SECOND CIRCUIT REVERSES RULING CONCLUDING THAT POLICYHOLDER 360HEROS HAS STANDING TO PURSUE REASONABLE DEFENSE FEES INCURRED BY INDEPENDENT COUNSEL
On June 4, 2020, the United States Second Circuit Court of Appeals’ June 4, 2020, ruled following de novo review in 360 Heros, Inc. v. Mainstreet America Assurance Co. (“MSA”), Case No. 19-2614 (Dkt. No. 119), the District Court’s determination that no standing arose by the insured to pursue monies owed to independent counsel was erroneous. The controversy regarding independent counsel’s right to receive reasonable attorney’s fees incurred in the defense of MSA’s insured 360Heros was not moot following the dismissal of the lawsuit pursued against it by GoPro.
The Second Circuit applied precedent from the New York Court of Appeals which clarified that an insured represented by its chosen counsel entitles the insured to receive payment for its defense counsel’s reasonable fees and cost, a duty directly owed by the insurer to the insured for payment of such fees. See Public Serv. Mut. Ins. Co. v. Goldfarb, 53 N.Y.2d 392, 401 (1981) (“[D]efendant [] is entitled to defense by an attorney of his own choosing, whose reasonable fee is to be paid by the insurer.”).
It was not of no moment that the underlying litigation was resolved and monies required to settle paid by MSA, without contribution from 360Heros. An ongoing and live controversy continued to exist over whether MSA had fulfilled its obligations under the Policy. The District Court’s “erroneous conclusions” were two-fold.
First, the District Court’s dismissal with prejudice of the 360Heros action against MSA for declaratory relief and bad faith based solely on the lack of any “no out of pocket” costs to 360Heros. “MSA’s duty to defend under the Policy extends to the payment of 360Heros’s reasonable fees and defense costs, and MSA’s fulfillment of that obligation remains in dispute. 360Heros is liable for unpaid fees and expenses, it maintains a concrete interest in this action and could receive effectual relief from a court.” Id at *8.
Second, while a rate agreement was reached between the 360Heros counsel and MSA, that did not mean that the legal obligation substituted as real parties in interest, the insured’s counsel G&A and MSA. “MSA’s duty to pay G&A arose from its duty to defend 360Heros under the Policy. MSA candidly admitted as much at oral argument.. . . The rate agreement between G&A and MSA did not eliminate this contractual relationship.” Id. at *9.
Even if monies paid did not go directly to 360Heros, nonetheless, a live controversy existed between MSA and 360Heros over fulfillment of the policy and 360Heros continuing stake in the outcome of the controversy with respect to unpaid fees and expenses means that the District Court erred in dismissing the action for lack of subject matter jurisdiction.
One issue on remand will be whether MSA’s erroneous claims is analogous to the assertion of claims for declaratory relief against the insured so as to trigger applicable case authority under New York law compelling the insurer to pay for the cost of coverage counsel in resisting relief that would eliminate any insurer duty to directly pay the insured for fees for which payment the insured had a legal interest. Pursuant to U.S. Liab. Ins. Co. v. WW Trading Co., No. 19-2661-cv, 2020 U.S. Dist. LEXIS 15582, *10 (2d Cir. May 15, 2020), (“[A]n insurer’s duty to defend an insured extends to a defense against an insurer’s declaratory judgment action . . . so long as the insured ‘prevails on the merits.’”)