The Case for Allowing Insurers to Recover Attorneys’ Fees in Fraud Suits

November 1, 2013 | Appeals | Insurance Coverage

AMERICAN BAR ASSOCIATION – MASS TORTS & DEVELOPMENTS

After an employee of Glasbern Inc. was injured, the company’s Workers’ Compensation insurer, Zenith Insurance Company, began paying Workers’ Compensation benefits to him. Thereafter, Zenith sued Glasbern, Glasbern’s owner, Albert Granger, and its insurance broker, alleging that it only had issued and renewed the policy as a result of misrepresentations regarding Glasbern’s operations. Zenith sought damages for past payments to the injured employee and a declaratory judgment with respect to future payments – and it sought counsel fees, and costs.

A jury found in favor of Zenith and against Glasbern and Granger on the fraud claim. The jury also found Zenith to be contributorily negligent with respect to its negligence claims against Glasbern, Granger, and the broker. Finally, the jury decided in favor of Zenith and against Glasbern and Granger on their counterclaim for bad faith. The trial court entered partial judgment in accordance with the verdict.

The trial court subsequently held a non-jury trial on the issue of damages and awarded Zenith $1.1 million. It also issued a declaratory judgment in Zenith’s favor directing Glasbern and Granger to reimburse Zenith for any future payments it made to or on behalf of the injured employee. Zenith then filed a separate petition for counsel fees and costs.

Zenith originally sought $903,030. After eliminating certain items related solely to pursuing claims against the broker, it decreased the counsel fees and costs it was seeking to $899,189. Of that amount, $858,095 consisted of fees and $41,095 represented costs.

Last month, the trial court found that some deductions from the amounts requested by Zenith were warranted, including, in particular, deductions for the time spent by Zenith pursuing claims against Glasbern, Granger, and the broker that ultimately were unsuccessful. The trial court then awarded Zenith a total of $555,614 in attorneys’ fees, plus costs in the amount of $27,132, for a total of $582,746.[1]

The decision in this case is significant for at least two reasons. For one thing, it highlights the importance of attorneys’ fees in fraud cases brought by insurance companies. The attorneys’ fees and costs the insurer sought initially were nearly the same amount as the damages it had been awarded, and in the absence of the nearly $600,000 in attorneys’ fees and costs that it was awarded it certainly would not have come close to being made whole from the fraud.

The second significant aspect of the court’s decision is that it was rendered not by a New York court under New York law, but by a federal district court in Pennsylvania applying a Pennsylvania statute – the Pennsylvania Insurance Fraud Act (“IFA”) – which provides that an insurer may be awarded compensatory damages where the insurer has been damaged as a result of a violation of the IFA, and that it may recover its attorneys’ fees. Indeed, the statute specifically recognizes that the “compensatory damages” available to an insurer that has been damaged as a result of a violation of the fraud law “may include reasonable investigation expenses, costs of suit and attorney fees.”[2]

New Jersey’s Rule

Pennsylvania is not alone among the jurisdictions surrounding New York in authorizing awards of attorneys’ fees to insurance carriers in fraud cases in which they are successful. 

Earlier this year, in a case applying New Jersey law, a New York federal district court refused to dismiss an insurance carrier’s claim for attorneys’ fees in a case in which it asserted fraud.

In that case, Dukes Bridge LLC v. Security Life of Denver Ins. Co.,[3] Dukes Bridge LLC sued Security Life of Denver Insurance Company (“SLD”) for payment of the death benefits on a life insurance policy. SLD raised an affirmative defense of fraud and brought counterclaims against Dukes Bridge and various trusts and trustees. The counterclaim defendants moved to dismiss SLD’s claims for attorneys’ fees and interest.

Eastern District Judge I. Leo Glasser first found that New Jersey law, rather than New York law, applied. That ruling inexorably led to Glasser’s decision to refuse to dismiss SLD’s claim for attorneys’ fees because the New Jersey Insurance Fraud Prevention Act (“IFPA”), which is similar to Pennsylvania’s law, provides that insurance companies can “recover compensatory damages, which shall include reasonable investigation expenses, costs of suit and attorneys fees.”[4]

As Glasser pointed out, the IFPA was enacted by the New Jersey legislature “to confront aggressively the problem of insurance fraud in New Jersey.” Glassser added that it should be construed “liberally” to accomplish the Legislature’s “broad remedial goals.” Glasser then ruled that SLD was “entitled to attorneys’ fees for counterclaim defendants’ alleged violations of the IFPA,” and he denied the counterclaim defendants’ motion to dismiss SLD’s claims for attorneys’ fees.[5]

The Situation in New York

Suppose an insurance company in New York brings a civil fraud suit here, as is occurring more and more often in wide range of cases.[6] Suppose the carrier is successful in demonstrating that a policyholder or other defendant engaged in fraud. Can it then seek to recoup its attorneys’ fees?

The short answer is that, as of this date, New York does not yet have a law similar to Pennsylvania’s IFA or New Jersey’s IPFA with a provision enabling a prevailing insurance carrier to obtain its attorney’s fees. Therefore, as far as current New York law is concerned, the carrier would have to bear its own costs and its own expenses.

If a person weighs out the risks of engaging in insurance fraud – including the difficulties of proving a criminal insurance fraud case “beyond a reasonable doubt” and the fact that, under New York law, a civil fraud judgment in favor of an insurance carrier only may result in a defendant being ordered to “pay back” what it had stolen – there might seem to be little incentive not to try to steal from an insurance company time and time again.

The absence of legislation authorizing attorneys’ fees to be awarded to insurance companies in New York is all the more perplexing when one recognizes that, in certain cases, policyholders in New York are entitled to recover their counsel fees when they succeed in coverage battles with their insurers – even in the absence of fraud on the part of an insurance carrier. Generally speaking, for example, an insured that prevails in an action brought by an insurance company seeking a declaratory judgment that it has no duty to defend or indemnify the insured may recover its attorneys’ fees.[7]  As the New York Court of Appeals explained, where the “expenses incurred by [the insured] in defending against the declaratory judgment action arose as a direct consequence of [the insurer’s] unsuccessful attempt to free itself of its policy obligations, [the insured] is entitled to recover those expenses from the insurer.”[8] 

Conclusion

Certainly, insurance companies that bring fraud claims under the federal Racketeer Influenced and Corrupt Organizations Act, or RICO,[9] may be entitled to recover a reasonable attorneys’ fee, even in New York.[10] Yet the absence of a specific New York statute authorizing payment of an attorneys’ fee to an insurance carrier that succeeds in a fraud case is a significant void in New York law. There is a great deal of merit to allowing insurance companies in New York to recover their attorney’s fees where they demonstrate fraud. Such a statute – perhaps modeled on the provisions of the insurance fraud act already in effect in New Jersey and in Pennsylvania – would help the battle against insurance fraud in New York. 



[1] Zenith Ins. Co. v. Glasbern, Inc., No. 10-5433 (E.D.Pa. Sept. 10, 2013).

[2] 18 Pa. Cons. Stat. Ann. § 4117(g). This section provides, in relevant part, that “[a]n insurer damaged as a result of a violation of this section may sue therefor in any court of competent jurisdiction to recover compensatory damages, which may include reasonable investigation expenses, costs of suit and attorney fees.”

[3] No. 10 Civ. 5491 (ILG) (RML) (E.D.N.Y. Feb. 4, 2013). See, also, Liberty Mutual Ins. Co. v. Land, No. A-6126-06T2 (N.J. App. Div. Jan. 14, 2010)(in statutory insurance fraud case, appellate court affirms judgment in favor of insurance carrier in the amount of $175,302.88, including $52,576.78 in counsel fees, which the trial court had trebled as permitted under the IFPA).

[4] N.J. Stat. Ann. § 17:33A-7(a).

[5] Judge Glasser also noted that, under New Jersey law, parties are entitled to post-judgment interest on attorneys’ fees. N.J. R. Civ. Prac. 4:42-11(a). However, Judge Glasser continued, New Jersey courts generally refuse to award prejudgment interest on attorneys’ fees. Therefore, Judge Glasser granted the counterclaim defendants’ motion to dismiss SLD’s claims for pre-judgment interest on SLD’s claim for attorneys’ fees , but denied their motion to dismiss SLD’s claims for post-judgment interest.

[6] See, e.g., Evan H. Krinick, “Court Validates Another Tool for Insurers in Fight against No-Fault Fraud,” NYLJ  May 3, 2013. 

[7] See, e.g., U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 N.Y.3d 592 (2004); see Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12 (1979).

[8] U.S. Underwriters Ins. Co., 3 N.Y.3d at 598; see Westport Ins. Corp. v. Hamilton Wharton Group, Inc., No. 10 Civ. 2188(RMB)(THK) (S.D.N.Y. Feb. 23, 2011) (“[Insurer] has  cast [insured] in a ‘defensive position’ in this declaratory judgment action which seeks to free [insurer] from its policy obligation to defend and indemnify [insured] in the State Actions.  Since the Court has determined that [insurer] does have a duty to defend and may have a duty to indemnify (depending upon the resolution of fact issues in the State Actions), [insured] ha[s] prevailed on the merits for the purpose of obtaining legal fees.”).

[9] 18 U.S.C. §§ 1961–1968. Section 1964(c) provides, in part, that “[a]ny person injured in his business or property by reason of a violation of section1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney’s fee….”

[10] Insurers clearly are bringing more and more RICO claims in actions in which they allege fraud under New York’s no-fault law. See, e.g., Evan H. Krinick, “Wave of Civil Claims Being Asserted by Insurers Against Alleged Fraud,” NYLJ July 1, 2011.

Reprinted with permission from the  November 1, 2013 issue of the New York Law Journal.  All rights reserved.

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