Opinion
June 3, 1999
Appeals from the Supreme Court, (Stuart Cohen, J.).
William Hart of counsel ( Timothy B. Parlin and Judah Schecter on the brief; Law offices of William Hart and Chase Manhattan Legal Department, attorneys), for respondents.
Gil A. Isidro of counsel ( Robert M. Sullivan on the brief; Lustig Brown, L. L. P., attorneys), for appellants.
The issue on this appeal from the denial of the motion by defendants Richard J. Kuh, KBS International Corp. and KBS Brokerage Corp. (Kuh/KBS) to dismiss so much of the complaints in these consolidated actions as seek to recover attorneys', fees and expenses from Kuh/KBS is whether, in an action against a broker whose negligence leads to a lack of coverage, an insured is entitled to recover attorneys' fees expended in seeking a determination, of coverage.
Prior to 1989, Chase Manhattan Bank entered into a messenger services agreement with Archer Motor Services, Inc., pursuant to which Archer agreed to transport various items, including papers, documents and, negotiable instruments, for Chase and to obtain "all risk" insurance covering loss or damage to any of Chase's items while in Archer's possession. Archer obtained insurance listing Chase as an additional insured under the policy, as required, through defendant Kuh/KBS, a broker, who placed the insurance with Lloyd's. On six occasions in early 1990, certain items being transported by Archer for Chase were stolen or lost while in Archer's possession. Chase filed a claim, which Lloyd's rejected on the ground of material misrepresentation in the procurement of the policy. The purported misrepresentation was contained in a Kuh/KBS letter to a Lloyd's representative stating that the average value at risk per vehicle was "usually about $100,000", while the maximum value at risk was "usually about $200,000." Chase and Archer contend that Kuh/KBS was not authorized to make such a statement, which seriously undervalued the property being transported. According to Chase and Archer, they did not become aware of the misrepresentation until after the losses occurred.
In April 1991, Chase commenced an action against Lloyd's alleging breach of the insurance contract, in the United States District Court for the Southern District of New York. After Lloyd's joined Archer as a party and counterclaimed against both Chase and Archer, for rescission, based on the undervaluation, Chase commenced a third-party action against Kub/KBS, in which it alleged negligence in the policy placement and sought, inter alia, to recover attorneys' fees incurred and to be incurred in the litigation with Lloyd's. The Federal court-action was dismissed on the ground of lack of diversity jurisdiction, and the three actions involved herein, involving claims for breach of the contract of insurance and the negligence of the insurance broker, Kuh/KBS, were then brought in State court.
At issue here is Kuh/KBS's motion to dismiss so much of the complaints as seek to recover attorneys' fees and expenses incurred in connection with the litigation with Lloyd's, which the IAS Court denied, rejecting Kuh/KBS's argument that legal fees and litigation expenses are not recoverable as a matter of law. We reverse.
In determining the liability of an insurance broker for losses not insured because of the broker's negligence in failing to. procure the requested coverage, a broker cannot be held liable for losses that would have fallen outside the ambit of the coverage had it been properly procured; in such case, the broker "stands in the shoes of the insurer as concerns liability to the insured." ( Macon v. Arnlie Realty Co., 207 A.D.2d 268, 270.) An insured may only enforce its rights to the extent it could have done so against the insurer. ( Supra; see, Andriaccio v. Borg Borg, 198 A.D.2d 253.)
The rule is well settled in this State that the successful party in litigation may not recover, attorneys' fees, except where authorized by the parties' agreement, statutory provision or court rule. ( Hunt v. Sharp, 85 N.Y.2d 883; Chapel v. Mitchell, 84 N.Y.2d 345, 348-349; Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21.) While, as Mighty Midgets recognizes, an insured is allowed to recover its legal fees in an action brought against it by an insurer "in an effort to free itself from its policy obligations" ( Mighty Midgets v. Centennial Ins. Co., supra, 47 N.Y.2d, at 21), recovery of counsel fees "may not be had in an affirmative action by [the insured] to settle its rights" ( supra, at 21; Mazzuoccolo v. Cinelli, 245 A.D.2d 245). Thus, where an insurer improperly disclaims coverage, it is liable for the attorneys' fees incurred by the insured in defending a suit by the insurer to establish the insurer's nonliability for the underlying claim as well as in the liability action, but not for the fees expended in suing the insurer to establish coverage. ( Mighty Midgets v. Centennial Ins. Co., supra, 47 N.Y.2d, at 21.)
The rationale for this distinction is that when an insurer casts an insured in a defensive posture the liability feature of the insurance is triggered and provides coverage for defense expenses incidental to the assertion of claims against the insured. As the Court noted in Mighty Midgets, "[A]n insurer's responsibility to defend reaches the defense of any actions arising out of the occurrence." (47 N.Y.2d, supra, at 21.) Thus, pursuant to the policy, defense expenses are recoverable by the insured, even if incurred in defending against an insurer seeking to avoid coverage for a particular claim. Recovery of attorneys' fees in such a case is not an exception to the American rule; it is incidental to the insurer's duty to defend, and the right to such recovery arises from that contractual duty.
The three consolidated actions here are nothing more than a State-forum reprise of Chase's Federal court action against the same defendants seeking a determination of coverage by Lloyd's, or, in the event of an adverse determination on that issue, the imposition of liability on the part of Kuh/KBS for the misrepresentation successfully utilized by the insurer to avoid coverage. That Archer was joined as a party in the Federal action by the insurer does not confer upon it a right to seek counsel fees since the underlying claim against the insurer is not for liability indemnification but, rather, for direct, first-party coverage. In such circumstances, the defense provision of the liability coverage is not triggered. Thus, to the extent that the complaints seek the recovery of attorneys' fees and expenses they should be dismissed.
The so-called exception to the general rule set forth in Shindler v. Lamb ( 25 Misc.2d 810, 812, affd 10 A.D.2d 826, affd 9 N.Y.2d 621), upon which the dissent rests its conclusion allowing the recovery of attorneys' fees, is not applicable to this case. The exception is stated in Shindler (supra, at 810) as follows: "If, through the wrongful act of his present adversary, a person is involved in earlier litigation with a third person in bringing or defending an action to protect his interests, he is entitled to recover the reasonable value of attorneys' fees and other expenses thereby suffered or incurred [citations omitted]." According to the dissent, the Shindler rule applies since Kuh/KBS's misrepresentation exposed Chase and Archer to earlier litigation with a third person, namely, Lloyd's. The problem with this reasoning is that as to Kuh/KBS, against whom indemnity is sought for an alleged misrepresentation vitiating the policy, Lloyd's is not a third party. In the face of an allegation of a broker's error or omission in failing to procure proper coverage, the broker, as noted, "stands in the shoes of the insurer as concerns liability to the insured." ( Macon v. Arnlie Realty Co., supra, 207 A.D.2d, at 270.) Allowing the recovery of attorneys' fees against the broker in this case, where neither Chase nor Archer, if successful, could recover the same from the insurer, Lloyd's, would violate the general rule against awarding attorneys' fees to the successful party in litigation.
As the dissent agrees, the IAS Court also erred in granting Chase's motion to amend its complaint to assert claims for punitive damages since the complaint alleges a private wrong, involving causes of action for ordinary fraud, breach of fiduciary duty and negligence. ( See, Mom's Bagels v. Sig Greenebaum Inc., 164 A.D.2d 820, 822, appeal dismissed 77 N.Y.2d 902.)
Accordingly, the order of Supreme Court, New York County (Stuart Cohen, J.) entered July 7, 1997, which, to the extent appealed from, denied defendants-appellants' motion to dismiss the demand of plaintiffs in Action Nos. 2 and 3 for attorneys' fees and litigation expenses, should be reversed, on the law, without costs and disbursements, and the motion granted. The order of said court and Justice, entered November 14, 1997, which granted a motion by plaintiff in Action No. 2 to add claims for punitive damages, should be reversed, on the law, without costs and disbursements, and the motion denied.
The issue in this appeal is whether an insured may recover attorneys' fees and litigation expenses from an insurance broker, where the broker's misrepresentation caused the insurer to disclaim coverage, and the insured is compelled to initiate litigation to enforce its rights under the policy. Since a well recognized exception to the "American Rule" permits recovery of such costs in such circumstances, I dissent from that portion of the majority's holding which reverses and grants the motion to dismiss plaintiffs' claims for attorneys' fees and expenses.
Under the "American Rule," to which New York adheres, "attorney's fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule [citations omitted]" ( Hooper Assocs. v. AGS Computers, 74 N.Y.2d 487, 491; see also, Hunt v. Sharp, 85 N.Y.2d 883, 885; Chapel v. Mitchell, 84 N.Y.2d 345, 348-349). However, Chase and Archer seek recovery under the Shindler rule, which states: "If, through the wrongful act of his present adversary, a person is involved in earlier litigation with a third person in bringing or defending an action to protect his interests, he is entitled to recover the reasonable value of attorneys' fees and other expenses thereby suffered or incurred [citations omitted]" ( Shindler v. Lamb, 25 Misc.2d 810, 812, affd 10 A.D.2d 826, affd 9 N.Y.2d 621). Under the Shindler rule, the litigation expenses sought to be recovered must have been the "natural and necessary consequences of the defendant's acts" ( Coopers Lybrand v. Levitt, 52 A.D.2d 493, 496).
Kuh/KBS' motion for dismissal of the claims for attorneys' fees and expenses was properly denied. The Shindler rule is applicable here, where Kuh/KBS' allegedly unauthorized misrepresentations constituted at least part of the basis for Lloyd's disclaimer, and necessitated that Chase and Archer take legal action against third party Lloyd's to protect their rights under the insurance policy ( see, Hermann v. Bahrann, 236 A.D.2d 516; Sahn v. AFCO Indus., 192 A.D.2d 480, 481).
Kuh/KBS argues that the Shindler rule is inapplicable here because the alleged wrongdoer (Kuh/KBS) and the third party against whom litigation costs were incurred (Lloyd's) were both defendants in the Federal action and are both parties to this consolidated action ( see, Goldberg v. Mallinckrodt, Inc., 792 F.2d 305, 309; Chase Manhattan Bank v. Traditional Invs. Corp., 1995 US Dist LEXIS 2031 [SD NY, Feb. 21, 1995, Sotomayor, J.]). I disagree. While related, the actions against Lloyd's and Kuh/KBS are separate and distinct. The suit against Lloyd's is based on a breach of the insurance contract, while the action against Kuh/KBS alleges independent tortious conduct by an insurance broker. Additionally, Kuh/KBS was only impleaded into the Federal action three years after it was commenced, and that action was eventually dismissed. This is not a case where the alleged wrongdoer is also the adversary of the fee claimant in the main action ( cf., Mazzuoccolo v. Cinelli, 245 A.D.2d 245; City of New York v. Zuckerman, 234 A.D.2d 160, 161, lv dismissed 90 N.Y.2d 845; Coopers Lybrand v. Levitt, supra). Since, despite the eventual consolidation, Kuh/KBS' wrongful act exposed Chase and Archer to "earlier litigation with a third person" ( Shindler v. Lamb, supra, at 812), in this case Lloyd's, the Shindler rule still applies ( see, Vicinanzo v. Brunschwig Fils, 739 F. Supp. 891, 895-896 [SD N Y 1990]).
Kuh/KBS argues, and the majority agrees, that since an insurance broker who negligently fails' to procure insurance "stands in the shoes of the insurer" with respect to liability to the insured, and prevailing law prohibits an insured from recovering litigation expenses incurred in an affirmative action against an insurer to settle its rights under the policy ( see, New York Univ. v. Cont. Ins. Co., 87 N.Y.2d 308, 324; Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12, 21), Chase cannot recover from Kuh/KBS expenses that it plainly could not recover from Lloyd's. Kuh/KBS' reliance on this principle is misplaced. The cases cited by Kuh/KBS do not involve attorneys' fees and litigation expenses, but merely restate the established proposition that a broker cannot be liable for losses that would have fallen outside the policy's coverage ( see, Rodriguez v. Investors Ins. Co., 201 A.D.2d 355, 356; Andriaccio v. Borg Borg, 198 A.D.2d 253). The principle that a negligent insurance broker "stands in the shoes" of the insurer does not immunize a broker from liability for its independent tortious acts which necessitate litigation with a third party ( see, Sahn v. APCO Indus., supra, at 481).
I agree with the majority, however, that the IAS Court erred in granting Chase's motion for leave to amend its complaint to add a demand for punitive damages. "Punitive damages are not recoverable for an ordinary breach of contract as their purpose is not to remedy private wrongs but to vindicate public rights ( see, Garrity v. Lyle Stuart, Inc., 40 N.Y.2d 354, 358)." ( Rocanova v. Equitable Life Assur. Socy., 83 N.Y.2d 603, 613.) A party seeking punitive damages arising out of a contractual relationship must demonstrate independent tortious conduct, which is egregious, and that "such conduct was part of a pattern of similar conduct directed at the public generally" ( supra, at 613). The allegations underlying Chase's punitive damages demand, asserting only a private wrong, do not support its claim for punitive damages ( see, Mom's Bagels v. Sig Greenebaum Inc., 164 A.D.2d 820, 822-823, appeal dismissed 77 N.Y.2d 902).
ROSENBERGER and WALLACH, JJ., concur with SULLIVAN, J. P.; MAZZARELLI, J., dissents in part in a separate opinion.
Order, Supreme Court, New York County, entered November 14, 1997 (Action No. 2; Appeal No. 2992), reversed, on the law, without costs and disbursements and the motion by plaintiff to add claims for punitive damages denied; order, same court, entered July 7, 1997 (Action Nos. 2 and 3; Appeal No. 2993), reversed, on the law, without costs and disbursements, and the motion by defendants to dismiss the demand of plaintiffs for attorneys' fees and litigation expenses granted.