(Article from Insurance Law Alert, September 2026)
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Holding
A federal district court in New York granted an insured’s motion for attorney’s fees incurred in successfully defending a declaratory judgment action brought by its excess insurer. The court held that, under New York’s “Mighty Midgets” doctrine, the insured could recover its fees where the excess insurer’s duty to defend was “looming” and “likely to be triggered.” GuideOne Nat’l Ins. Co. v. Sys. 2000 Plumbing Serv., Inc., 2026 U.S. Dist. LEXIS 195589 (S.D.N.Y. Aug. 31, 2026).
Background
Systems 2000 Plumbing Service, Inc. (“Systems 2000”) was insured under a $2 million primary policy issued by Travelers and a $4 million “follow form” excess policy issued by GuideOne. After a 2021 fire at an apartment building where Systems 2000 was performing work replacing valves, Travelers voluntarily reformed its policy to remove a residential exclusion. GuideOne declined to follow Travelers’ reformation, maintaining that it had no obligation under its excess policy to cover the resulting claims.
GuideOne subsequently brought a declaratory judgment action seeking a determination that it had no obligation to defend or indemnify Systems 2000. Following a bench trial, the court ruled in favor of Systems 2000 on mutual mistake and illusory contract grounds. Systems 2000 then moved to recover the attorney’s fees it had incurred in the coverage action.
Decision
The United States District Court for the Southern District of New York granted Systems 2000’s motion for attorney’s fees under New York’s “Mighty Midgets” doctrine, which permits an insured to recover fees under certain circumstances when “cast in a defensive posture by the legal steps an insurer takes in an effort to free itself from its policy obligations.” Mighty Midgets, Inc. v. Centennial Ins. Co., 47 N.Y.2d 12, 389 N.E.2d 1080, 1085 (N.Y. 1979). The court addressed the Second Circuit’s decision in Liberty Surplus Ins. Corp. v. Segal Co., 420 F.3d 65 (2d Cir. 2005), which reasoned that an excess insurer ordinarily should not be responsible for an insured’s fees where its contingent duty to defend has not been triggered. The court found that Liberty Surplus left open the possibility of fee recovery where the excess insurer’s duty to defend has not yet been triggered, but “likely will be,” and the insurer brings a declaratory judgment action to avoid that “looming” obligation.
The court found that GuideOne’s duty to defend fell within that scenario. The underlying claims exceeded $15 million—more than seven times the $2 million primary limit—and prelitigation correspondence suggested that GuideOne understood that the loss was likely to exceed the primary coverage before it commenced the declaratory judgment action. The court therefore concluded that GuideOne’s duty to defend was “looming” and “likely” to be triggered.
In determining how the New York Court of Appeals would resolve this question, the court relied on RLI Ins. Co. v. Smiedala, 77 A.D.3d 1293 (4th Dep’t 2010). There, the Fourth Department held that an excess insurer was not insulated from fee-shifting merely because its duty to defend had not yet been triggered, reasoning that the insured nevertheless had been placed in a defensive posture by the insurer’s attempt to avoid its policy obligations. Based on RLI Ins. Co., the court predicted that New York courts would permit fee recovery where an insured successfully defends itself against a declaratory judgment action brought by an excess insurer concerning the insurer’s looming, likely-to-be-triggered duty to defend.
Comments
The general rule recognized by the Second Circuit in Liberty Surplus is that an excess insurer whose duty to defend has not been triggered is not responsible for the insured’s fees in coverage litigation. The GuideOne decision identifies a narrow exception. The result turned on the court’s finding that circumstances indicated exhaustion of the primary coverage—and thus GuideOne’s defense obligation—was not merely possible but likely. The decision therefore underscores the importance of evaluating the underlying exposure and exhaustion picture when an excess insurer considers pursuing declaratory relief against an insured.
The GuideOne decision also highlights the different standards governing the two potential bases for fee shifting under New York law. The court did not reach the insured’s alternative argument that a fee award was proper because GuideOne acted in bad faith in denying coverage. The court nevertheless expressed skepticism about that argument, observing that the complex coverage dispute reflected an “arguable difference of opinion” between insurer and insured.