By: Rob Witmeyer
A recent federal court decision out of the Western District of Texas addressed the availability of insurance coverage under a CGL policy for two important items: (1) attorneys’ fees assessed against an insured; and (2) rip and tear expenses. This summary will discuss the attorneys’ fees issue with a future summary analyzing the court’s rip and tear holding.
The relevant facts are as follows. The general contractor hired a subcontractor to perform utility work. After the subcontractor performed the utility work, the general contractor and other third parties performed road work above the subcontractor’s utility work. At some point prior to final completion of the road work, the general contractor became aware that the utility subcontractor’s work was defective. As a result, the general contractor had to remove the almost-completed road work to access and replace the subcontractor’s defective utility work. This resulted in physical injury to the road and loss of use damages.
After establishing that the CGL insurance policy covered some of the property damage, the insured sought coverage for the plaintiff’s attorneys’ fees assessed against the insured in the underlying litigation. However, the insurer argued that the policy did not provide insurance coverage for those fees because such attorneys’ fees are not “damages.” Critically, the CGL insuring agreement provided coverage only for “damages because of . . . property damage to which this insurance applies.”
The court addressed the hot-button coverage issue—whether the CGL policy provides insurance coverage for the plaintiff’s attorneys’ fees assessed against the insured. Following a recent trend in Texas federal court opinions, the court answered that question in the negative. The court determined that the CGL insuring agreement cannot provide coverage for such attorneys’ fees because those fees are not “damages.” Two recent opinions out of the Southern District of Texas have also found that the CGL policy insuring agreement does not provide coverage for plaintiff’s attorneys’ fees assessed against the insured. See AGLIC v. US Fire, 255 F. Supp. 3d 677, 695 n.1 (S.D. Tex. June 1, 2017) (Rosenthal, J.); Mid-Continent Cas. Co. v. Petroleum Sols, Inc., No. 4:09-CV-04222, 2016 WL 5539895, *28 (S.D. Tex. Sept. 29, 2016) (Atlas, J.).
These cases followed the Texas Supreme Court’s instruction that attorneys’ fees are not “damages.” See In re Nalle Plastics Family Ltd. P’ship, 406 S.W.3d 168, 172-73 (Tex. 2013). In that case, the Court held that attorneys’ fees are not compensatory damages for purposes of the supersedeas statute. The Court stated that “[w]hile attorneys’ fees for the prosecution or defense of a claim may be compensatory in that they help make a claimant whole, they are not, and have never been, damages.” Id. at 173. The Court further extended its reasoning to the Texas Theft Liability Act, under which a defendant may be awarded attorneys’ fees even without an award of compensatory damages. See In re Corral-Lerma, 451 S.W.3d 385, 386 (Tex. 2014).
These recent holdings that attorneys’ fees assessed against an insured are not “damages” will likely have far-reaching impacts in Texas cases. For example, the plaintiffs’ attorneys’ fees are often a major issue at mediation. The outcome of that mediation may be substantially different if the defendants have no insurance coverage for those fees, particularly if the insureds are not collectible. In addition, these recent holdings may affect coverage under other policies, such as professional liability policies, that often use the term “damages” in their definitions of “loss.” Depending on the precise language, those policies may end up providing no insurance coverage for attorneys’ fees assessed against an insured as well.