When Insurer Refuses Defense Fees Incurred by Insured Are Presumed to be Reasonable & Necessary

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Insurer Should Consider Defense Under a Reservation Rather than Refuse Defense

Larry Nassar, who was affiliated with nonprofit USA Gymnastics, Inc. (“USAG”), sexually assaulted hundreds of female athletes. After Nassar’s conduct came to light, USAG faced many lawsuits and multiple investigations. USAG and its insurers, including Liberty Insurance Underwriters, Inc., litigated questions about insurance coverage in an adversary proceeding before a bankruptcy court. In a previous appeal, among other rulings, the Seventh Circuit affirmed the decision that Liberty had a duty to defend USAG.

In USA Gymnastics v. Liberty Insurance Underwriters, Inc., No. 21-2914, United States Court of Appeals, Seventh Circuit (August 16, 2022) USAG and Liberty disputed the amount of fees to which USAG was entitled after liability of Liberty to defend was established by the Seventh Circuit.

Right to Reimbursement of Attorneys Fees

The court rejected Liberty’s arguments and concluded that under applicable case law, USAG was entitled to a presumption that the fees incurred were reasonable and necessary. 

Presumption that Attorneys’ Fees are Reasonable & Necessary

The market-tested presumption applies when, following an insurer’s breach of the duty to defend, a policyholder has supervised and incurred legal fees without any expectation of payment by the insurer. Payment by the policyholder is not necessarily required. But if the policyholder does pay a significant percentage of its fees-particularly when it has difficulty covering its day-to-day operating expenses-that is strong evidence of market incentives to economize, rendering the presumption applicable.

USAG was bankrupt and lacked money to spare. Therefore, the judgment was affirmed.

ZALMA OPINION

As the Seventh Circuit concluded the insured – in bankruptcy – did not have money available to pay excessive fees and presumed what they paid and what they were unable to pay were reasonable and necessary and Liberty must reimburse USAG for those fees. If Liberty defended under a reservation of rights it could control the fees and if it was found to have no coverage it could get reimbursement from the insured from whatever assets available from the bankruptcy court. Liberty gambled it was right and lost and must pay the fees charged to USAG.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, is available at http://www.zalma.com and [email protected].

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