Pennsylvania Superior Court Rules That Attorney’s Fees Are Not Available In A Declaratory Judgment Action Absent Bad Faith

July 2004

BY: WILLIAM J. SCHMIDT AND EDWARD M. KOCH

On June 8, 2004, the Pennsylvania Superior Court issued a reported opinion that clarifies the limited availability of attorney’s fees in declaratory judgment actions in Pennsylvania. In Regis Insurance Co. v. Wood, 2004 WL 124433 (Pa. Super. Jun. 8, 2004) (“Woody’s”), the court denied an insured attorney’s fees for the defense of adeclaratory judgment action initiated by the insurer to determine theapplicability of insurance coverage because the insurer did not act inbad faith in initiating the action. As a result, insurers may filedeclaratory judgment actions where coverage is in reasonable doubtwithout fear that they might have to pay their insured’s attorney’s fees for the defense of the declaratory judgment action.

The Limited Availability of Attorney’s Fees in Pennsylvania

Pennsylvania courts adhere to the “American Rule.” That is, absent an express statutory authorization, a clear agreement by the parties, or some other established exception, attorney’s fees are not available to a successful litigant in a claim under Pennsylvania law.

However, attorney’s fees are available to a successful litigant in limited circumstances. For example, attorney’s fees are available to an insured where the insurer has acted in bad faith with regard to a claim for insurance coverage. Attorney’s fees are also available where an opponent has acted in an arbitrary, dilatory, obdurate or vexatious manner during the litigation – a so-called “Section 2503 claim.” Unsettled prior to Woody’s was the standard for the availability of attorney’s fees in the declaratory judgment context.

The Woody’s Case

The Woody’s case arose out a bar fight in which an injured patron sued Woody’s Bar. Woody’s insurer, Regis Insurance Company, refused to defend Woody’s in the patron’s tort suit due to a recent change in the policy which excluded coverage for assault and battery. Woody’s disputed the applicability of the endorsement. As a result, Regis filed a declaratory judgment action to obtain the court’s guidance on the applicability of the exclusion. Ultimately, the court determined the exclusion did not preclude coverage because Woody’s was not properly notified of the policy change. In accordance with the court’s ruling, Regis paid for Woody’s defense and indemnification costs in the underlying tort action.

But Woody’s was not satisfied. Woody’s then sought from Regis attorney’s fees it incurred in the defense of the declaratory judgment action. In support, Woody’s proposed a variety of theories. Woody’s first argued that the court had authority to award attorney’s fees under the Declaratory Judgment Act because the Act permitted the court to “take such other action as may be required in the interest of justice.” Next, it argued that the court had authority under Section 2503 which permits attorney’s fees as a sanction for arbitrary, dilatory, obdurate, and vexatious conduct. The court rejected both theories.

As to the first theory regarding the court’s supplemental powers in fashioning a declaratory judgment award, the court relied on the 1981 case of Kelmo Enterprises v. Commercial Union Ins., 285 Pa. Super. 13, 426 A.2d 680 (1981). Although the Pennsylvania Bad Faith Act was nearly a decade away from enactment, the Kelmo court in 1981 erected a “bad faith” standard for the award of such fees. The Superior Court in Woody’s held that the bad faith standard announced in Kelmo was the same as the bad faith standard contained in the Pennsylvania Bad Faith Act enacted in 1990. In so holding, the court rejected Woody’s theory that a lesser standard of bad faith applies in this context.

The court also rejected the second theory that attorney’s fees are awardable for arbitrary, dilatory, obdurate, and vexatious conduct. The court noted that “there is no meaningful difference between the stubbornly litigious, unreasonable, and bad faith conduct identified in the Declaratory Judgment Act caselaw, and the arbitrary, vexatious, obdurate, and bad faith conduct identified in Section 2503.” Thus, the court reasoned, the standard is the same. Henceforth, attorney’s fees are only available to the successful declaratory judgment litigation wherethere is a finding of bad faith.

Applying that standard, the court found no indicia of bad faith that would permit an award of attorney’s fees to Woody’s. In fact, the court found the evidence was not entirely clear as tocoverage and thus, Regis’ filing of the declaratory judgmentaction was a “legitimate act to clarify its legal obligations.”

Conclusion

The Superior Court’s decision in Woody’s marks a reaffirmationof the declaratory judgment procedure for insurers inPennsylvania. As a result of the Woody’s decision, insurers mayfile declaratory judgment actions where coverage is in reasonabledoubt without fear that they might have to pay their insured’sattorney’s fees in the defense of the declaratory judgment action.

About the Authors: William J. Schmidt (215-864-6209, schmidtw@whiteandwilliams.com) is a partner in the Property Department of White and Williams LLP who concentrates his practice in the defense of insurers in insurance coverage and bad faith litigation. Edward M. Koch (215-864-6319, koche@whiteandwilliams.com) is an associate in the Appellate Practice Group. Messrs. Schmidt and Koch represented Regis Insurance Company in the Woody’s litigation.