Attorneys’ Fees Awarded Pursuant to Statute Are Not “Damages”

An Ohio federal court has held that attorneys’ fees awarded under a fee-shifting provision contained in the Individuals with Disabilities Education Act (IDEA) do not constitute covered “damages” under an insurance policy.  Wesco Ins. Co. v. Roderick Linton Belfance LLP, 2018 WL 4510093 (N.D. Ohio Sept. 19, 2018).

A law firm filed due process complaints on behalf of its clients against several school districts.  The school districts filed separate complaints for recovery of fees under the IDEA, which includes a fee-shifting provision.  The law firm tendered the defense of those complaints to its E&O carrier, which denied coverage on the ground that the complaints were not claims seeking “damages.”  The policy at issue defined the term to include “judgments, awards and settlements if negotiated with the assistance and approval of the [insurer].”  The term expressly did not include “sanctions.”

In the ensuing coverage litigation, the court concluded that fees recovered under the IDEA do not constitute “damages” because they are “sanctions.”  According to the court, a sanction is a “penalty or coercive measure that results from failure to comply with a law, rule or order.”  Because fees recovered under the IDEA are awarded only upon a finding that litigation was brought for an improper purpose, the court concluded that those fees are “sanctions.”  Accordingly, the court held that the insurer had no duty to defend or indemnify its insured.