The decision whether or not to enforce one’s rights under an insurance policy by suing an insurance company can be a difficult one for a policyholder. The decision-making process usually occurs after a policyholder has already suffered the one-two punch of sustaining some type of financial loss (e.g., repairing damaged property or incurring defense costs), and then receiving a related denial of coverage from an insurer.
Understandably, adding the cost of hiring an attorney to challenge an insurer’s denial can often dissuade a policyholder from pursuing his or her claim. Many times, however, hiring an attorney to initiate a coverage action against an insurer is a policyholder’s only option. Not surprisingly, policyholders often ask whether they will be able to recover the attorney fees and costs incurred in any such action from the insurer. Unfortunately for Connecticut policyholders, the answer is, generally no.
Connecticut follows the American Rule, whereby the prevailing party in litigation is not entitled to recover attorney fees incurred during the course of such litigation, absent a contractual or statutory exception. See ACMAT Corp. v. Greater New York Mutual Insurance Co., 282 Conn. 576 (2007). Unlike some other contracts, it would be surprising to see an insurance policy with a contractual exception to the American Rule entitling a party to recover attorney’s fees in litigation.
Moreover, as it stands now, Connecticut has no statutory exception entitling a policyholder to recover attorney fees in a straight breach of contract, or declaratory judgment, action against an insurer. In most cases, a policyholder must fund the pursuit of their claim without the possibility of reimbursement of attorney fees, and to the extent the policyholder is successful in such pursuit, they will have still sustained a net financial loss.
Connecticut does recognize one limited exception to the American Rule. The ACMAT ruling notes that a policyholder may be awarded attorney fees “if the policyholder can prove that the insurer has engaged in bad faith conduct prior to or in the course of the litigation.” This exception is hardly a cure-all for most policyholders, as it requires an insurer to do something more than just simply deny a claim. “Bad faith means more than mere negligence; it involves a dishonest purpose.” Capstone Building Corp. v. American Motorists Insurance Co., 308 Conn. 760, 795 (2013).
The Connecticut Unfair Trade Practices Act (CUTPA), Connecticut General Statutes § 42–110a et seq., provides a statutory basis for the recovery of attorney fees from an insurer. Similar to the common law exception to the American Rule regarding bad faith, however, this statutory basis is limited. To recover attorney fees under CUTPA, a policyholder must show a violation by an insurer of certain enumerated offenses under the Connecticut Unfair Insurance Practices Act (CUIPA), Connecticut General Statutes § 38a–815 et seq., and any such violation must constitute a general business practice of the insurer. See Lees v. Middlesex Insurance Co., 229 Conn. 842, 849 (1994). (“In requiring proof that the insurer has engaged in unfair claim settlement practices with such frequency as to indicate a general business practice, the legislature has manifested a clear intent to exempt from coverage under CUIPA isolated instances of insurer misconduct.”)
While Connecticut affords some relief to policyholders, allowing for the recovery of attorney fees under certain limited circumstances, other states provide a greater entitlement to attorney fees. In some states, for example, courts have carved out an exception for policyholders who prevail in a coverage action involving an insurer’s failure to defend a policyholder under a liability policy. See Wilkinson v. Citation Insurance Co., 447 Mass. 663 (2006); Mighty Midgets Inc. v. Centennial Insurance Co., 47 N.Y.2d 12 (1979) (but only when the insurer commences the coverage action). Some states have statutes which afford more expansive rights to policyholders regarding the recovery of attorney fees. Policyholders in Florida enjoy one of the most favorable of these statutes, whereby attorney fees are allowed in almost all circumstances, regardless of the type of insurance policy involved or the particular conduct of an insurer. See Fla. Stat. § 627.428.
There is little reason to believe that any additional judicially-created exceptions to the American Rule will occur in Connecticut. Accordingly, policyholders will need to rely on future action of Connecticut’s legislative body in order to gain the absolute right to recover attorney fees in insurance coverage litigation.
One would think that insurers and policyholders alike support some level of protection for policyholders regarding certain potential actions of insurers. The disagreement, however, seemingly lies in the level and severity of any such protections (e.g., requiring bad faith or a general business practice, or limiting awards of attorney fees to only certain types of policies or claims).
Insurers would argue that the “bad faith” exception to the American Rule, as well as CUTPA and CUIPA, are sufficient protections for a Connecticut policyholder when an insurer denies a claim. Insurers would further argue that they should be allowed to make mistakes when adjusting claims, or reasonably challenge the existence of coverage or the applicability of policy exclusions, without being exposed to extra-contractual damages.
On the other hand, policyholders are less likely to pursue a claim without an assurance that they can recover the out-of-pocket expenses incurred in a successful challenge of an insurer’s denial of coverage. This is especially so with respect to smaller insurance claims, when the cost to pursue the claim might exceed the amount of the claim itself. Therefore, policyholders would argue that they should be entitled to recover attorney fees, because this is the only way in which a policyholder can be made whole when an insurer has wrongfully denied coverage.•