A federal court in New York has held that an insurer carries the burden of demonstrating which, if any, defense costs should be allocated to the defense of non-covered entities. High Point Design, LLC v. LM Ins. Co., No. 14-cv-7878, 2016 WL 426594 (S.D.N.Y. Feb. 3, 2016). The court ruled that once the policyholder established that amounts were spent defending covered claims, the burden shifts to the insurer to show that certain of those amounts resulted from the defense of other claims against non-covered entities. To meet that burden, the insurer was required to show that the relevant costs would not have been incurred but for the non-covered claims.
The case involved attorneys’ fees that High Point Design paid in an underlying patent litigation. There, High Point sued Buyer’s Direct over use of a patent. Buyer’s Direct countersued High Point and brought certain retailers into the suit. High Point and the retailers used the same law firm to defend the patent litigation.
High Point was an insured under various policies issued by Liberty Mutual companies but the retailers were not. The Liberty Mutual policies afforded a defense to High Point without regard for any non-covered claim, or non-covered co-defendants. Liberty argued, however, that it could apportion defense costs among covered and non-covered defendants. The court was left to determine, therefore, how to apportion attorneys’ fees between the covered claims against High Point and the non-covered claims against the retailers.
The court resolved the issue by ruling that, after High Point established that it had paid amounts for attorneys’ fees in the patent litigation, the burden shifted to the insurers to show which part of those amounts, if any, related to the non-covered claims against the retailers. The court stated it would, therefore, require the insurers, to demonstrate that the amounts they claimed the policies did not cover “would not have been incurred but for” the presence of the retailers in the patent litigation. This inquiry, the court explained, amounts to “a substantial fact issue,” which the court would resolve after additional submissions from the parties.