Opinion ID: 1506273
Heading Depth: 1
Heading Rank: 5

Heading: Whether ANI's policies cover the defense costs incurred in this action.

Text: Cross-appellants, Hittman and Chem-Nuclear, (position also adopted by Commonwealth) argue the Court of Appeals erred in enforcing the provision contained in both the Facility and S & T policies which includes (or offsets) defense costs within the policies limits. The insureds also argue they are entitled to recover their attorney's fees incurred in the declaration action brought by cross-appellees, ANI. The Facility and S & T Forms of the Nuclear Energy Liability Policy both contain the following expense offset provision, titled: Limit of Liability: Termination of Policy Upon Exhaustion of Limit, which states, in part: the limit of the companies' liability stated in the declarations is the total liability of the companies for their obligations under this policy and the expenses incurred by the companies in connection with such obligations, including ... payments for expenses incurred in ... defense of any claim or suit, including ... attorneys' fees and disbursements.... Each payment made by the companies in discharge of their obligations under this policy or for expenses incurred in connection with such obligations shall reduce by the amount of such payment the limit of the companies' liability under this policy. Regarding offset of the defense costs, the Court of Appeals reasoned absent a finding of bad faith on the part of an insurer, a breach of its obligation to defend the insureds does not provide for a rewriting of the policy contract to award the insured more coverage than it purchased. We disagree with the Court of Appeal's reading of the contract. It is the Opinion of this Court that all of the cross-appellants' Maxey Flats defense costs are now damages to be paid by cross-appellees, ANI; Not payments made directly by ANI in discharge of their obligations under this policy or for expenses incurred in connection with such obligations.... We are not disposed to expand the meaning of payments made in discharge of their obligations under the policy, or expenses incurred in connection with such obligations to include payment of damages under compulsion. Anyway one reads the contested policy language, it requires voluntary payments by the companies in furtherance of the contractual obligations under the policy; not litigated damages for failure to honor the policy terms. If ANI had paid attorneys' fees and expenses in defense of the insureds in the EPA CERCLA action, they would be entitled to offset such payments for expenses incurred in defense of any claim or suit as their policies directly provide. However, this policy language does not encompass damages paid, or to be paid for a breach of the contract. As argued by cross-appellants and supported by Kentucky law, an insurer has a duty to defend if there is any allegation which potentially, possibly or might come within the coverage terms of the insurance policy. James Graham Brown Foundation v. St. Paul Fire & Marine Insurance Co., 814 S.W.2d 273, 279 (Ky.1991)(internal citations omitted). If the insurer believes there is no coverage, it has several options. One is to defend the claim anyway, while preserving by a reservation of rights letter its right to challenge the coverage at a later date. Another is to elect not to defend. However, should coverage be found, the insurer will be liable for all damages naturally flowing from the failure to provide a defense. See Eskridge v. Educator and Executive Insurers, Inc., 677 S.W.2d 887 (Ky.1984). This includes damages for reimbursement of defense costs and expenses if the insured hires his own lawyer, and in some instances, the amount of a default judgment, if he does not. cf., Grimes v. Nationwide Mutual Insurance Company, 705 S.W.2d 926 (Ky. App.1985). In line with the reasoning of Eskridge and Grimes , we find the defense costs expended by cross-appellants in the CERCLA action, for which ANI owed a duty to defend, are damages to be paid them, and even though measured by the cost of such defense as owed, are not deductible, or to be offset, from ANI's liability policy limits. We note also that should this Court have determined a lack of coverage existed regarding the EPA proceeding, ANI would still have owed a duty to defend the insureds in the EPA action, because we believe the EPA's Potentially Responsible Parties notice letter contained allegations which potentially, possibly or might be considered to indicate property damage within ANI policies' scope of coverage. Therefore, ANI owed a duty to defend, regardless of whether they were later adjudicated to owe a duty to pay. We also agree with cross-appellants' argument that if ANI were allowed to invoke the above quoted provision from their liability policy, they would not suffer any adverse consequences as a result of their breach of duty to defend. There would be no incentive to review the contractual language carefully, as there would be no consequences. Therefore, public policy is another incentive to find in favor of the Cross-Appellants on this issue. An insurer should not stand to gain from its denial to defend its insured. The second sub-issue regarding attorneys' fees involves the insureds' claim that the Court of Appeals erred in refusing to allow them recovery of their attorneys' fees incurred in the declaratory judgment action initiated by ANI. With this contention, we cannot agree. The Court of Appeals correctly stated the general rule in Kentucky that, with the exception of a specific contractual provision allowing for recovery of attorneys' fees or a fee-shifting statute, ... each party assumes responsibility for his or her own attorneys' fees, citing Nucor Corp. v. General Electric Co., 812 S.W.2d 136 (Ky. 1991). We are still in agreement with the holding in Nucor , and therefore, affirm the Court of Appeal's decision not to allow cross-appellants recovery of their attorneys' fees in the declaratory judgment action.