Wentworth Group, Inc. v. Evanston Insurance Company

Background

The plaintiffs sought a declaration that Evanston Insurance Company had a duty to defend and indemnify them in an underlying New York state-court action and that their claims in that action were covered by Evanston’s insurance policy. The issue decided in this order was the plaintiffs’ motion for attorneys’ fees and costs. Magistrate Judge James L. Cott recommended denying that motion. The plaintiffs timely objected; Evanston did not file objections.

Review of the Magistrate Judge’s Report

The district court reviewed the portions of the report challenged by the plaintiffs independently, a process called de novo review. It reviewed unchallenged or inadequately challenged portions for clear error, meaning a definite and firm conviction that the magistrate judge made a mistake.

Legal-Step Requirement

Under New York law, an insured may recover attorneys’ fees in a narrow exception to the usual rule that each side pays its own fees. The insured must have been placed in a defensive position by legal steps the insurer took to free itself from its policy obligations, and the insured must have prevailed on the merits.

The court held that the plaintiffs did not identify a qualifying legal step by Evanston. Evanston had defended the plaintiffs in the underlying action beginning in 2015 and continued doing so until June 2020. Evanston then notified the plaintiffs that it was disclaiming coverage but offered to continue paying for an additional 45 days while settlement discussions continued. Considering this conduct as a whole, the court concluded that it was not equivalent to an action brought by the insurer to free itself from its policy obligations.

The plaintiffs also relied on Evanston’s answer, counterclaims, summary-judgment motion, request for fees, and settlement offer. The court found that the plaintiffs had not provided authority showing that this post-lawsuit conduct established that Evanston had placed them in a defensive posture before they filed the action. The court also distinguished a case in which the insurer had resisted its duty to defend from the beginning. Here, Evanston had provided coverage for five years before disclaiming it.

Bad-Faith Requirement

New York law also permits an insured to recover fees when the insurer’s denial of coverage reflects bad faith so extreme that no reasonable insurer would have asserted it. The court explained that bad faith requires morally culpable conduct or a gross disregard of the insurer’s policy obligations, and that New York law strongly presumes against finding insurer bad faith.

The court held that the plaintiffs had not overcome that presumption. Evanston had provided coverage for five years before disclaiming coverage based on its position that the remaining breach-of-contract claims involved intentional conduct outside the policy’s coverage. Although the court had previously rejected Evanston’s argument supporting the disclaimer, it had not found that argument to be an unreasonable interpretation of the policy. The court therefore concluded that the disclaimer did not demonstrate bad faith or a gross disregard of Evanston’s obligations.

Disposition

The court adopted Magistrate Judge Cott’s report, overruled the plaintiffs’ objections, and denied the plaintiffs’ motion for attorneys’ fees and costs. The Clerk of Court was directed to close the motion.