In a highly unusual decision, Judge Shirley Kornreich in Madison 96th Associates v. 17th East Owners Corporation, 43 Misc.3d 1210(A), denied an attorney-fee award to a prevailing plaintiff-insured in a declaratory judgment action but encouraged the insured to appeal her decision. In ruling as she did, the court followed the well-known and long-standing "Mighty Midgets" rule where a prevailing insured commencing an affirmative action against its insurer is not entitled to recover the costs of the DJ whereas a prevailing insured who is "cast in a defensive position" by its insurer is entitled to recover the DJ costs. Mighty Midgets v. Centennial Ins. Co., 47 N.Y.2d 12 (1979).
In her decision, Kornreich stated that "[o]ver the years, countless insureds have sought to challenge the rule-which creates a perverse incentive because allowing fees under these circumstances would create an incentive for the insurer to refuse to defend in the underlying suit, thereby leaving it up to the insured to bring a declaratory action seeking coverage."
The Judge also stated that "[t]here is the potential that insurers might shrink from their defense obligations under their policies and categorically deny their insureds' tenders of defense in an effort to reduce their financial exposure, without risk of incurring any additional liabilities or expenses associated with issuing and maintaining policies." Here, the court ignores the reality that an insurer wrongfully disclaims at its peril because it cannot then challenge the merits of the underlying case and must also reimburse the insured for its underlying defense costs, plus statutory interest at 9% from when the costs were incurred.
The insured in Kornreich's case argued that Mighty Midgets should be expanded to include affirmative actions by insureds based on the claimed trend in New York expanding the recovery against insurers for bad-faith denials of coverage in two decisions by the Court of Appeals:Bi-Economy Market v. Harleysville Ins. Co. of NY, 10 N.Y.3d 187 (2008) and Panasia Estates v. Hudson Ins. Co., 10 N.Y.3d 187 (2008.). There, the Court allowed consequential extra-contractual damages in the first-party property context.
Kornreich rejected that argument on the ground it had not been raised in the complaint but nonetheless expressed her support for the insured's position, stating: "even absent bad faith, public policy strongly militates in favor of forcing [the insurer] to pay the DJ fees . . . The court encourages [the insured] to appeal this decision so its counsel can find out if its purported foresight is correct or if the penumbras of Bi-Economy and Panasia are illusory."
It seems unlikely that the New York Court of Appeals would change the Mighty Midgets rule based on the bad-faith rationales in its first-party property cases. Moreover, one thing that the Court of Appeals recent K-2 Investment decisions demonstrate is the Court's view of the importance of abiding by its precedents. (In K-2, the Court changed its mind when the losing party advised the Court on reargument that it had overlooked its prior 30-year-old Servidone decision.)
That being said, however, the Court's insurance coverage decisions over the last ten years, including notably its decision in Lang v. Hanover Insurance Co., 3 N.Y.3d 350 (2004)., have often seemed to be driven by a view that public policy favors decisions that will encourage insurers to err on the side of both affording coverage and, when in doubt commencing a DJ action. Hopefully, when the issue is briefed on appeal, the briefing will not be such that it causes the court to stray into and adversely impact New York's existing bad faith law.