Nuances of procedure can make a big difference in coverage disputes. In Danaher Corp. v. Travelers Indemnity Corp., No. 10 Civ. 0121(JPO)(JCF) (S.D.N.Y. Jan. 31, 2013), Travelers was required to pay the attorneys’ fees its insured had incurred filing a summary judgment motion in a case against Travelers. The ruling was not based on any impropriety in the insurer’s opposition to the motion, but rather, on the fact that Travelers had chosen to bring the insured into the case under Federal Rule 14 (as a third-party defendant), rather than Rule 19 (as a necessary party). By proceeding in this way, the court held, Travelers inadvertently ran afoul of New York’s dreaded Mighty Midgets rule. But the court’s opinion also leaves room for doubt that there was anything Travelers could have done to get out of the Midgets’ way.
The plaintiff in the case, Danaher Corporation, acquired a company called Chicago Pneumatic Tool Co. in 1986 and sold it to Atlas Copco North America the following year. Under the terms of the sale, Danaher retained liability for products manufactured by Chicago Pneumatic before June 1987. When a number of silica- and asbestos-exposure claims were asserted against Chicago Pneumatic, Danaher brought a declaratory judgment action against several insurers, seeking defense and indemnification for the claims affecting Danaher.
Travelers, which had issued primary CGL policies to Chicago Pneumatic, was one of the defendants in Danaher’s action. Travelers counterclaimed against Danaher, seeking a declaration of its rights and obligations under the CGL policies and an allocation of defense expenses and indemnity payments. The counterclaim was based on a dispute “between Travelers and Chicago Pneumatic as to the scope and extent of insurance coverage available to Danaher and/or Chicago Pneumatic.” But the claim was also presented as a third-party claim (under Fed. R. Civ. P. 14) against “Atlas Copco . . . as successor to Chicago Pneumatic.”
Danaher and Atlas Copco both moved for partial summary judgment with respect to Travelers’s duty to defend the underlying actions. The court granted Atlas Copco’s motion, finding that the company “stands in the shoes of Chicago Pneumatic and is the insured” under the Travelers policies. Atlas Copco then brought a second motion for partial summary judgment, seeking the attorneys’ fees it incurred in connection with its earlier motion.
The basis for the second motion was a “narrow exception” to the American rule against recovery of attorneys’ fees—a rule created by New York’s Court of Appeals in Mighty Midgets, Inc. v. Centennial Ins. Co., 416 N.Y.S.2d 559 (N.Y. 1979). The Mighty Midgets rule permits recovery of attorney’s fees from an insurer, where the insured “has been cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations.” As the Court of Appeals subsequently explained, the rule is premised on the proposition that “an insurer’s duty to defend . . . extends to the defense of any action arising out of the occurrence, including a defense against an insurer’s declaratory judgment action.” U.S. Underwriters Ins. Co. v. City Club Hotel, LLC, 3 N.Y.3d 592, 597-98 (2004).
In opposition to the motion, Travelers argued that it had not “cast” Atlas Copco “in a defensive posture.” That is, it was Danaher that initiated the litigation by bringing a DJ action against Travelers; Travelers’s counterclaim essentially duplicated the one filed by Danaher. And Atlas Copco (Travelers asserted) was a necessary plaintiff in Danaher’s suit, under Fed. R. Civ. P. 19. Rule 19 mandates joinder of any person that “claims an interest relating to the subject matter of the action,” and whose absence from the case might leave an existing party subject to the risk of incurring “double, multiple. or otherwise inconsistent obligations.” Travelers position, in other words, was that Atlas Copco would have had to join the case sooner or later, and the fact that it had been brought in as a third-party defendant, rather than a co-plaintiff with Danaher, was merely fortuitous.
The court rejected that argument, on the ground that it is not “necessary to engage in counterfactual gymnastics” to apply the Mighty Midgets rule: “Put simply, Travelers impleaded Atlas Copco as a third-party defendant, and no unusual circumstances justify ignoring this fact.” The court did not dispute Travelers’s contention that Atlas Copco could have been joined under Rule 19. But what was dispositive, in the court’s reasoning, was the fact that Travelers “cho[se] instead to implead Atlas Copco under Rule 14.” That choice rendered the possibility of Rule 19 joinder “not only hypothetical, but also irrelevant.”
At first blush, this case appears to present a cautionary tale about fully exploring an insurer’s procedural options and understanding the possible ramifications of each choice. And that certainly is what lawyers should do. But if Travelers had proceeded under Rule 19, rather than by impleader, the result might well have been the same. The court also noted that having Atlas Copco joined as a “necessary plaintiff” would not necessarily mean that it “should be treated as if it filed ‘an affirmative action . . . to settle its rights.’”
It appears, then, that the Danaher action actually presented Travelers with a Hobson’s choice: either leave Atlas Copco out of the case, and thereby run the risk of facing inconsistent obligations to Atlas Copco and Danaher, or bring Atlas Copco in (either through Rule 14 or Rule 19), and thereby incur the wrath of the Mighty Midgets.
