Travelers Ins. Co. v. State Ins. Fund

• Decision Date: 08 September 1992
• Docket Number: No. M-45488,M-45488
• Citation: 588 N.Y.S.2d 973,155 Misc.2d 542
• Parties: TRAVELERS INSURANCE COMPANY, Claimant, v. STATE INSURANCE FUND, Defendant. Motion
• Court: New York Court of Claims

Page 973

588 N.Y.S.2d 973

155 Misc.2d 542

TRAVELERS INSURANCE COMPANY, Claimant, v. STATE INSURANCE FUND, Defendant.

Motion No. M-45488.

Court of Claims of New York.

Sept. 8, 1992.

Caulfield, Galvin, Heller, Harris & Colligan, New York City (Jerome F.X. Hoffman, of counsel), for claimant.

Robert Abrams, Atty. Gen. (Michael A. Rosas, New York City, of counsel), for defendant.

OPINION

GERARD M. WEISBERG, Judge.

On this application to file a late claim pursuant to Court of Claims Act § 10(6), we must address an issue which the parties state is apparently one of first impression before the New York courts: Must an insurer obligated to share defense costs pay expenses attributable to work performed by the other carrier's in-house counsel? We hold that it must and that the claim therefore appears to be meritorious.

Gateway Tire Corp. was insured by both claimant, the Travelers Insurance Company, and defendant, the State Insurance Fund. On or about October 31, 1988, Gateway was named as a defendant and third-party defendant in a suit brought by George and Betty Herrion. Both insurers acknowledged their obligations to defend and indemnify Gateway in this suit. Specifically, in a letter dated November 1, 1989, Michael F. Coyle, an attorney in the office of the General Attorney of defendant, stated: "The State Insurance Fund acknowledges its co-insurer obligations pursuant to INA v. Dayton Tool & Die Works, Inc., for the defense of Gateway Tire Corp. our mutual assured and third party defendant in the above captioned action." The letter then goes on to say: "The State Insurance Fund agrees to share in the costs of defense of Gateway Tire Corp. It consents to the retaining of Gervais, deCicco & McCory for the defense of our mutual assured ...".

Although not stated in the letter, defendant allegedly had a policy of not contributing to defense costs that were attributable to in-house counsel. The firm of Gervais, deCicco & McCory, as it turned out, was in-house counsel to Travelers. ¹ After the Herrion action was settled, claimant sent defendant a statement showing the settlement amount and the costs of the Gervais attorneys attributable to defending the action. While the State Insurance Fund agreed to pay one half of the settlement, it was only then, allegedly, that it learned that Gervais, et al. were in-house counsel. It therefore refused to pay one half of the defense costs generated by those attorneys and notified claimant of this in a letter dated March 26, 1991.

For the purposes of this motion, we will assume claimant's cause of action for breach of contract accrued on that date. Pursuant to Court of Claims Act § 10(4), it had to either file a claim or a notice of intention to file a claim within six months thereafter. It did neither necessitating the instant motion.

Addressing the factors specified in Court of Claims Act § 10(6), claimant offers no excuse for failing to timely serve and file a claim. On the other hand, the State Insurance Fund had notice of the underlying facts and an opportunity to investigate within six months of the accrual. It therefore will suffer no substantial prejudice if a late filing is allowed. Nor does claimant have another remedy.

This brings us to the only real issue in this motion: Does the proposed claim ² have an appearance of merit? Defendant, viewing the matter solely as one of contract, argues that the "agreement to share defense costs is vitiated by the material and latent ambiguity in its terms." (Affirmation in Opposition p 3.) Claimant, on the other hand, responds that aside from the underlying contract, there is a common-law obligation for co-insurers to share defense costs which include those attributable to in-house counsel.

The law is clear, and the parties do not dispute, that where, as here, there are two insurers who have both covered the same insured with respect to the same risk "both must contribute, pro rata, toward the payment of the cost of settlement and legal fees and other expenses of the litigation." (Federal Ins. Co. v. Atlantic Natl. Ins. Co., 25 N.Y.2d 71, 78-79, 302 N.Y.S.2d 769, 250 N.E.2d 193.) ³ What is not clear is whether the phrase "legal fees and other expenses of litigation" includes the costs attributable to in-house counsel. While we and the parties have found no New York case law which has answered this question, our research discloses it has been addressed in other jurisdictions.

Thus, in Pittsburgh Plate Glass Co. v. Fidelity and Cas. Co., 281 F.2d 538, plaintiff's casualty insurer wrongfully refused to defend. Plaintiff therefore defended itself using both in-house and outside counsel. After settling, it sued the insurer to recover all of these items. In ruling in the insured's favor, the Third Circuit stated: "If Pittsburgh's [in-house] attorneys had refrained from activity, the workload and consequently the fee of the [outside] attorneys necessarily would have been increased. There is no reason in law or in equity why the insurer should benefit from Pittsburgh's choice to proceed with some of the work through its own legal department." (Supra, at 542.)

Pittsburgh has been followed by the Fifth Circuit in United States v. Myers, 363 F.2d 615, the United States District Court in Oregon in United States v. State Farm Mut. Auto. Ins. Co., 245 F.Supp. 58 and in the United States District Court for the Southern District of New York in Stichman v. Michigan Mut. Liability Co., 220 F.Supp. 848. ⁴ Thus, all the cases which have addressed the question have concluded that where an insurer wrongfully refuses to defend, the insured may recover its defense costs, including those attributable to in-house counsel. Would New York follow this rule and extend it to a claim of contribution between co-insurers?

The concept of seeking reimbursement for in-house counsel is not unique to insurance law. Rather the issue arose early and often, first in civil rights cases and then in other areas of the law as well. Thus, in the following areas the Federal courts have held that successful litigants were entitled to recover attorneys' fees even where in-house or publicly funded counsel were employed. (See, e.g., Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 [legal aid society]; Washington v. Seattle School Dist. No. 1, 458 U.S. 457, 102 S.Ct. 3187, 73 L.Ed.2d 896 [government attorneys]; American Family Life Ass. Co. v. Teasdale, 733 F.2d 559 [assistant attorney general]; Crooker v. United States Dept. of the Treasury, 634 F.2d 48 [pro se attorney]; National Treasury Employees Union v. Nixon, 521 F.2d 317 [in-house counsel]. See generally, 42 U.S.C. § 1988.) Bound to heed this rule in Federal civil rights cases, the New York courts followed suit. (See, e.g., Matter of Humphrey v. Gross, 135 A.D.2d 634, 522 N.Y.S.2d 213; Matter of Rahmey v. Blum, 95 A.D.2d 294, 466 N.Y.S.2d 350.) Going further, however, even where not mandated by Federal law, the New York courts have awarded attorneys' fees for in-house counsel in other areas of New York law. (See, e.g., Maplewood Management v. Best, 143 A.D.2d 978, 533 N.Y.S.2d 612; Matter of Greenpoint Hosp. Community Bd. v. New York City Health & Hosp. Corp....