4th Circuit Rules Attorney Fees may be included in the Controversy Calculation

Fourth Circuit Rules in Favor of Insurer, Finding Attorney Fees Incurred in DJ Action May Be Considered in Determining Controversy Amount

Calculation of the amount in controversy was at issue in a recent Fourth Circuit ruling. According to the March 2013 opinion in Francis v. Allstate Insurance Co., an insured’s prospective attorney’s fees incurred in the litigation of the declaratory judgment action could be added to the fees the insured incurred defending the underlying lawsuit to achieve the $75,000 amount in controversy federal jurisdictional requirement.

Allstate insured Francis and her minor son through a Renters Policy. In the underlying action, the Francises

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were sued for defamation and related offenses by a resident aide at the Maryland School for the Deaf, which the minor Francis attended. Allstate denied coverage, and the Francises filed this declaratory action in Maryland state court. The Francises spent $66,347 in attorney’s fees defending the defamation suit, ultimately winning summary judgment during the pendency of this declaratory action.  

Allstate removed the declaratory judgment action to federal court.  In a motion to remand, the Francises argued Allstate failed to meet the amount in controversy requirement of $75,000.  The declaratory judgment complaint included as requested relief the cost and expenses to be incurred in the declaratory judgment action, as well as defense costs in the underlying defamation suit.  In the motion to remand, the Francises argued that cost of pursuing declaratory judgment was not a part of the amount of controversy calculation, and even if it was, fact finding would need to be conducted to determine if the costs would exceed the $6,000 gap.

Generally, attorney’s fees are not included in the amount in controversy calculation, although there are two exceptions:  (i) the fees are provided for by contract; and (ii) the fees are mandated or allowed by statute.  Maryland common law provides that an insurer is liable for attorneys’ fees incurred by an insured as a result of breach of the contractual obligation to defend, and this is applicable whether they are incurred in defending the underlying suit or in a declaratory judgment action.  Accordingly, the court concluded that as Maryland law permitted recovery of attorney’s fees, the potential attorney’s fees to be incurred in the declaratory judgment action should be considered in determining whether the amount in controversy exceeded the jurisdictional threshold, affirming the district court’s denial of the Francises’ motion to remand.