Published on: August 26, 2015

A policyholder who defeated an insurer’s declaratory action asserting that it had no obligation to cover a negligence claim brought against the policyholder was entitled to attorneys’ fees, a U.S. District Court judge has ruled.

The insurance company, which continued to defend the policyholder on the underlying claim while its declaratory action was pending, had sought a declaratory judgment that the insured’s policy should be rescinded based on misrepresentations he made in his policy application. Because the litigation in the declaratory action involved the scope of its duty to indemnify, the insurer argued, the policyholder was not entitled to attorneys’ fees.

But Judge Mark G. Mastroianni disagreed, characterizing the case as involving the insurer’s duty to defend and noting that, under Supreme Judicial Court case law, a policyholder is entitled to legal fees incurred establishing a carrier’s obligation to defend a claim, even if no bad faith is involved.

“Both in seeking rescission of the insurance policy and, in the alternative, asking the court to find the terms of the policy would not cover any loss, [the insurer] sought a judgment that would end its duty to defend [the policyholder] before his tort liability was actually established,” Mastroianni wrote in ordering that the insurer pay the fees. “As the Massachusetts Supreme Judicial Court explained in [its 2006 decision in Wilkinson v. Citation Insurance Co.], the ‘meaningful difference’ between the duty to defend and the duty to indemnify is in the timing; disputes related to the duty to indemnify ‘arise … only after the insured’s liability has been established.’”

The Decision is significant for condominium associations.  Often times condominiums submit claims and insurers defend the claim under a reservation of rights.  Sometimes the insurer, while defending, brings a separate declaratory judgment action.  This case stands for the proposition that if the insured loses the declaratory judgment action, the insurer has to pay the condominium association’s attorneys’ fees in defending the declaratory judgment action regarding the coverage dispute.

For a copy of the decision [click here].