FEBRUARY 2012 BAD FAITH CASES: INSURED MAY RECOVER ATTORNEY’S FEES INCURRED IN DECLARATORY JUDGMENT ACTION ONLY IF IT CAN PROVE THAT THE CARRIER REFUSED TO DEFEND IN BAD FAITH (Western District)

In UPS Freight v. National Union Fire Insurance Co. and C.C. Eastern, Inc., the magistrate judge issued a report and recommendation (“R&R”) in a declaratory judgment action by an insured against its carrier. The action stemmed from an underlying negligence suit in state court.
Specifically, the insured sought a declaration against both defendant carriers that (1) they owed a duty to defend in the underlying negligence suit, (2) that the carrier is obligated to reimburse the insured for defense costs and (3) that the carriers must afford coverage to the insured for any liability imposed on it in the state court action.
This motion was originally filed in 2006 and was followed by a 2008 motion for summary judgment by the insured, to which the carriers responded by filing a cross-motion for summary judgment. In 2008, the magistrate issued an R&R recommending that the carriers’ cross-motions be denied and that the insured’s motion be granted with respect to the second carrier, but not the first. The district judge declined to adopt the R&R in full, but granted the second carrier’s motion. The insured then appealed to the Third Circuit.
The Third Circuit ruled that the first carrier owed the insured a duty to reimburse all defense costs incurred in the underlying state court action and affirmed the grant of summary judgment to the second carrier.
The case was remanded and the insured filed a motion for entry of judgment, requesting that judgment be entered against the remaining carrier for $184,754.81 incurred in the state court action and $52,003.41 incurred in the instant action. The carrier objected to this motion, arguing that it required more documentation of attorney’s fees and costs incurred by the insured. In response, the insured submitted detailed billing statements documenting legal services rendered on its behalf in both the state and federal court actions.
The magistrate recommended that the insured be entitled to the $184,754.81 that it incurred in the state court action. However, the magistrate refused to recommend that the insured be reimbursed for the $52,003.41 incurred in bringing the instant declaratory judgment action.
While the Pennsylvania Supreme Court has yet to rule on the issue, the magistrate followed Third Circuit precedent, which predicted that “an insured who is compelled to bring a declaratory judgment action to establish his insurer’s duty to defend…may recover his attorneys’ fees incurred…if the insurer has, in bad faith, refused to defend the action brought by the third party.” The magistrate recommended that, because the insured had not proved that the carrier acted in bad faith, the insured not be entitled to reimbursement for $52,003.41.
In conclusion, the R&R stated that judgment should be entered for the insured with respect to costs incurred during the state court action, but not for costs incurred during its declaratory judgment action against its carrier.
Date of Decision: February 14, 2012 (On February 16, 2012, Judge Sean McLaughlin adopted Magistrate Judge Baxter’s Report and Recommendation as an Order of the Court)
UPS Freight v. National Union Fire Insurance Co. and C.C. Eastern, Inc., No. 06-137, 2012 U.S. Dist. LEXIS 19505 (W.D. Pa. Feb. 14th, 2012) (Baxter, M.J.)