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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowAn insurance company that balked at representing USA Gymnastics against lawsuits stemming from Larry Nassar’s sexual abuse of hundreds of female athletes has failed in its challenge to an order that it pay significant fees to the Indianapolis-based athletic organization.
In February, the 7th Circuit Court of Appeals held that Liberty Insurance Underwriters Inc. had a duty to defend USAG against nearly all the athlete lawsuits involving Nassar. It also found that the congressional, U.S. Olympic & Paralympic Committee, and state-level investigations were “formal proceedings” or “formal investigations” for which coverage exists under the insurance policy.
The appellate court remanded for further factfinding on the question of whether the policy’s “Third Party EPL” sublimit restricted the scope of coverage.
While the first appeal was pending, the parties continued to dispute and litigate issues concerning payment. The Indiana Southern District Court, upholding a bankruptcy court ruling, ultimately entered final judgment for USAG in the amount of roughly $2.1 million plus prejudgment interest.
Liberty appealed and moved to approve a supersedeas bond and stay execution on the judgment. That motion was granted and the execution of judgment was stayed pending the 7th Circuit’s mandate in the case at hand.
Days before oral argument, Liberty made a $1.6 million payment toward the judgment, leaving roughly $458,472.26 up for debate.
As for that remaining amount, the 7th circuit concluded in USA Gymnastics v. Liberty Insurance Underwriters, Inc., 21-2914, that the insurance company would still have to pay up.
The appellate court first addressed the parties’ arguments about presumption, noting that the market-tested presumption applies when, following an insurer’s breach of the duty to defend, a policyholder has supervised and incurred legal fees without any expectation of payment by the insurer.
“Payment by the policyholder is not necessarily required,” Judge Michael Brennan wrote in a Tuesday opinion. “This is because, as here, the policyholder may lack sufficient funds to pay fees that are reasonable and necessary to its defense. But if the policyholder does pay a significant percentage of its fees — particularly when it has difficulty covering its day-to-day operating expenses — that is strong evidence of market incentives to economize, rendering the presumption applicable.
“It is undisputed that USAG paid nearly 70 percent of the attorneys’ fees for which it now seeks reimbursement,” Brennan continued. “That is compelling evidence of a market test. This element of the (Thomson Inc. v. Ins. Co. of N. Am., 11 N.E.3d 982 (Ind. Ct. App. 2014)) presumption supports, rather than contradicts, the bankruptcy and district courts’ conclusions that the fees USAG claimed are presumed to be reasonable and necessary.”
Discussing three special circumstances that Liberty argued rendered Thomson inapplicable, the 7th Circuit began with an alleged conflict of interest with USAG’s chief legal officer, C.J. Schneider, who was also an attorney with a law firm that served as outside counsel for USAG.
“Despite Liberty’s contentions, the governing case law does not hold or suggest that the presumption is inapplicable when there is an apparent conflict of interest,” it wrote. “To the contrary, an insurer’s objections to a policyholder’s selection of defense counsel lose force when the insurer disclaims its duty to defend and turns out to be wrong on the law.”
It also noted that the lower court was aware of Schneider’s dual role and concluded USAG’s practices were nevertheless sufficient to support the Thomson presumption’s application.
It further pointed to the bankruptcy court’s conclusion that the entire amount USAG claimed for Gibson Dunn & Crutcher LLP’s work was reasonable and necessary. That factual finding, the appellate court concluded, posed a “high hurdle” for Liberty in seeking to overturn it.
The 7th Circuit also agreed with the bankruptcy court that there is no dispute that USAG was bankrupt and lacked money to spare. As such, the National Gymnastics Foundation’s grants to USAG do not preclude application of the Thomson presumption.
Turning to Liberty’s assertion that the bankruptcy and district courts clearly erred in finding the Thomson presumption was not rebutted, the 7th Circuit acknowledged the deference it owes. It cited trial courts as being “better equipped to adjudicate factual matters and fine details,” particularly in litigation about attorney fees.
In assessing the expert testimony offered in determining whether the fees USAG incurred were reasonable and necessary, the 7th Circuit affirmed that attorney Gene Schoon’s “total value” approach for USAG was more appropriate under Indiana law than the approach presented by attorney Brand Cooper on behalf of Liberty.
“Schoon applied the total-value approach required under (Indiana Rule of Professional Conduct 1.5) and Thomson, while Cooper applied an approach erroneous under Indiana law,” Brennan wrote. “So, the bankruptcy and district courts properly applied Indiana law in crediting Schoon’s analytical framework rather than Cooper’s.”
Finally, in reviewing Liberty’s challenges to the trial courts’ factual findings, the 7th Circuit found it unnecessary to scrutinize individual line items.
“In adjudicating this fee dispute, the bankruptcy court concluded that the Thomson presumption applied despite Liberty’s challenges to the nature of USAG’s supervision of outside counsel and the proportion of fees paid by USAG,” the appellate panel concluded. “That ruling adhered to both Thomson and the Seventh Circuit authority it adopted. The particular form of supervision for which Liberty advocates is not a prerequisite for the presumption that attorneys’ fees are reasonable and necessary, and neither is the policyholder’s full payment of all the fees it incurred.
“The special circumstances that Liberty identifies also do not categorically preclude the presumption’s application. Rather, the bankruptcy and district courts were within their discretion to conclude it applied, subject to limited exceptions. Finally, Liberty failed to rebut the presumption by showing any portion of the fees was not reasonable and necessary.”
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