnify.”

Practice Pointers

Insurers often file declaratory judgment lawsuits against their insureds. In the third-party liability context, such lawsuits require an insured to fight a two-front war—simultaneously defending both the underlying action and the insurer’s declaratory judgment lawsuit. Courts in New York have the ability to both dismiss an insurer’s declaratory judgment action and award attorneys’ fees to the insured. This rule now applies to both an insurer’s duty to defend and an insurer’s duty to indemnify, in the absence of any defense dispute.