Attorneys fees on a DJ

Attorney fee recovery in New York declaratory judgment actions presents complex questions about when prevailing parties can shift litigation costs to insurers. Under the general American Rule, each party bears its own attorney fees unless a statute, contract, or established exception permits fee-shifting. In insurance coverage disputes, courts have recognized a narrow exception allowing certain insureds to recover attorney fees when defending against an insurer’s declaratory judgment action seeking to avoid coverage obligations. This exception derives from the insurer’s contractual duty to defend, which extends to defending against the insurer’s own coverage denial lawsuit.

The First Department’s decision in Hertz Vehicles, LLC v. Cepeda addresses a critical gap in existing precedent: whether medical providers who obtain benefits through assignment can recover attorney fees after successfully defending a declaratory judgment action. While earlier decisions like Fiduciary Insurance Co. v. Medical Diagnostic Services, P.C. established limitations on fee recovery for assignees, Hertz clarifies the underlying rationale and explores the boundaries of the duty-to-defend exception.

Case Background

Hertz Vehs., LLC v Cepeda, 2017 NY Slip Op 08603 (1st Dept. 2017)

The Hertz case arose from a no-fault insurance dispute in which a rental car company filed a declaratory judgment action seeking a determination that it owed no coverage for accident claimants who were passengers in an insured vehicle. The medical provider that had treated the passengers and acquired their rights through assignment defended the declaratory judgment action and prevailed. Following its victory, the provider moved to recover the substantial attorney fees it had incurred defending against Hertz’s coverage denial lawsuit.

The procedural posture placed the court at the intersection of two competing principles. On one hand, the provider had been forced to expend significant resources defending its right to payment for medical services rendered. On the other hand, the provider was not technically an insured under the policy and had acquired its rights only through assignment. The trial court denied fee recovery, and the provider appealed.

Jason Tenenbaum’s Analysis

The question left unanswered in Fiduciary was what happens if the Assignor (or EIP) who succeeds on a DJ is a driver, owner or registered user of the vehicle? The Court here is clear.

“The insured in the circumstances described above may recover attorneys’ fees because “an insurer’s duty to defend an insured 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, 3 NY3d at 597-598).

There is no such duty in this case, as Innovative is not an insured to which Hertz owes a duty to defend. Although Innovative was assigned the claimants’ rights for reimbursement of no-fault benefits, the claimants were only passengers in the insured vehicle at the time of the accident, and were not parties to whom Hertz owed a duty to defend (Fiduciary Ins. Co. Of Am. v Medical Diagnostic Servs., P.C., 150 AD3d 498 citing U.S. Underwriters, 3 NY3d at 597-598).”

The Court is sympathetic to the medical provider who must expend tens of thousands on a New York County DJ action for billing, often times less than $5,000.00. Therefore, an artificial distinction has been made between someone to whom a defense is owed in a third party action and to someone who a duty to defend and indemnify next exists.

I am learning that most states will award reasonable attorneys fees, regardless of who files a lawsuit, when a Claimant prevails in a coverage dispute adjudicated in the Courts. It appears New York is about 25 % of the way there,

Legal Significance

The Hertz decision crystallizes a fundamental distinction in New York insurance law between insureds entitled to a defense and mere assignees of no-fault benefits. The ruling turns on the specific language of automobile insurance policies, which typically obligate insurers to defend the named insured, permissive users, and certain statutorily protected parties. Passengers generally fall outside this duty-to-defend framework, receiving only first-party no-fault benefits rather than liability coverage.

This distinction creates a two-tier system for attorney fee recovery in declaratory judgment actions. When insurers sue drivers, owners, or operators seeking declarations of non-coverage, those insureds can recover defense costs because the duty to defend extends even to defending against the insurer’s own lawsuit. However, when insurers sue to deny benefits to passengers or their assignee medical providers, no fee recovery is available because no duty to defend existed in the first place.

The decision also highlights the economic pressures facing medical providers in no-fault litigation. As Jason Tenenbaum notes, providers may be forced to spend tens of thousands of dollars defending declaratory judgment actions involving relatively small amounts of medical bills. Without fee-shifting, the cost of litigation may exceed the value of the underlying benefits, creating a practical barrier to enforcement of no-fault rights. This asymmetry gives insurers significant leverage in coverage disputes, as they can impose litigation costs that dwarf the amounts in controversy.

Practical Implications

For medical providers and their attorneys, Hertz confirms that fee recovery in declaratory judgment actions depends entirely on whether the original claimant was owed a duty to defend. Providers should carefully assess the status of assignors before accepting assignments or investing resources in declaratory judgment defenses. When claimants are passengers rather than insureds with defense rights, providers must weigh litigation costs against recovery amounts and consider alternative dispute resolution mechanisms.

The decision also underscores strategic considerations in case selection and assignment practices. Providers may wish to prioritize cases where assignors are drivers, owners, or operators entitled to defense coverage, as these cases offer potential fee recovery. Additionally, providers might negotiate fee arrangements that account for the risk of non-recovery in passenger cases or seek contractual provisions addressing defense costs in their assignment agreements.

For insurance companies, Hertz provides a roadmap for limiting fee exposure in declaratory judgment actions. By carefully distinguishing between insureds owed defense duties and mere benefit claimants, insurers can file declaratory judgment actions without triggering fee-shifting obligations. However, this strategy carries reputational risks and may invite legislative or regulatory responses designed to level the playing field for medical providers.

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