Opinion ID: 1877444
Heading Depth: 1
Heading Rank: 4

Heading: Objections to the Awards of Defense and Litigation Costs

Text: Continental also challenges the jury's award of $1,154,318.50 in defense costs to Domtar, as well as the trial court's order that Continental pay $1,663,674.25 in attorney fees related to the litigation of this action.
We first address Continental's challenges to the award of defense costs. Continental first argues that the trial court erred in concluding that certain investigation and compliance costs incurred by Domtar were defense costs not subject to policy deductibles or liability limits. Because Domtar was admittedly required to incur these costs under the terms of the RFRA, Continental argues that all of these defense expenses were in fact a necessary part of the remediation of the Site and, thus, indemnity costs. Continental cites this court's decision in 3M, 457 N.W.2d at 184, as support for its position. In 3M, this court was confronted with certified questions from the federal district court regarding the scope of coverage under a CGL policy. The insurers in 3M argued that claims for environmental cleanup costs mandated by the MPCA did not fall within the scope of damages covered under CGL policies. Id. at 178. We rejected the insurers' reliance on the distinction between legal and equitable remedies in defining the scope of coverage, and held that costs necessary to effectuate the clean[-]up of environmental contamination were covered damages. Id. at 184. Because two of the certified questions we answered affirmatively in 3M referred to investigation as well as remediation costs, Continental contends that 3M definitively establishes that investigation costs are indemnity damages and not defense costs. See id. at 178 n. 2. We disagree. Our decision in 3M simply did not address the proper classification of investigation costs, but rather addressed the narrow issue of whether government-mandated clean-up costs fall within the scope of CGL policy coverage in the first instance. Domtar contends that its investigation and compliance costs cannot be considered remediation ( i.e., indemnity) costs because at the time of trial the MPCA had yet to select a remedy for the Site. Domtar asserts that it incurred the costs in an attempt to avoid or at least minimize the cost of the remediation. Domtar points to the MPCA's decision  later reversed  declining to name Domtar as a responsible party for the Sediments Operable Unit as evidence that it acted prudently and minimized at least its initial liability, which ultimately would have accrued to the benefit of its insurers. In affirming the trial court's award, the court of appeals found compelling that the expenses [were] incurred to avoid more onerous demands and not alone to comply with regulatory demands. Domtar II, 552 N.W.2d at 751. We likewise consider persuasive the considerable evidence presented at trial indicating that, while Domtar admittedly incurred many of the disputed costs in compliance with the RFRA, the costs served the dual purpose of furthering Domtar's objective of minimizing both the scope and magnitude of its ultimate liability for cleanup costs. In arguments before this court, Continental suggested that only those costs incurred to defeat liability are eligible as defense costs, thus excluding costs incurred by an insured in an attempt to minimize the scope or magnitude of liability. We disagree. We believe the better approach is to allow an insured to receive as defense costs those expenses reasonably necessary either to defeat liability or to minimize the scope or magnitude of such liability. See Aerojet-Gen. Corp. v. Transport Indem. Co., 50 Cal. App.4th 354, ___, 53 Cal.Rptr.2d 398, 408 (concluding that a reasonable defense even for a clearly liable party requires investigative studies necessary to limit damages or the scope of remedial action the party is required to undertake), rev. granted, 57 Cal. Rptr.2d 277, 923 P.2d 766 (1996). Such an approach encourages insureds to accept responsibility for clean-up costs not seriously in dispute without fear that all investigation and compliance costs will thereafter be considered indemnity costs by default. It is axiomatic that in order to establish its right to defense costs, an insured must first meet its burden of establishing that the costs sought were in fact reasonable and necessary to its defense of the action. See Pagett v. Northern Elec. Supply Co., 283 Minn. 228, 236, 167 N.W.2d 58, 64 (1969) (stating that a plaintiff must prove his damages by a fair preponderance of the evidence); see also Fireman's Fund Ins. Cos. v. Ex-Cell-O Corp., 790 F.Supp. 1318, 1338 (E.D.Mich.1992) (concluding that an insured bears the burden of showing investigative studies were necessary and proper to limit the scope or cost of remediation). But if an insured meets this burden at trial, the fact that otherwise allowable defense costs serve the dual purpose of complying with the RFRA does not, in our estimation, render such costs indemnity costs. See, e.g., Hi-Mill Mfg. Co. v. Aetna Cas. & Sur. Co., 884 F.Supp. 1109, 1117 (E.D.Mich.1995), aff'd, 98 F.3d 1341 (6th Cir.1996) (unpublished table decision); Aerojet, 50 Cal.App.4th at ___, 53 Cal.Rptr.2d at 409; General Accident Ins. Co. of Am. v. New Jersey Dep't of Envtl. Protection, 143 N.J. 462, 476, 672 A.2d 1154, 1162 (1996). We therefore conclude that the trial court did not err in determining that the investigation and compliance costs Domtar incurred in an effort to minimize the potentially staggering scope and magnitude of its liability for the Site were defense costs not subject to policy limits under Domtar's CGL policies with Continental. Continental next contends that the trial court improperly held Continental liable for all defense costs even though Domtar is also proceeding against Canadian General. Continental relies on our decision in Jostens, Inc. v. Mission Ins. Co., which provides that when two or more insurers arguably have primary coverage for a claim, each should share equally in the insured's defense costs. 387 N.W.2d 161, 167 (Minn.1986). However, Jostens clearly states that an insured may    recover his costs    from either or both insurers and that only  as between them  are insurers equally liable for such costs. Id. (emphasis added). Continental's remedy, if any, is to seek contribution from Canadian General. Finally, Continental asserts that the trial court erred in awarding Domtar defense costs it incurred prior to tendering the claim to Continental for defense. Although the MPCA sent notice to Domtar of its potential liability on November 28, 1990, Domtar spent several months searching its insurance records and did not tender its defense request until July 2, 1991. The jury awarded Domtar defense costs incurred prior to Domtar's formal tender of the claim. After this court released its decision in SCSC, the trial court amended its award of litigation costs to exclude pre-tender attorney fees. However, the trial court did not similarly amend the jury's award of defense costs. In SCSC, this court stated, Generally    the formal tender of a defense request is a condition precedent to the recovery of attorney fees that a party incurs defending claims   . SCSC, 536 N.W.2d at 316. Domtar argues that the word generally implies that the rule is not to be applied in lock-step fashion. Domtar argues  and the court of appeals agreed  that the award of pre-tender costs was appropriate because of Domtar's diligence in reconstructing its insurance coverage and because Continental presented no evidence that it would have elected to defend had the tender been made earlier. Domtar II, 552 N.W.2d at 752 (noting that Domtar tendered the defense at the earliest feasible time). Continental counters that, under SCSC, the tender of the claim is a clear condition precedent to the duty to defend. Moreover, Continental asserts that pre-tender costs should not be allowed merely because an insurer breaches its duty to defend its insured. The remedy for breach is the benefit of the bargain; to allow Domtar pre-tender costs would go beyond the benefit of the bargain and would also reward Domtar for its lack of foresight in failing to maintain adequate records of its insurance policies. In SCSC, we clearly articulated the general rule that an insured does not invoke its insurer's duty to defend until it properly tenders a defense request. SCSC, 536 N.W.2d at 317. Logically, then, an insurer cannot be held responsible for defense costs incurred prior to the tender of the defense request giving rise to the insurer's duty to defend, the diligence of the insured notwithstanding. While there may be, as we implied in SCSC, circumstances justifying a departure from the general rule, we do not find such compelling circumstances present in this case. Accordingly, we reverse the award of defense costs and remand with instructions that the trial court reduce the award by the amount of defense costs incurred prior to July 2, 1991.
Continental also challenges the amount of litigation-related attorney fees awarded Domtar by the trial court. See Morrison v. Swenson, 274 Minn. 127, 137-38, 142 N.W.2d 640, 647 (1966) (concluding that an insured may recover legal fees incurred in pursuing a declaratory judgment action against an insurer as a direct loss incident to the insurer's breach). First, Continental contends that Domtar was erroneously awarded attorney fees incurred to litigate issues unrelated to Continental. Continental asserts that the trial court erroneously concluded that it was not reasonably possible for Domtar to segregate its attorney billing by defendant or task activity and that the trial court erroneously awarded Domtar attorney fees incurred in unsuccessfully litigating the indemnity issue. Second, Continental contends that the trial court erred in awarding attorney fees exceeding those customarily charged for similar matters by attorneys in Minnesota. When two defendants independently breach separate contracts, and it is not reasonably possible to segregate the damages, the defendants are jointly and severally liable. Lesmeister v. Dilly, 330 N.W.2d 95, 102 (Minn.1983) (citing Northern Petrochem. Co. v. Thorsen & Thorshov, Inc., 297 Minn. 118, 128, 211 N.W.2d 159, 167 (1973)). Continental points to this rule and argues that the trial court erred in concluding that it was not reasonably possible for Domtar to segregate its attorney fee billings on a policy-by-policy or defendant-by-defendant basis. Continental relies on testimony from a post-trial motion hearing in which witnesses for Domtar admitted that in some circumstances it would be possible to segregate billings by activity and opposing party, provided the client requested such billing in advance. Continental also points to Domtar's ability to allocate the fees attributable to its jurisdictional dispute with Canadian General as evidence that a post-billing allocation would be possible and that fees could easily have been segregated at the time of the initial billing. [8] Because Domtar should have anticipated the need for segregated billing, Continental argues, it is unfair to hold Continental liable for fees attributable to claims against defendants dismissed prior to trial. [9] When recovery is allowed under Morrison, we review the award of fees and costs under an abuse of discretion standard. See Morrison, 274 Minn. at 137-38, 142 N.W.2d at 647; see also Blattner v. Forster, 322 N.W.2d 319, 321 (Minn.1982); Romain v. Pebble Creek Partners, 310 N.W.2d 118, 124 (Minn.1981). Domtar contends that the trial court did not abuse its discretion in awarding attorney fees in this case. Domtar argues that the evidence at trial established that it would be impossible to segregate fees because in a declaratory judgment action of this nature many of the legal issues, strategic considerations, factual developments, and discovery practices are common to all defendants. That Domtar was able to segregate attorney fees regarding the discrete issue in Canadian General does not establish that it could similarly segregate its attorney fees in this matter. Finally, Domtar cites the trial court's observation that Continental could have avoided any dispute as to attorney fees had it not wrongfully breached its duty to defend Domtar. See Fireman's Fund Ins. Cos., 790 F.Supp. at 1345 (Had Wausau accepted the tender of defense and retained or appointed counsel to represent the policy-holders, we would not today be struggling with a determination over which attorney[] fees were reasonable and necessary defense costs.). We conclude that the trial court did not abuse its discretion in awarding attorney fees. The hearing testimony established, in short, that while it might have been reasonably possible to segregate billing by activity and defendant at the time of billing, such billing is not typical and was not rendered in this matter. We decline Continental's invitation to retroactively impose upon Domtar an obligation to segregate its billing for attorney fees in a manner that is not typical in such litigation. Moreover, we believe that such detailed billing would be of questionable utility insofar as a declaratory judgment action with multiple defendants involves many common legal issues and considerations that would be difficult, if not impossible, to segregate by individual defendant insurer or policy even at the time the initial bill was rendered. Continental next contends that Domtar should not recover fees incurred for the purpose of litigating the indemnity issue because the jury did not find a breach of the duty to indemnify. We find no merit in this argument. While the legal question of breach of duty to indemnify was not submitted to the jury, the jury resolved factual issues submitted to it in favor of Domtar. Because this was a declaratory judgment action to establish Continental's duty, the fact that no remediation costs were awarded does not mean that Domtar was unsuccessful on the issue, as Continental seems to contend. Continental asserts that fees charged by plaintiff's counsel Paul Zevnik were unreasonable. Mr. Zevnik is a partner in a national insurance coverage litigation practice in Washington, D.C. and billed Domtar between $400 and $475 an hour for his services. Continental contends that because Zevnik's hourly rate exceeds that customarily charged for similar services in Minnesota, it is unreasonable and should be reduced to reflect the fee customarily charged in Minnesota. Under Minn. R. Prof. Conduct 1.5, an attorney's fee must be reasonable. One factor in determining the reasonableness of the fee under Rule 1.5 is the fee customarily charged in the locality for similar legal services. Minn. R. Prof. Conduct 1.5(a)(3). Continental fails to acknowledge, however, that the fee customary for the locality is only one of several factors. Other factors consider the novelty and difficulty of the questions involved and the experience, reputation, and ability of the attorney. Minn. R. Prof. Conduct 1.5(a)(1), (7). Thus, even assuming that Continental is correct in asserting that Rule 1.5 provides the standard for the reasonableness of attorney fees in a breach of duty to defend action, the trial court properly considered these other factors, including Mr. Zevnik's national experience in insurance recovery litigation and his familiarity with the defensive posture and tactics of various insurers, in passing upon the reasonableness of Domtar's request for attorney fees. See Holt v. Swenson, 252 Minn. 510, 517, 90 N.W.2d 724, 728 (1958) (stating that the character, ability, and experience of the attorney, the difficulty of the propositions involved, and the results obtained are among factors in determining the reasonableness of attorney fees). Accordingly, we conclude that the trial court did not abuse its discretion in its award of attorney fees. [10]
We affirm the trial court's conclusions that Continental breached its duty to defend; that the defendants have a duty to indemnify Domtar, excluding self-insured periods; and that no defenses to coverage apply. We reverse the award of defense costs only insofar as it included pre-tender costs, and we remand solely for a factual determination as to the extent of such costs. Affirmed in part, reversed in part, and remanded.