In Employers Mutual Casualty Co. v. Philadelphia Indemnity Insurance Co., a California Court of Appeal in the Second District recently held that attorneys fees paid in settlement on behalf of the defendant insured to plaintiff in the underlying action were “taxed costs” covered under a supplementary payments provision. 

The insured mobile home park operator was sued by residents of its mobile home park for various alleged failures to maintain the premises.  Employers and another insurer defended the insured and eventually settled the claims for $3 million, allocating $1.2 million to damages and the remaining $1.8 million to the plaintiffs’ attorneys fees.  The Mobilehome Residency Law under which the plaintiffs in the underlying action brought suit entitles the prevailing party to reasonable attorneys fees.

Employers then brought suit for contribution against two of the insured’s other insurers, including Philadelphia.  Philadelphia’s policies contained “supplementary payments” coverage for “all costs taxed against the insured in the suit.”  The trial court ruled that, under this supplementary payments coverage, Philadelphia owed Employers a “time on the risk” proportion of the $1.8 million paid as statutory attorneys fees in the settlement of the underlying action.  On appeal, Philadelphia argued that the attorneys fees were not “taxed costs” within the meaning of its policies because “taxed costs” are those judicially assessed.  The court found that the use of the word “taxed” in the policies was ambiguous: narrowly it could mean a judicial assessment but broadly it could mean “any levy of an assessment.”  Following the well established rules that ambiguities are resolved against the insurance company so that indemnity will be provided, and that coverage clauses are interpreted broadly, the court applied the more broad interpretation.

The court also stated that its interpretation was sensible as a matter of policy and equity.  It permits an insured to settle a claim instead of taking the action to trial and risking greater liability.  It also permits defending insurers to settle an action and pursue contribution towards taxed costs instead of discouraging insurers from settling claims with high costs.  The court also brushed off arguments that Employers was estopped from seeking coverage of the attorneys fees it paid because it did not pay those fees out of its own supplementary payments provisions.  It found that there was no evidence that Philadelphia relied on any action by Employers and in any event, Philadelphia denied coverage.  Finally the court rejected Philadelphia’s argument that taxed costs can only arise after liability is fixed and liability was never fixed.  It found that the settlement established the insured’s liability for the purpose of insurance coverage.

The import of this opinion is that insureds and defending insurers should, when settling claims and suits, consider allocating a portion of amounts paid in settlement to attorney fees and other costs.  Such allocation may preserve limits in other grants of coverage and therefore maximize the total amount available for existing and future claims.  In addition, Supplementary Payments are generally payable in any case where there is a duty to defend.  Thus, they are recoverable under the “duty to defend” standard, and not the higher “duty to indemnify” standard.  It should be noted that in Employers, attorneys fees were expressly authorized by the statue under which plaintiffs in the underlying suit brought their claims.  “Supplementary Payments” or other grants of coverage applying to “taxed costs” may not extend to amounts designated as attorneys fees when attorneys fees are not authorized by law or contract.