In the case of R.D. Offutt Co. v. Lexington Ins. Co., 494 F.3d 668 (8th Cir. 2007), the Eighth Circuit Court of Appeals affirmed the award of an insured attorney fees, even though the insured was unsuccessful in its bad faith claim against the insurance company. The decision arose from the insured’s breach of contract and bad faith denial of coverage action against Lexington Insurance Company. The insured made a claim against the insurance company for payment of expenses incurred due to switchgear failure at a water pumping station used to irrigate the insured’s land that was leased to tenant farmers.
Regarding the award of attorneys’ fees to the insured, Lexington argued:
[T]he North Dakota statute’s language is couched in discretionary terms and thus an award of attorney fees is not mandatory. Because Lexington lacked bad faith in its denial of Offutt’s coverage, it says it would be inappropriate to award Offutt fees.
The Federal Court applied North Dakota state law to the dispute. The Court looked to law from the North Dakota Supreme Court, which did not hold that the absence of bad faith is relevant to an award of fees to an insured. In Western National Mutual Insurance Co. v. University of North Dakota, 643 N.W.2d 4 (N.D. 2002), the jury found that the insurer had not acted in bad faith by denying coverage; this finding was not challenged on appeal, and the insured was awarded fees.
More fundamentally, the supreme court has based its decisions in this area on the principle that insureds should be made whole, not on a desire to deter bad acts by insurers. As the court has stated, “When the insured gets … policy protection only by court order after litigating coverage, it is both ‘necessary’ and ‘proper’ to award attorney fees and costs to give the insured the full benefit of his insurance contract.” [citation omitted] This principle applies even if an insurer denies coverage in good faith, since even a good faith denial that leads to litigation forces the insured to spend money litigating the issue of coverage. Moreover, the district court was careful not to award Offutt fees for time spent litigating the unsuccessful bad faith claim.
Based on this reasoning, the Eighth Circuit Court of Appeals determined that the District Court did not abuse its discretion in awarding fees to the insured.
Please consider that the outcome in this case was based on North Dakota statutory and case law. It is important to keep in mind that the law in other jurisdictions may vary.