By Donald Snemis, Ice Miller LLP; Chris Kozak, Plews Shadley Racher & Braun LLP; Chelsey Lang, IU McKinney
Recently, the U.S. Court of Appeals for the Seventh Circuit issued an opinion ordering Liberty Insurance Underwriters, Inc. to pay defense costs incurred by USA Gymnastics, Inc. related to lawsuits and investigations arising from the conduct of Larry Nassar, who used his position with USAG to sexually assault numerous female athletes. USA Gymnastics v. Liberty Ins. Underwriters, Inc., No. 1:18-cv-01306-RLY-MPB (7th Cir., Aug. 16, 2022). This decision could be important to environmental attorneys involved in insurance coverage issues.
In an earlier case, the Seventh Circuit held that Liberty had a duty to defend USAG. Liberty continued to refuse to pay USAG’s attorney’s fees, so USAG sought to enforce the order in bankruptcy court. Both the bankruptcy court and the U.S. District Court for the Southern District of Indiana found for USAG and ordered Liberty to pay USAG’s fees.
On appeal, the Seventh Circuit held that when an insurer breaches its duty to defend, and the policyholder secures, supervises, and pays for a defense without any expectation of payment, there is a presumption that the fees are reasonable and necessary. As this was a case grounded in diversity jurisdiction, the Seventh Circuit relied heavily upon the Indiana Court of Appeals’ opinion in Thomson Inc. v. Ins. Co. of N. Am. 11 N.E.3d 982, 1023-24, 1031 (Ind. Ct. App. 2014), a case where the policyholder was seeking reimbursement for defense costs incurred while defending itself in a toxic-tort class action.
The Seventh Circuit rejected Liberty’s claim that the presumption should not apply because USAG did not adequately supervise its outside counsel or require write offs of fees. Nothing in the case law requires that level of scrutiny. The court also rejected Liberty’s claim that the Thomson presumption was inapplicable because USAG had not paid about 30% of the fees it incurred. Payment of 70% of the fees was sufficient to demonstrate that the fee amount was market tested, reasonable, and necessary. The Court also highlighted that the policyholder must only incur the fees before they were presumed reasonable, not that it must always pay them before the presumption applied.
The court accepted Liberty’s argument that the Thomson presumption should not apply to a firm retained by USAG that agreed to seek reimbursement only from USAG’s insurers, and not USAG itself. However, the Seventh Circuit ordered those fees paid anyway, as there was adequate independent evidence that the fees were reasonable and necessary. Further, the court rejected Liberty’s claim that the presumption should not apply because USAG accepted grant funds from the National Gymnastics Foundation, thus disincentivizing USAG from closely monitoring its fees.
Ultimately, the Seventh Circuit affirmed the lower court’s finding that Liberty failed to overcome the Thompson presumption and ordered Liberty to pay the entire judgment against it. In doing so, the court favored the “total value” approach used by USAG’s expert to measure the reasonableness and necessity of attorney’s fees, which requires the consideration of time spent as well as the novelty, difficulty, skill, experience, reputation, and ability of the lawyers retained. The court rejected the “task-based” approach used by Liberty’s expert, which focused only on the time spent for each task and the customary rate.
Environmental attorneys often represent clients who are being compelled to investigate and remediate sites by private plaintiffs or regulatory agencies. Most states, including Indiana, characterize “site investigations” and similar matters as part of the policyholder’s “defense” against a plaintiff’s or regulator’s claims. The logic of those decisions is that identifying the nature and extent of any contamination is crucial to either avoiding liability or shifting part of it to another entity under the ELA or CERCLA. That process is highly technical and can be very expensive. Insurers—even insurers who refuse to defend—often resist these costs or discount large portions of them as “unreasonable.” The USA Gymnastics decision makes it clear that where the insurer refuses to defend against these environmental matters, it faces steep hurdles to denying payment once coverage is shown. Although not itself an environmental case, environmental clients can use the threat of the presumption applied in USA Gymnastics to persuade their insurers to defend them in high-stakes environmental cases.
If you would like to submit content or write an article for the Environmental Law Section, please email Deneen Fitzgerald at dfitzgerald@indybar.org.
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