Opinion
NO. 1:03-cv-0590-JDT-TAB
March 31, 2004
REPORT AND RECOMMENDATION ON DEFENDANT'S MOTION FOR PAYMENT OF ATTORNEYS' FEES
A. Introduction.
Plaintiff Chicago Insurance Company ("CIC") issued a professional liability insurance policy ("the policy") to Defendant Abstract Title Guaranty Company, Inc. ("ATG"). The policy contains limits of $500,000 for each claim and $500,000 in the aggregate, including cost of defense expenses. Various claims have been filed against ATG that may be covered by the policy. Believing ATG's liability with respect to these claims will far exceed the policy limits, CIC filed this interpleader action and deposited the $500,000 policy limits into the Court's registry.
Thereafter, ATG filed a motion for payment of attorneys' fees to be distributed from the interpleaded funds to cover its defense costs. [Docket No. 121]. The remaining Defendants (collectively "the objecting Defendants") filed numerous objections to this motion. [Docket Nos. 138, 144, 146-49, 152]. On December 23, 2003, this matter was referred to the undersigned for a Report and Recommendation. [Docket No. 124]. On February 4, 2004, the Court held a hearing regarding the motion for payment of attorneys' fees. All parties were given an opportunity to present evidence and/or argument in support of their respective positions. The Court took the matter under advisement, and now issues its Report and Recommendation.
B. Discussion.
In response to ATG's motion for attorneys' fees, the objecting Defendants raise several overlapping arguments. For example, the objecting Defendants claim that ATG is not entitled to distribution from the interpleaded funds its cost of defense attorneys' fees because: (1) ATG has not met its deductible under the policy; (2) CIC has exhausted its duty to defend and, therefore, ATG has no greater rights in the interpleaded funds than that of the other named Defendants; (3) ATG seeks attorneys' fees that do not fall within the definition of "Claims Expenses" under the policy; and (4) inclusion of defense costs within the limits of liability is against public policy. In addition, the objecting Defendants argue that, in the event the Court determines ATG is entitled to attorneys' fees from the funds, ATG would only be entitled to a pro rata share. Furthermore, the objecting Defendants suggest that an in camera process for approval of ATG's attorneys' fees would be improper.
In contrast, ATG asserts that the objecting Defendants do not have standing to object because they are not parties to the underlying insurance contract between ATG and CIC. Furthermore, ATG argues that the insurance contract is for the benefit of the insured, not the objecting Defendants, thereby entitling it to reasonable defense costs out of the funds. Finally, ATG argues that it "is not required to prove it has expended any sum towards the deductible" because the insurance contract lies between CIC and ATG, and CIC waived any entitlement to the deductible by filing the present action and depositing the policy limits with the Court. [Docket No. 163, p. 7]. For the reasons set forth below, the Magistrate Judge recommends that ATG's motion for payment of attorneys' fees be GRANTED.
First and foremost, ATG is correct that, absent interpleader, the objecting Defendants would not have standing to sue CIC for payment of the funds. See Menefee v. Schurr, 751 N.E.2d 757, 761 (Ind.Ct.App. 2001) (declining to "abandon the rule that an injured third party does not have the right to bring a direct action against a wrongdoer's liability insurer."). However, because CIC filed the interpleader action requesting the Court to determine the distribution of the interpleaded funds among the various claimants, equity requires that the objecting Defendants maintain the ability to object to ATG's motion for attorneys' fees as it directly impacts the amount of funds that will remain for distribution. See U.S. v. Hodgekins, 28 F.3d 610, 614 (7th Cir. 1994) ("`Interpleader is an equitable procedure by which a person holding property (commonly called a stake-holder) who is or may be subject to inconsistent claims on that property (the stake) can bring together all the claimants in a single action.'") (citation omitted); Marine Indem. Ins. Co. of America v. Lockwood Warehouse Storage, 115 F.3d 282, 287 (5th Cir. 1997) ("The district court's finding concerning the priority of claims (to the extent that the priority of claims was not controlled by policy language or controlling law) is neither a conclusion of law nor a factual finding, but is, instead, an equitable decision."). Accordingly, the objecting Defendants have sufficient standing to contest ATG's motion for attorneys' fees.
The objecting Defendants maintain that ATG is not entitled reimbursement of defense costs from the interpleaded funds because it has not satisfied its $10,000 per claim deductible. The objecting Defendants' calculations of the deductible vary wildly, ranging from $10,000 to $1,090,000 (109 separate claims at $10,000 per claim). In contrast, ATG argues that whether it is required to pay a deductible is governed by the insurance contract between ATG and CIC. Therefore, ATG argues, "[a]s CIC has made no objection to ATG's motion, CIC has waived any requirement that ATG expend any amount toward a deductible prior to invoking the protections afforded by the Policy." [Docket No. 163, p. 7]. Alternatively, ATG argues that to the extent it is required to pay a deductible, that deductible is limited to $10,000 because the claims are "related" under the policy. As set forth below, the Court finds that CIC waived the payment of a deductible. Therefore, resolution of whether the claims are "related" is unnecessary.
On October 3, 2003, the Court granted ATG's motion for a more definite statement and ordered CIC to set forth any interest it claimed in the interpleaded funds. [Docket No. 83]. Thereafter, CIC filed its amended complaint, stating that "Plaintiff's interest in the interpleaded limits of the Policy is that the funds are intended to be used to pay Claims Expenses and to indemnify ATG with regard to any settlements and/or judgments regarding the claims referenced herein, up to the policy limit of $500,000." [Docket No. 87, If 32]. Notably, CIC's stated interest does not allege that use of the funds is contingent on payment or exhaustion of a deductible. Nor did CIC object to ATG's motion for attorneys' fees to be distributed out of the interpleaded funds. Therefore, CIC has waived this requirement. See American Standard Ins. Co. of Wisconsin v. Rogers, 788 N.E.2d 873, 876 (Ind.Ct.App. 2003) ("It is well settled that contractual provisions of an insurance policy may be waived or that the insurer may be estopped from asserting such provisions.").
Taken to its logical conclusion, the objecting Defendants' argument concerning ATG's payment of a deductible would also prevent distribution of the funds to the objecting Defendants. Deductible is defined as follows: "Under an insurance policy, the portion of the loss to be borne by the insured before the insurer becomes liable for payment." Black's Law Dictionary 422 (7th ed. 1999). Therefore, if the objecting Defendants were correct, distribution of the funds at all (even to the objecting Defendants) would be inappropriate until ATG met its deductible.
The objecting Defendants also maintain that, because CIC deposited the policy limits with the Court, it has exhausted its duty to defend and, therefore, ATG has no greater rights in the interpleaded funds than that of the other named Defendants. See Commercial Union Ins. Co. of New York v. Adams, 231 F. Supp. 860, 867 (S.D. Ind. 1964) (duty to defend relieved by relinquishing all interest in stake and paying policy limits into registry of court). Indeed, the policy at issue provides:
In no event shall the Company be obligated to pay Damages or Claim Expenses or to defend, or continue to defend, any suit after the applicable limit of the Company's liability has been exhausted by payments of judgments, settlements, Damages or Claims Expenses, as applicable.
[Docket No. 122, Ex. A, p. 1]. However, no Indiana court has ruled regarding the effect of depositing a policy's liability limits with the court on a insurer's duty to defend. Some jurisdictions have held that in such situations, the duty to defend continues, stating:
Otherwise, where the damages exceed the policy coverage, the insurer could walk into court, toss the amount of the policy on the table, and blithely inform the insured that the rest was up to him. This would obviously constitute a breach of the insurer's contract to defend actions against the insured, for which premiums had been paid, and should not be tolerated by the courts.Continental Ins. Co. v. Burr, 706 A.2d 499, 501 (Del. 1998), quoting National Casualty Co. v. Insurance Co. of North America, 230 F. Supp. 617, 622 (N.D. Ohio 1964). See also Utah Power Light Co. v. Federal Ins. Co., 711 F. Supp. 1544, 1553 (D. Utah 1989); Anderson v. United States Fidelity Guaranty Co., 339 S.E.2d 660, 661 (Ga.Ct.App. 1986) ("We do not agree . . . that the term `exhaust' encompasses the paying into court of the policy limits, but interpret that term to mean the payment either of a settlement or of a judgment wholly depleting the policy amount"). However, whether CIC's duty to defend terminated with depositing the policy limits into the Court's registry is not an issue presently before the Court.
Instead, what is before the Court is whether ATG may properly receive defense costs from the interpleaded funds. The objecting Defendants claim that ATG's interest in those funds is no greater than the other named Defendants and that, to the extent the Court finds ATG is entitled to defense costs, ATG is only entitled to a pro rata share. The Court disagrees.
"In a general sense, insurance is a contract whereby one party, for an agreed premium, undertakes to indemnify another party for losses arising from the happening of a particular event or contingency." Eakin v. Indiana Intergovernmental Risk Management Authority, 557N.E.2d 1095, 1098 (Ind.Ct.App. 1990). In other words, the policy is for the benefit of ATG, not the objecting Defendants. ATG should be able to use the interpleaded funds, in accordance with policy provisions, regardless of whether CIC shirked its duty to defend by depositing the policy limits in the Court's registry. See In re Technical Equities Corp., 163 B.R. 350, 361 (Bankr. N.D. Cal. 1993) ("That [insurance policy] contract is between the insureds and [the insurer]. Claimants are not parties to it. In a self-consuming policy, where the insureds choose to use the limits of the policy in defending themselves against claims, the policy limits are reduced.").
Likewise, the Court does not find persuasive the objecting Defendants' argument that allowing defense costs to be included within the liability limits of an insurance policy is against public policy. The objecting Defendants fail to cite to any binding precedential authority for this proposition. Instead, the objecting Defendants rely on statutes from a relatively small number of other jurisdictions. The policy is clear that claims expenses — which include defense costs — are included within the policy's limits of liability. Given this unambiguous language in the contract and the lack of binding precedent, the Court declines to carve out a public policy exception to "defense within limits" insurance policies. Accordingly, ATG is entitled to attorneys' fees and other defense costs to be paid out of the interpleaded funds.
This holding does not give ATG carte blanche access to the interpleaded funds. As the objecting Defendants point out, not everything ATG may be seeking attorneys' fees for falls within the definition of "Claims Expenses" under the policy. The objecting Defendants allege that:
the bulk of the legal services provided to ATG by its counsel to date likely have involved investigating ATG's own negligence and/or responding to requests for information made by the title insurance companies for whom ATG acted as a title issuing agent. While these legal services may be related to the Tauer Litigation in some tangential fashion, ATG has made no showing that they are related to the defense of a claim under the Policy.
[Docket No. 147, p. 7]. This point is well taken. ATG is not entitled to attorneys' fees out of the funds that do not fall within the definition of "Claims Expenses" in the policy.
Moreover, as the objecting Defendants note, whether ATG's defense costs fall within the definition of "Claims Expenses" would normally be policed by CIC, the insurer providing the defense. With CIC no longer defending ATG, and given the equitable nature of this action, in camera submission of ATG's defense costs and attorneys' fees is inappropriate under the circumstances. Instead, the Court finds that the better approach is for ATG to file with the Court (and thus serve on all parties for their review and consideration) its verified billing statements and other documentation as may be necessary to support ATG's requests for fees and costs. The submission of ATG's verified billing statements (with any necessary redactions to protect attorney-client or work product materials) for review and comment by the objecting Defendants will not compromise ATG's privileged information or litigation strategy. ATG shall file its requests for approval of defense costs quarterly. Additionally, ATG shall submit (not file) an unredacted copy of such requests directly to the Magistrate Judge concurrent with its quarterly filing. Any party objecting to such request shall file its objection within 15 days of ATG's request, with ATG's reply due seven days thereafter. ATG's first such submission shall be due 30 days from the date the District Judge adopts this Report and Recommendation.
C. Conclusion.
For the reasons stated above, the Magistrate Judge recommends that ATG's motion for payment of attorneys' fees be GRANTED. Accordingly, ATG shall file its requests for approval of defense costs (with redactions, if necessary, to protect privileged information) quarterly. Additionally, ATG shall submit (not file) an unredacted copy of such requests directly to the Magistrate Judge concurrent with its quarterly filing. Any party objecting to such request shall file its objection within 15 days of ATG's request, with ATG's reply due seven days thereafter. ATG's first such submission shall be due 30 days from the date the District Judge adopts this Report and Recommendation.
Any objections to the Magistrate Judge's Report and Recommendation shall be filed with the Clerk in accordance with 28 U.S.C. § 636 (b)(1), and failure to file timely objections within the ten days after service shall constitute a waiver of subsequent review absent a showing of good cause for such failure.
SO ORDERED.