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Quote of the Day - There is only one success - to be able to spend your life in your own way, and not to give others absurd maddening claims upon it. - Christopher Morley
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Insurer Must Pay Attorneys Fees Of Third Party Suing On Assigned Claim

When you have insurance, it does you no good if your insurance company won't pay your claim, even though your lawyer tells you the claim is covered.  It's just that much worse when you're being sued by someone else and your insurance company won't defend you, even though your insurance company owes you a defense against the lawsuit and payment for the claim.

That scenario happened to Luis Sanchez d/b/a L.A. Machinery Moving.  Luis was transporting two commercial dryers for Five Star Dye House, but in the process damaged one.  He dropped it, but didn't repair it fast enough.  Five Star sued Luis, and he promptly turned the claim over to his insurance company, Essex Insurance, who just as promptly denied Luis' claim.  The only problem Essex had, however, was that it should have defended Luis against Five Star's claim, and it should have actually paid the claim.  Luis defended Five Star's lawsuit, but lost to the tune of $1.35 million.

A triple whammy for Luis - no insurance coverage for the claim, no insurance coverage for the lawsuit and a big judgment.

After reviewing Luis' policy from Essex, however, both Luis' and Five Star's lawyers agreed:  Essex should have paid the claim.  Five Star wanted payment, but Luis likely couldn't pay the judgment on his own (which is why he had insurance in the first place).  Since Luis' insurance company at this point was balking, both Five Star and Luis were out of luck.  Or so it seemed.

Not to be outdone by his insurance company, Luis assigned his rights against Essex to Five Star.  Five Star sued Essex for bad faith failure to pay a claim, defend Luis and pay the judgment (all torts) and won.  Not only did Five Star get Luis' judgment paid, but it also recovered its attorneys fees against Essex.  If you're at all schooled in attorney's fees and contract law, you now have a question:  since Five Star and Essex didn't have a contract with one another and Five Star sued Essex for a tort, which in America doesn't allow you to recover attorneys fees, how did Five Star recover its attorneys' fees? 

There's a case called Brandt v. Superior Court here in California that allows just this kind of recovery for the insured - the concept is referred to as "Brandt fees."  There, the court reasoned that because an insurance company is in a fiduciary relationship with its insured, when an insurer wrongly fails to pay a claim and forces that insured to sue it to recover the benefits of the policy, the insured should be placed back in the position the insured was in as if the insurance company paid the claim.  That reasoning requires an insurance company to pay the attorneys fees of the insured in just that situation, like our friend Luis. 

Here, though, there was a slight twist.  It wasn't Luis the insured who sued Essex.  It was Five Star, a third party whose only relationship with the insurance company was a claim against its insured.  Essex wasn't in a fiduciary relationship with Five Star, so it didn't think it owed Five Star any amount of attorneys fees to recover for Luis' claim.  Essex cited to another case that held it owed no such fees to third parties.  Essex really must not have wanted to pay this claim, because it appealed the loss all the way to the Supreme Court.

Essex lost, and lost twice.  It lost in the Court of Appeals and at the Supreme Court level.  Both courts ruled that since Luis assigned his claim to Five Star, Five Star assumed all of Luis' rights, including his right to recover fees against Essex for successfully recovering the underlying claim for the damaged dryer.

Printer friendly page Permalink Email to a friend Posted by J. Craig Williams on Wednesday, July 12, 2006 at 09:55 Comments Closed (1) |
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