Does the multiplied portion of an attorneys’ fee award constitute the “multiplied portion of multiplied damages” such that it is precluded from coverage under a D&O insurance policy? That was the question addressed in a July 16, 2013 decision from the Seventh Circuit. In an interesting opinion from Chief Judge Frank Easterbrook, the appellate court, applying Illinois law, concluded that the multiplied portion of the fee award does not represent multiplied damages and accordingly the entire fee award is within the D&O policy’s coverage.
Amicas agreed to merge with Thoma Brava in a transaction valued at $5.35 per share. Shareholders filed a state court action in Massachusetts objecting to the merger. After the Massachusetts court entered a preliminary injunction stopping the merger vote, the lawsuit settled. Amicas shareholders ultimately received $6.05 per share in the merger transaction, representing a $26 million increase in the value of the transaction.
The Massachusetts lawsuit plaintiffs sought to recover their attorneys’ fees. The Massachusetts judge awarded the plaintiffs’ attorneys fees consisting of a lodestar of $630,000, increased by a multiplier of five. The multiplier represented an adjustment for the risk to the plaintiffs’’ lawyers that they might have recovered nothing and also for the “exceptionally favorable result” for Amicas’ shareholders. The total value of the award after application of the multiplier was $3,150,000.
The D&O insurer for Amicas acknowledged coverage for the lodestar amount, but disputed that its policy covered the multiplied amount of the fee award. In making this argument, the carrier relied on the policy’s definition of the word “Loss” for which the policy provides coverage. The definition states that “Loss shall not include civil or criminal fines or penalties imposed by law, punitive or exemplary damages, the multiplied portion of multiplied damages, taxes, [etc.]”
The carrier filed an action in federal court in Illinois seeking a judicial declaration that the multiplied portion of the fee award represents the “multiplied portion of multiplied damages,” and is therefore not within the policy’s definition of covered loss. Amicas filed a counterclaim against the insurer for its bad faith refusal to pay the multiplied portion of the fee award.
The district court ruled that the D&O insurer owes the full amount of the fee award, but rejected Amicas claim for bad faith. Both sides appealed.
The July 16 Opinion
In a short eight-page opinion written by Chief Judge Easterbrook for a unanimous three-judge panel, the Seventh Circuit, applying Illinois law, affirmed the district court on both issues.
Judge Easterbrook began by noting that the award of attorneys’ fees differs from “damages” and that “nothing in [the] policy defines the word ‘damages’ broadly enough to include attorneys’ fees.” He also noted that the court could not find a decision from any court that addressed the question whether the phrase “multiplied portion of multiplied damages” includes the multiplied portion of an attorney fee award.
Looking at the policy language itself, Judge Easterbrook noted that “the context of the phrase …tells us that treble damages and the like are the target.” The list of items that the definition excludes from the definition of covered loss “covers a category of losses that insurers regularly exclude to curtail moral hazard – the fact that insurance induces the insured to take extra risks.”
However, Judge Easterbrook noted, adversaries attorneys fees “are not remotely like punitive damages, trebled damages, or criminal fines and penalties,” adding that “ a multiplier of hourly rates provides compensation for the attorneys’ risks,” which “does not entail a moral hazard.”
Judge Easterbrook then went on to state that the way that the state court judge had calculated the fee award is irrelevant to whether or not fee award is covered. The state court judge could have, rather than using a multiplier, reached the same fee award amount by simply reckoning it as 12.11% of the shareholders’ gain, in which case, Judge Easterbrook said, “we assume that [the insurer] would not be relying on the exclusion.” He added the observation that “why should it matter that the judge got to the final award using the lodestar method rather than the percentage-of-benefit method?”
Finally, the Court rejected Amicas’ bad faith cross-appeal, finding that “the insurer did what Illinois prefers: it filed a declaratory judgment action to resolve the meaning of the policy.”
The interesting thing about this opinion is that it appears that the parties and the court both assumed that plaintiffs’ fees were covered under the policy; the only dispute was over the amount of the fee award that was covered. This is an interesting context for the dispute because the more common quarrel, at least from a historical perspective, is whether or not there is any coverage at all under a D&O policies for a plaintiffs’ fee award (See a recent post here for a discussion of this issue). This question often arises in the very type of merger objection lawsuit as was involved in the underlying litigation here.
To be sure, the question usually arises where the defendants have agreed to pay the plaintiffs’ fees as part of a settlement of a merger objection suit. In this case, the fee award was the product of an actual court award – although, it should be noted, an award made only after the underlying merger objection case had settled. It is interesting to me that -- at least from the face of the Seventh Circuit’s opinion -- there did not seem to be a dispute on the question whether the policy here provided any coverage for plaintiffs’ fees. (Indeed, Judge Easterbrook says in an opening paragraph of the opinion that the insurer had issued a policy that covered “not only what Amicas and its directors pay their own lawyers, but also what Amicas must pay to its adversaries’ lawyers.”) The only fight here was whether there was coverage for the multiplied portion of the award – not because it involved a fee award, but because it involved a multiplied portion.
I can certainly see how the carrier got to the position it took in the case. If you don’t get hung up on the question whether or not a fee award represents “damages,” the language precluding multiplied damages from the definition of covered loss might well be relevant. However, in the wake of Judge Easterbrook’s opinion, it seems unlikely that any carrier will try to raise the argument again. There is really no room left for a carrier to try to argue that the amount of an attorney fee award represents damages.
In addition, it will be very hard for any carrier to try to argue that the question of whether or not an attorney fee award is covered depends on the method the court uses in determining the size of the award. Whether the court in calculating the amount of a fee award uses a multiplier or a percentage of recovery measure, or some other approach, should not make a difference to the question of whether or not a D&O insurance policy provides coverage for a plaintiffs’ attorneys’ fee award.
There is one contextual issue here that bothers me. And that is that the exclusionary language at issue here was not in the exclusion section of the policy; rather, it was in the policy definitions section of the policy. The language clearly operates like a policy exclusion. Indeed, Judge Easterbrook even referred in his opinion to the specific phrase at issue as “an exclusion.”
I know that the appearance of this language in the definitions section is standard (if not universal). But that is a feature of the standard D&O policy structure that has always bothered me. I think a policyholder ought to be able to look at the policy’s exclusions section and be able to discern from a review of that section what loss the insurer intends to exclude from coverage. Analytically, the definitions section should say what is included within the meaning of the term loss, and the exclusions section should say what is excluded from loss.
Some might think this a mere formality as the policy must be read as a whole in any event. However, one of the recurring concerns I have heard policyholders express over the years about their D&O policy is that they are surprised when they have a claim to find out things that the carrier will say is not covered. One way to try to avoid this problem would be for the policy to say more clearly what the insurer intends to assert is not covered under the policy. A small step to providing this kind of clarity would be to put all of the policy’s exclusionary language in the exclusions section.
I know that the standard D&O policy form, with the presence of this exclusionary language in the definition of Loss, is unlikely to change any time soon. I still think it is worth calling attention to this issue. It is worth thinking about ways to make the policy more transparent to the policyholder. One way to do that is to make sure that all of the exclusionary language is in the exclusions section of the policy.