1The Honorable James M. Rosenbaum, United States District Judge for the

District of Minnesota.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 97-4367

___________

Chicago Title Insurance Company, *

a Missouri Corporation, *

*

Appellant, *

* Appeal from the United States

v. * District Court for the District

* of Minnesota.

Federal Deposit Insurance Corporation, *

*

Appellee. *

___________

Submitted: December 16, 1998

Filed: April 5, 1999

___________

Before BEAM, FLOYD R. GIBSON, and LOKEN, Circuit Judges.

___________

BEAM, Circuit Judge.

Chicago Title Insurance Company (Chicago Title) appeals the grant of attorneys'

fees and costs in favor of the Federal Deposit Insurance Corporation (the FDIC). The

district court1 granted the FDIC's motion for attorneys' fees and costs because Chicago

Title breached its contractual duty to defend its insured—the FDIC. Chicago Title

argues that there was no breach. We affirm and remand.
2Originally, the mortgage was transferred to the Murray Federal Savings & Loan

Association with the Resolution Trust Corporation acting as receiver. The FDIC is

now acting as receiver and holds the mortgage and title insurance policy. For

simplicity, the actions of the receiver will simply be referred to as those by the FDIC,

although in some instances, the actions were taken by the Resolution Trust

Corporation.

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I. BACKGROUND

In 1987, Murray Savings Association (Murray), provided a loan for the

construction of an apartment building. As security for the loan, Murray took a

mortgage on the apartment building and property. Murray also obtained a title

insurance policy, issued by Chicago Title, that insured, among other things, the priority

of the mortgage. The title insurance policy required that Chicago Title provide a

defense, "at its own cost and without undue delay," for any claims covered by the

policy. Construction of the apartment building began, but the builder eventually

experienced financial difficulties and abandoned the unfinished project. Murray also

fell upon hard times and was declared insolvent. Murray was placed in receivership,

and a real estate development company was retained to complete the project. The

mortgage, along with the title insurance policy, was assigned to the FDIC as receiver.2

Beginning in 1989, a series of legal proceedings were commenced to foreclose

mechanics' liens filed against the apartment property for work done on the project

(hereinafter the lien actions). The lien actions asserted that the mechanics' liens had

priority over the mortgage. On the belief that the title insurance policy covered

mechanics' liens and thereby required Chicago Title to defend against the lien actions,

the FDIC tendered the defense to Chicago Title. A defense was requested for the first

time in May 1989, but was promptly refused by Chicago Title. The FDIC retained

independent counsel to defend against the lien actions but persisted in seeking a

defense from Chicago Title. Chicago Title finally accepted the tender of defense for

all the lien actions in April 1991, subject to a reservation of rights. Chicago Title

agreed to defend the FDIC but reserved the right to dispute whether the insurance
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policy provided coverage for the mechanics' liens. The reservation of rights on

coverage created a conflict of interest for Chicago Title in providing the defense, thus

it agreed that the FDIC would defend against the lien actions, and Chicago Title would

reimburse FDIC for the attorneys' fees and costs incurred. 

The FDIC paid their counsel for defense fees and costs, and sought

reimbursement for the first time in August 1991. Chicago Title informed the FDIC that

the requested fees and costs were unreasonably high and refused to pay any amount.

Settlement negotiations between the parties to the lien actions were then underway.

Because insurance coverage was uncertain, Chicago Title also participated with the

FDIC in the settlement negotiations. In September 1991, a settlement was reached with

the FDIC and Chicago Title each contributing one-half of the $498,000 agreed upon

amount. After the settlement, the FDIC submitted its final attorneys' fees and costs,

amounting to $280,584.06, to Chicago Title. Chicago Title deemed the requested sum

to be unreasonably high and again refused to pay any amount. 

Chicago Title brought this declaratory judgment action to recover the amount it

had contributed to the settlement ($249,000) from the FDIC. Chicago Title alleged that

the title insurance policy did not cover the mechanics' liens that were the subject of the

lien actions. The FDIC counterclaimed for the amount it had contributed towards the

settlement and the fees and costs it incurred in defending against the lien actions. On

appeal from the results of a jury trial, we concluded that the title insurance policy

covered the mechanics' liens. See Chicago Title Ins. Co. v. Resolution Trust Corp., 53

F.3d 899, 903 & 908 (8th Cir. 1995). Consistent with the title insurance policy, we

affirmed the jury's express finding that Chicago Title owed a contractual duty to defend

the FDIC in the lien actions. We then remanded to the district court. The district court

referred the matter to a special master, for a determination of reasonable attorneys' fees

and costs required to defend the FDIC. The district court reduced the FDIC's requested

fees and costs from $280,584.06 to an amount it considered reasonable—$197,559.54.

Ordinarily, when the coverage issue is concluded, that is the end of the matter.

However, the FDIC filed a motion to recover the $434,384.24 in fees and costs it had
3Chicago Title would have us review de novo the legal question of whether a

failure to pay an unreasonable amount of attorneys' fees constitutes a breach of the duty

to defend. We do not reach this issue, as the subsequent analysis will demonstrate,

because Chicago Title failed to pay what it considered to be a reasonable sum.

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expended in this declaratory judgment action. The FDIC argued that because Chicago

Title had not reimbursed the FDIC for defense fees and costs until forced to do so by

the district court, that this refusal to pay was a breach of the duty to defend which, in

turn, authorized an award of attorneys' fees and costs in this litigation. The district

court concluded that, because Chicago Title had breached its duty to defend the FDIC

in the lien actions, Chicago Title should be liable for the fees and costs required to

enforce that duty. However, the district court reduced the requested amount by 30%

and awarded $304,068.97. Chicago Title appeals.

II. DISCUSSION

Chicago Title argues on appeal that it did not breach a duty to defend the FDIC

in the lien actions because it accepted the tender of defense and only refused to

reimburse the FDIC for excessive and unreasonable charges. In contrast, the FDIC

argues that the refusal to pay attorneys' fees and costs was a breach of the contractual

duty to defend, thereby authorizing the award of fees and costs in this declaratory

judgment action. Applying Minnesota law, which the parties agree controls, see

Chicago Title, 53 F.3d at 904, we review questions of fact under the "clearly

erroneous" standard and conclusions of law de novo.3 Fed. R. Civ. P. 52(a) (review

of factual findings); see Hawkins Chem., Inc. v. Westchester Fire Ins. Co., 159 F.3d

348, 352 (8th Cir. 1998) (de novo review for legal questions).

The general rule is that attorneys' fees and costs are awarded only when

authorized by statute or provided for in the contract. See Rent-A-Scooter, Inc. v.

Universal Underwriters Ins. Co., 173 N.W.2d 9, 12 (Minn. 1969). While the title
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insurance policy required Chicago Title to pay attorneys' fees and costs in the lien

actions, it did not authorize fees and costs for this declaratory judgment action.

However, a limited exception to the general rule was developed in Morrison v.

Swenson, 142 N.W.2d 640, 647 (Minn. 1966). The exception provides that attorneys'

fees and costs can be awarded when an "insurer has breached the insurance contract

in some respect." American Standard Ins. Co. v. Le, 551 N.W.2d 923, 927 (Minn.

1996). One such breach of the insurance contract is a breach of the duty to defend.

See Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 737-38 (Minn. 1997).

There is no question that Chicago Title had a duty to defend the FDIC against

the lien actions. "'That is, the insured has a contract right to have actions against him

defended by the insurer, at its expense.'" Security Mut. Cas. Co. v. Luthi, 226 N.W.2d

878, 884 (Minn. 1975) (quoting 7C John Alan Appleman, Insurance Law and Practice

§ 4691, at 283 (Walter F. Berdal rev. 1979)). The title insurance policy provides, as

indicated, that for covered claims, Chicago Title "at its own cost and without undue

delay, shall provide for the defense of an insured." Appellee's Appendix at 41. And,

as noted, the jury expressly found, and we affirmed, a duty to defend. The only

question remaining is whether Chicago Title breached that duty.

A breach of the contractual duty to defend usually occurs by "wrongfully

refusing to defend the insured." Le, 551 N.W.2d at 927. This does not mean that the

insurer cannot contest coverage. If an insurer faithfully fulfills its duty to defend its

insured and also brings a declaratory judgment action to determine insurance coverage,

then there will be no breach of the duty to defend. See id. Thus, in a scenario where

the insurer fulfills its duty to defend and also contests coverage, the insured is not

entitled to attorneys' fees and costs in the declaratory judgment 
4The reservation of rights document reserved "the right to seek reimbursement

for defense costs advanced" to the FDIC in the event that the mechanics' liens were not

covered by the title insurance policy. Appellant's appendix at 33 (letter explaining

Chicago Title's acceptance of the tender of defense and reservation of rights). A right

of reimbursement would not have arisen since the jury found that Chicago Title had a

duty to defend. See Knapp v. Commonwealth Land Title Ins. Co., 932 F. Supp. 1169,

1171-72 (D. Minn. 1996).

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action to determine coverage. Attorneys' fees and costs are only awarded for the

declaratory judgment action if there was a breach of the duty to defend in the

underlying litigation. See id. 

Chicago Title refused the tender of defense in the lien actions for nearly two

years, then grudgingly accepted the tender with an extensive reservation of rights that

continued to deny that Chicago Title had a duty to defend or that the title insurance

policy covered the mechanics' liens.4 When a conflict of interest such as this arises—

accepting the tender of defense while denying coverage—the duty to defend transforms

into a "duty to reimburse [the FDIC] for reasonable attorneys' fees incurred in

defending the lawsuit." Prahm v. Rupp Constr. Co., 277 N.W.2d 389, 391 (Minn.

1979). Therefore, Chicago Title authorized reimbursement for "all action [deemed]

necessary to defend such claims." Appellee's Appendix at 71. This would have

fulfilled Chicago Title's duty to defend, but Chicago Title then refused to pay any

amount of the invoices for attorneys' fees and costs because it considered the requested

amount unreasonable.

Chicago Title argues that the law, as stated in Prahm, only imposes a duty to

reimburse for "reasonable" attorneys' fees. Prahm, 277 N.W.2d at 391 (emphasis

added). That is true. However, the district court found that at least $80,000 to

$120,000 of the invoices were not disputed by Chicago Title as unreasonable, and

Chicago Title did not pay or, apparently, even offer to pay a portion of them. In

Minnesota, the duty to defend is read broadly. See Brown v. State Auto. & Cas.

Underwriters, 293 N.W.2d 822, 825 (Minn. 1980). For example, it requires insurers
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to defend an entire action and not just "to the extent of [the insurer's] own interests in

the litigation." Mannheimer Bros. v. Kansas Cas. & Sur. Co., 184 N.W. 189, 190

(Minn. 1921). Furthermore, payment of the undisputed amount is consistent with the

Minnesota policy of "encouraging insurance companies to properly meet their duty to

defend [the] insured against third party claims and minimize unnecessary claims to

enforce policy coverage." Knapp v. Commonwealth Land Title Ins. Co., 932 F. Supp.

1169, 1172 (D. Minn. 1996).

Our opinion in Continental Casualty Co. v. Employers Commercial Union

Insurance Co., 476 F.2d 782 (8th Cir. 1973), provides a useful analogy in this case.

In Continental, two insurance companies were disputing which one was obligated to

the insured and therefore had a duty to defend. The Continental court stated that one

of the insurance companies should have defended the suit and then subsequently taken

up legal action to determine which company had the obligations. See id. at 784.

Chicago Title had a duty to defend the FDIC by providing the defense or

reimbursing the defense fees and costs. Despite Chicago Title's nominal acceptance

of the duty, the FDIC was in fact required to defend itself in the lien actions. Chicago

Title was then forced by litigation to reimburse the defense costs. This is a breach of

the duty to defend. See Brown, 293 N.W.2d at 826. When a breach of the duty to

defend occurs, the insured "is entitled to be reimbursed for attorneys fees and costs

expended" to force the insurer to pay for the defense. Independent Sch. Dist. No. 697

v. St. Paul Fire and Marine Ins. Co., 515 N.W.2d 576, 581 (Minn. 1994). Pursuant to

the finding of breach, the FDIC requested $434,384.24 in attorneys' fees and costs for

litigating this declaratory judgment action. The district court reduced that amount by

30% to $304,068.97. We affirm the district court's discretionary reduction. See

Domtar, 563 N.W.2d at 740-41. We also think it is appropriate to further reduce the

award by $23,100, equaling 70% of the time expended to establish the reasonableness

of the lien action fees before the special master. Appellee's Appendix at 59. This
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amount should not be recoverable since the sole purpose of the hearing was to establish

the reasonableness of the fees, which fees were found to have been unreasonably high.

Chicago Title's argument that it is relieved from its breach because the FDIC

claimed an unreasonable amount of attorneys' fees and costs—relying on the implied

covenant of good faith and fair dealing—is of no avail. It does not, in any event, vitiate

the duty to pay at least what Chicago Title itself considered an unquestionably

reasonable amount. Cf. Gopher, 588 N.W.2d at 770 (concluding that "an insurer's

ability to dispute the reasonableness of attorney fees is diminished when it has

improperly declined a tender of defense").

III. CONCLUSION

For the foregoing reasons, we affirm the district court's grant of attorneys' fees

and costs resulting from Chicago Title's breach of its duty to defend. We remand to the

district court to award $280,968.97 in fees and costs.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.