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Resolving an attorney fee issue that had split federal and state trial courts, the Court of Appeals Thursday held that fees are available where an insurer disclaiming coverage nonetheless provides a defense to its insured. U.S. Underwriters Insurance Co. v. City Club Hotel came to Albany via the 2nd U.S. Circuit Court of Appeals, which sought clarification of New York law. The matter stemmed from a federal suit involving a construction accident in April 2000. Court records show that a worker was hurt while renovating a West 44th Street building owned by Shelby Realty where the City Club Hotel was a tenant. U.S. Underwriters Insurance Co. had issued a general liability policy to City Club and Shelby. Construction worker Marek Szpakowski fell from the scaffold and was injured during a time the policy was in effect. About five months after receiving notice of claim, the insurance company disclaimed coverage of Shelby and City Club based on an exclusion in the policy. It brought suit in U.S. District Court seeking a declaratory judgment that it had no duty to defend. At the same time, however, it defended Shelby Realty in a personal injury action. The federal trial court said the insurer did have a duty to defend, but it denied the insured’s application for attorney fees and other costs it incurred defending itself against Underwriters declaratory judgment action. The federal appellate court agreed that Underwriters had a duty to defend, but said it was unclear as a matter of state law whether the defendants were entitled to counsel fees. Previously, the court had held that an insured who prevails in a declaratory judgment action where an insurance carrier denies a duty to defend is entitled to attorney fees. Thursday, the court for the first time extended that rule to instances in which the insurer disclaiming coverage actually defends its insured. “Given that the expenses incurred by Shelby in defending against the declaratory judgment action arose as a direct consequence of U.S. Underwriters’ unsuccessful attempt to free itself of its policy obligations, Shelby is entitled to recover those expenses from the insurer,” Judge George Bundy Smith wrote for a unanimous court. “In other words, Shelby’s recovery of attorney fees is incidental to the insurer’s contractual duty to defend.” Mark J. Bunim of Bryan Cave in Manhattan argued for the insureds. Steven Verveniotis of Miranda & Sokoloff in Mineola appeared for the insurance company.

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