Massachusetts Federal Court Holds Defense Costs Must Be Reasonably Allocated Between Insured and Non-Insured Parties
A Massachusetts federal court, applying Massachusetts law, has held that the allocation of legal fees between two corporations is determined based on what reasonably would have been negotiated had each party in the joint defense paid its own legal fees. Lionbridge Techs., LLC v. Valley Forge Ins. Co., 2023 WL 5985288 (D. Mass. Sept. 14, 2023).
The insured is a language translation and localization company. A non-insured entered into a bidding process to acquire a foreclosed entity through a court-ordered sale. Under the impression that the non-insured’s bid was used as a pretext to obtain more information for the competitive advantage of the insured, the foreclosed entity sued the insured and the non-insured alleging misappropriation of trade secrets, unfair competition, and unjust enrichment, while solely suing the non-insured for breach of a confidentiality agreement and fraud. The insurer was notified and accepted the tender of the defense under a reservation of rights.
The policy’s insuring clause provided, in relevant part, the insurer “will pay those sums that [the insured] becomes legally obligated to pay as damages because of personal and advertising injury to which this insurance applies. [The insurer] will have the right and duty to defend [insured] against any suit seeking those damages.” The policy included no provision addressing the allocation of loss when a claim is made against parties insured under the policy and parties that are not insured.
In the ensuing coverage litigation, the policyholder moved for summary judgment, arguing that the insurer should pay all defense costs. The court cited Watts Water Technologies., Inc. v. Fireman’s Fund Insurance Co. for the proposition that an insurer is responsible for all work on behalf of the insured. However, the court observed, an insurer should not be forced to pay the entire defense bill of the insured and non-insured, but rather “assess the reasonableness of the allocation of legal fees between” the insured and the non-insured co-defendant “in the view of all surrounding circumstances.” 2007 WL 2083769, at *11 (Mass. Super. Ct. July 11, 2007). The court concluded that it was reasonable for it to decide allocation in accordance with Watts Water and held that it was only fair to consider “the allocation that reasonably would have been negotiated had each party in the joint defense paid its own legal fees.” Id. The court also noted that the insurer could also seek contribution from the non-insured and its insurers. The court reserved the issue of what the allocation ought to be between the parties to allow the parties an opportunity to present evidence on fees.