UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

John Wallace et al.

v. Civil No. 18-cv-747-LM Opinion No.

Nautilus Insurance Company

O R D E R

John Wallace and Elizabeth Trase (“plaintiffs”) hired

McPhail Roofing, LLC (“McPhail”) to replace the roofs on both of

their houses. Shortly after McPhail finished construction,

plaintiffs noticed that the roofs were leaking, and eventually

replaced the roofs. Plaintiffs subsequently commenced an

arbitration proceeding against McPhail, and were awarded the

cost of replacing the roofs, compensation for the damage done to

their property by the leaking, and attorneys’ fees and expenses.

Nautilus Insurance Company (“Nautilus”), McPhail’s

commercial general liability insurer, defended McPhail in the

arbitration. Nautilus paid plaintiffs on McPhail’s behalf

roughly 10% of the arbitrator’s award, which included

compensation for the damage to plaintiffs’ houses and property

caused by the leaking, such as landscaping damages, repainting,

and attic cleaning and reinsulation. In addition, Nautilus paid

expenses and fees plaintiffs incurred in pursuing the arbitration, including expert witness fees and pre- and post-

judgment interest. Nautilus asserted, however, that its

insurance policy with McPhail did not cover the cost of

replacing the roofs or plaintiffs’ attorneys’ fees, and it

refused to indemnify McPhail for those amounts.

After McPhail declared bankruptcy, plaintiffs brought this

action against Nautilus, seeking a declaration that the unpaid

portion of the arbitrator’s award is covered by McPhail’s

insurance policy with Nautilus. See N.H. Rev. Stat. Ann.

(“RSA”) 491:22.

The court granted the parties’ joint request to resolve

this case on a stipulated record. The parties have submitted

cross-motions for judgment on the stipulated record and, on May

16, 2019, the court heard oral argument.1

At the May 16 hearing, Nautilus requested the opportunity

to file a supplemental memorandum addressing issues the court

raised during oral argument. The court granted that request and

the parties submitted supplemental memoranda. See doc. nos. 22

& 23. The court has considered the memoranda in resolving the

parties’ motions.

1 The parties filed briefs in support of their respective positions, rather than motions for judgment on the stipulated record. See doc. nos. 14 & 16. For the sake of clarity, the court construes the parties’ briefs as cross-motions for judgment on the stipulated record.

2 BACKGROUND

Plaintiffs own adjoining houses on Quarry Road in Yarmouth,

Maine. In 2015, plaintiffs determined that the cedar shingle

roofing on both their houses was deteriorating. In September

2015, plaintiffs entered into separate contracts with McPhail to

replace the roofs on their houses. Both contracts called for

McPhail to install “LifePine” roofs.

McPhail used subcontractors to complete the work and

finished the roof replacements in the fall of 2015. In November

2015, after McPhail installed the roofs, both plaintiffs noticed

several issues with their roofs, both aesthetically and

otherwise.2 The plaintiffs withheld roughly a third of the

agreed-upon contract price from the final payments due to

McPhail under the contracts.

Plaintiffs contacted LifePine’s owner, who referred them to

Robert Fulmer, a roofing consultant in New Hampshire who the

owner described as an expert in LifePine roofs. In January

2016, Fulmer conducted a detailed inspection of the roofs and

found evidence of water leaking through both roofs during

rainstorms. According to Fulmer, improper installation of the

2 For example, although not detailed in the parties’ motions, the stipulated record shows that plaintiffs noticed issues with the “ridge cap installation” that did “not appear to allow proper ventilation” and a two-inch “reveal” in one course of the “shakes” at Wallace’s house. Doc. no. 14-1 at 2.

3 shakes on the roofs allowed rain to seep through to the roof

decks (the plywood underneath the roofs) and eventually into the

houses. Fulmer opined that the only way to cure the

installation defects was to remove and replace the roofs

entirely. Plaintiffs took Fulmer’s advice and replaced both

roofs, using another contractor.

Plaintiffs and McPhail were unable to resolve their dispute

and proceeded to arbitration. Plaintiffs sought compensation

for the damage caused by the leaking and for the replacement

cost of the roofs. McPhail sought the remaining payment due

under the parties’ contracts. Nautilus, with whom McPhail held

a general commercial liability policy (the “Policy”), defended

McPhail in the proceeding.

On June 29, 2017, the arbitrator issued an award, finding

that McPhail had failed to properly install the roofs in

accordance with the manufacturer’s instructions and applicable

building codes. He further found that the remedy of removing

and replacing the roofs was reasonable.

The arbitrator awarded Wallace $140,053.50 and Trase

$160,065.62 against McPhail. At the parties’ request, the

arbitrator itemized the award of damages for each plaintiff.

For Wallace, the arbitrator awarded damages for the replacement

roof without shingles, the shingles themselves, attic cleaning,

4 attic reinsulation, and repainting. For Trase, the arbitrator

awarded damages for the replacement roof without shingles, the

shingles themselves, and damage to her landscaping.

In addition, the parties stipulated that the arbitrator

must award attorneys’ fees and expenses to the substantially

prevailing party. Because the parties could not agree on the

amounts, the arbitrator issued a Supplemental Decision on March

29, 2018. He awarded plaintiffs $176,898.95, broken down

separately into awards for attorneys’ fees, expert witness fees,

and other expenses, plus additional compensation for pre- and

post-judgment interest. On May 10, 2018, the District of Maine

entered a judgment confirming the arbitration awards against

McPhail. Wallace & Trase v. Notinger as Ch. 7 Bankr. Trustee

for McPhail Roofing, LLC, No. 2:18-cv-00188, Dkt. No. 4 (D. Me.

May 10, 2018).

Nautilus promptly paid plaintiffs on McPhail’s behalf what

it determined was covered under the Policy. Specifically,

Nautilus paid Wallace $14,961.70, which represented the itemized

damages in the arbitrator’s award for attic cleaning and

reinsulation, as well as repainting, and $25,910.24 in expert

witness fees and expenses. Nautilus paid Trase $873.63, which

represented the itemized damages to her landscaping, and

$24,566.32 in expert witness fees and expenses. Nautilus

5 refused to pay the remainder of the arbitrator’s award,

including the cost of replacing the roofs and the award of

attorneys’ fees.

Following McPhail’s declaration of bankruptcy, plaintiffs

obtained an assignment of McPhail’s claims against Nautilus. In

re McPhail Roofing, LLC, No. 17-11305-MAF, Dkt. No. 99 (Bankr.

D.N.H. Aug. 22, 2018). This action followed.

STANDARD OF REVIEW

Under New Hampshire law,3 in “‘a declaratory judgment action

to determine the coverage of an insurance policy, the burden of

proof is always on the insurer, regardless of which party brings

the petition.’” Mass. Bay Ins. Co. v. Am. Healthcare Servs.

Ass’n,

(2017) (quoting Cogswell Farm Condo.

Ass’n v. Tower Grp., Inc.,

(2015)); see RSA

491:22-a (2010). “The interpretation of insurance policy

language is a question of law for this court to decide.”

3 The parties agree that New Hampshire law applies to their dispute because New Hampshire bears the most significant relationship to the Policy, as McPhail is a New Hampshire company and Nautilus and McPhail entered into the agreement in the state. See Consol. Mut. Ins. Co. v. Radio Foods Corp.,

(1968) (holding that “in the absence of an express choice of law validly made by the parties, the contract is to be governed, both as to validity and performance, by the law of the State with which the contract has its most significant relationship”).

6 Cogswell Farm,

(quotation omitted). The court

first looks “to the plain and ordinary meaning of the policy’s

words in context, and . . . construe[s] the terms of the policy

as would a reasonable person in the position of the insured

based on more than a casual reading of the policy as a whole.”

(quotation omitted). “If more than one reasonable

interpretation is possible, and an interpretation provides

coverage, the policy contains an ambiguity and will be construed

against the insurer.”

DISCUSSION

The parties’ dispute requires the court to answer two

questions: First, does the Policy require Nautilus to indemnify

McPhail, and therefore provide payment to plaintiffs, for the

cost of removing and replacing plaintiffs’ roofs? Second, does

the Policy require Nautilus to pay plaintiffs’ attorneys’ fees

incurred in the arbitration? The court addresses each question

in turn.

I. Coverage for Cost of Replacement Roofs

Nautilus contends that it does not have a duty to indemnify

McPhail for the cost of removing and replacing plaintiffs’ roofs

for two reasons. It argues: 1) the loss is outside the scope of

7 the Policy’s coverage; and 2) even if some portion of the loss

is within the Policy’s coverage, the loss is excluded by one or

more Policy exclusions. Plaintiffs dispute both arguments.

A. Scope of Coverage

The Policy at issue in this case is a standard commercial

general liability (“CGL”) policy, the language of which has been

subject to litigation in several jurisdictions for many years.

Under the Policy, Nautilus agreed to “pay those sums that the

insured becomes legally obligated to pay as damages because of

‘bodily injury’ or ‘property damage’ to which this insurance

applies.” Doc. no. 14-3 at 11. The Policy applies only if the

“‘bodily injury’ or ‘property damage’ is caused by an

‘occurrence’ that takes place in the ‘coverage territory.’”

Finally, the Policy defines an “occurrence” as “an accident,

including continuous or repeated exposure to substantially the

same general harmful conditions.” Id. at 24.

1. Occurrence

Nautilus contends that under New Hampshire law, the cost to

replace defective workmanship—here, the roofs themselves—is not

covered under the Policy because defective workmanship is not an

occurrence. In support of its position, Nautilus relies

8 primarily on Weedo v. Stone-E-Brick, Inc.,

(1979), a

New Jersey Supreme Court case which has been cited often in

various jurisdictions. Weedo holds that a standard CGL policy

does not cover the cost to make good on faulty workmanship

absent property damage or bodily injury. Although, as Nautilus

concedes, Weedo has never been cited by a New Hampshire state

court, New Hampshire law is consistent with its holding. See

Hull v. Berkshire Mut. Ins. Co.,

(1981)

(holding that plaintiffs’ claim was not covered by a standard

CGL policy because “they allege no bodily injury or property

damage . . . [or] damages caused by an accident” and instead had

alleged only “a claim for money damages for the builder’s

defective work”); see also McAllister v. Peerless Ins. Co.,

(1984) (holding that “defective work, standing

alone, did not result from an occurrence, and indeed was not

property damaged within the meaning of the policy”).

Plaintiffs do not dispute that New Hampshire law holds that

defective workmanship alone is not an occurrence under the

Policy’s language. They argue, however, that the occurrence for

purposes of the Policy in this case is not the defective

workmanship itself, but rather the leaking caused by the

defective roofs, which resulted in property damage. The court

agrees.

9 In High Country Assocs. v. N.H. Ins. Co.,

(1994), the New Hampshire Supreme Court addressed the issue of

what constitutes an “occurrence” for purposes of a standard CGL

policy. The plaintiffs brought an underlying suit against a

construction company that had built several condominium units.

The plaintiffs alleged that the company’s negligent construction

“resulted in substantial moisture seepage into the buildings,

causing mildew and rotting of the walls, and loss of structural

integrity.”

. The construction company held a

standard CGL policy with the defendant insurer, and the

plaintiffs brought a declaratory judgment action against the

insurer seeking indemnification under the policy. The superior

court granted the insurer’s motion for summary judgment, holding

that the allegations of damage in the underlying suit did not

constitute an occurrence as defined in the CGL policy.

The New Hampshire Supreme Court reversed, holding that the

plaintiffs had alleged an occurrence: the “actual damage to the

buildings caused by exposure to water seeping into the walls

that resulted from the negligent construction methods of High

Country Associates.”

. The court added:

the property damage described in the amended writ, caused by continuous exposure to moisture through leaky walls, is not simply a claim for the contractor’s defective work. Instead, the plaintiff in the underlying suit alleged negligent construction

10 that resulted in property damage, rather than merely negligent construction as in Hull and McAllister.

As in High Country, there was an occurrence here—water

leaking through the poorly constructed roofs. Indeed, prior to

this lawsuit, Nautilus recognized that there was an occurrence,

because it agreed that the damage to Wallace’s attic and Trase’s

landscaping was covered under the Policy and compensated

plaintiffs accordingly. Thus, despite Nautilus’ assertion to

the contrary, as in High Country, this case deals with

“negligent construction that resulted in an occurrence, rather

than an occurrence of alleged negligent construction.”

.

2. Damages because of property damage

The fact that there was an occurrence that caused property

damage, however, does not end the court’s inquiry. The Policy

provides that Nautilus is obligated to pay the “sums that the

insured becomes legally obligated to pay as damages because of

‘bodily injury’ or ‘property damage’ to which this insurance

applies.” Doc. no. 14-3 at 11 (emphasis added). Thus, the

relevant question is whether the cost of removing and replacing

the roofs is considered damages because of plaintiffs’ property

damage.

11 Nautilus argues that this cost is not damages because of

property damage under the Policy. It relies generally on cases

that provide that the cost of repairing and replacing faulty

workmanship is not compensable under a standard CGL policy, and

notes that plaintiffs offer no case law that supports their

broad interpretation of the Policy’s language.

In response, plaintiffs offer two arguments in favor of

coverage. First, they assert that in both houses, the roof

decks—the sheets of plywood underneath the roofs themselves—

were damaged by the water leaking from the inadequately

constructed roofs. They contend that the roof decks are

property and that, therefore, damage to the roof decks

constitutes property damage caused by an occurrence. Plaintiffs

further argue that the physical damage to the roof decks could

not be repaired without removing the roofs and that, as such,

the cost of removing and replacing the roofs is covered under

the Policy.4 Second, they contend that the damages for the roof

replacement costs are “causally linked” to the leaking and are

therefore damages incurred “because of” property damage under

the Policy.

4 Such damages—the cost of removing and replacing undamaged property in order to replace damaged property—are often referred to as “rip-and-tear” damages.

12 a. Rip-and-tear damages

The arbitrator found that plaintiffs’ houses had

experienced water infiltration caused by McPhail’s failure to

install the roofs as required by LifePine’s Roofing Installation

Instructions and that the installation failed to comply with

applicable building codes. He further found that because of

these defects, there was water intrusion in Wallace’s attic and

the roof decks on both houses, and damage to Trase’s

landscaping.

Plaintiffs assert that because the roof decks, which

constitute their property, are directly underneath the roofs,

the physical damage to the roof decks could not be repaired

without removing the roofs themselves. They contend that as

such, they are entitled to recover the cost of removing and

replacing the roofs.

No New Hampshire case has addressed the question of whether

so-called “rip-and-tear” damages are covered under a standard

CGL policy. Case law from other jurisdictions, however,

supports the principle that such damages fall within the scope

of coverage of such policies. See Carithers v. Mid-Continent

Cas. Co.,

(11th Cir. 2015) (affirming

district court’s holding that cost of replacing a defectively-

constructed balcony was covered under standard CGL policy when

13 it was necessary to remove the balcony to repair property damage

to the plaintiff’s garage); Clear, LLC v. Am. & Foreign Ins.

Co., No. 3:07CV00110JWS,

, at *9 (D. Alaska Mar.

24, 2008) (interpreting standard CGL policy to provide coverage

for “the reasonable costs to repair property damage caused by

the defective work . . ., including the cost of removing and

replacing property that was not injured when that removal and

replacement was necessary in order to fix the damage caused by”

the defective workmanship). Nautilus did not address

plaintiffs’ argument concerning rip-and-tear damages in its

filings.

During oral argument, however, in response to the court’s

questioning, Nautilus’ counsel stated that although the roof

decks on both houses were stained by the leaking from the

defective roofs, they did not need to be repaired or replaced.5

Nautilus’ counsel represented that the roof decks on both houses

were re-used when the replacement roofs were constructed.

Nautilus’ counsel invited plaintiffs’ counsel to correct him if

he misspoke; plaintiffs’ counsel did not do so. During the

5 Although the Trase house had a full roof deck, the Wallace house apparently used only pieces of a roof deck which were attached to purlins, and otherwise did not use a roof deck. The difference in construction between the two houses is not material to the court’s analysis.

14 arbitration, several witnesses testified, consistent with

Nautilus’ counsel’s representations during oral argument, that

the roof decks were reused when plaintiffs replaced McPhail’s

roofs. See Stip. Rec. at R-3.92-93 (Wallace testimony);

at

R-3.220-22 (Sean Urqhardt testimony);6

at R-4.98-99 & 4.251

(Robert Fulmer testimony).

Thus, even assuming that rip-and-tear damages are covered

under the Policy, plaintiffs did not incur such damages in this

case. The stipulated record shows that contrary to plaintiffs’

representation in their motion, the roofs did not need to be

removed to “replace the water-damaged roof deck below.” Doc.

no. 16 at 10. The roof decks were not replaced but were instead

re-used when plaintiffs replaced McPhail’s roofs. For these

reasons, plaintiffs’ arguments concerning “rip-and-tear” damages

are not applicable to the facts of this case.

b. Causal link

In response to Nautilus’ argument that repairing or

replacing defective workmanship does not fall within the scope

of the Policy’s coverage, plaintiffs argue that the damages for

roof replacement costs are “causally linked” to the property

damage caused by the occurrence. In support, plaintiffs assert

6 Sean Urqhardt is the caretaker for plaintiffs’ property.

15 that in his decision, the arbitrator had to decide whether the

extent of the leaking and resulting damage justified the full

replacement cost of the roofs. They argue:

The very first point the Arbitrator made in deciding that issue was that there had been leaking that caused property damage, making clear that the existence of property damage from leaking was an important factor in deciding to award the full replacement cost. (Id.) One could easily imagine, in fact, that the Arbitrator would have determined that a different remedy was appropriate had there been the same defective work but no damage from leaking. See, e.g., Restatement (Second) of Contracts § 348 (1981) (“If an award based on the cost to remedy the defects would clearly be excessive . . . damages will be based instead on the difference between the market price that the property would have had without the defects and the market price of the property with the defects.”). Because the Arbitrator’s own analysis demonstrates that the property damage from leaking was an important factor in awarding the damages at issue, the damages are “causally linked” to the property damage.

Doc. no. 16 at 12.

Plaintiffs’ argument mischaracterizes the arbitrator’s

decision. Nowhere in his decision does the arbitrator suggest

that the damage to plaintiffs’ property was the basis for, or

even a factor in, his determination that plaintiffs are entitled

to recover the cost of the roof replacements from McPhail.

Rather, in awarding plaintiffs the cost of replacing the roofs,

the arbitrator stated:

I focus on the situation the Owners faced. When Bolen became involved, he referred the Owners to Fulmer as an expert who [sic] he hoped could mediate between the Owners and McPhail. Fulmer advised the Owners that

16 the only way to cure the installation defects was to remove and replace the roofs. There is no dispute that interlayment could not be retrofitted into the roofs; in order to fulfill the installation instruction and code requirement of interlayment, the roofs had to be replaced. Faced with a recommendation made by the expert referred by the manufacturer, it was reasonable for the Owners to rely on that advice in choosing the remedy.

Doc. no. 14-1 at 8. Thus, the arbitrator found that plaintiffs

were entitled to the replacement cost of the roofs because: (1)

the roofs were installed defectively; and (2) plaintiffs’

consultant advised them that the only way to cure the

installation defects was to remove and replace the roofs. The

arbitrator’s reasoning is not dependent on or influenced by

damage to plaintiffs’ property.

In their motion, plaintiffs rely on M. Mooney Corp. v. U.S.

Fid. & Guar. Co.,

(1992) to support their

broad interpretation of the Policy’s language as to the “causal

link” necessary to trigger the Policy’s coverage. In Mooney,

the plaintiff hired a contractor to build 52 condominium units.

After the units were completed and sold, a chimney fire damaged

one unit. Inspection of the other units showed charring

adjacent to fireplaces in four other units.

The fire marshal investigated the fire and determined that

the contractor had improperly constructed the fireplaces. He

17 ordered that no fireplaces could be used until the defects were

repaired and the fire hazard eliminated.

The contractor held a standard CGL policy with the

defendant. The defendant agreed that the policy covered the

cost of repairing the five damaged units but denied coverage for

the other forty-seven units that were repaired by order of the

fire marshal. The New Hampshire Supreme Court held that the

loss of use of the fireplaces in the other forty-seven units was

considered “property damage” under the policy.

Mooney is not applicable to the facts of this case. In

Mooney, “loss of use” was defined as “property damage” in the

policy. Therefore, the plaintiff’s loss of use of the forty-

seven fireplaces and the units themselves was specifically

considered “property damage” under the policy. As such, the

plaintiff’s loss of use of the fireplaces and the units was, by

definition, covered under the policy. Here, however, plaintiffs

make no claim that the cost of replacing their roofs is itself

property damage or that any specific Policy provision covers

that cost. Thus, plaintiffs’ reliance on Mooney is misplaced.

In their supplemental memorandum, plaintiffs offer several

cases that purportedly support their theory that a standard CGL

policy covers the cost of repairing defective work merely

because the work resulted in an occurrence that caused property

18 damage. See doc. no. 23 at 4. None of the cases plaintiffs

offer, however, stands for the proposition that a CGL policy

covers the cost of replacing defective work any time property

damage results from it. Instead, at best, the cases plaintiffs

cite stand for the proposition that when a contractor’s

defective workmanship leads to property damage caused by an

occurrence that also damages the defective work itself, the cost

of repairing that work may be considered property damage covered

under a standard CGL policy. See Crownover v. Mid-Continent

Cas. Co.,

, 206–07 (5th Cir. 2014) (holding that

standard CGL policy covered cost of replacing HVAC units

defectively installed because the defective installation caused

“property damage” to the HVAC units themselves); Forrest Const.,

Inc. v. Cinc. Ins. Co.,

, 365–66 (6th Cir. 2013)

(holding that subcontractor’s negligent construction that caused

damage to property and the construction project itself was

covered under CGL policy); Limbach Co. LLC v. Zurich Am. Ins.

Co.,

(4th Cir. 2005) (holding that standard

CGL policy covered cost of repairing “property damage” to

subcontractor’s work damaged by contractor’s defective

workmanship); Auto-Owners Ins. Co. v. Pozzi Window Co.,

, 1248–49 (Fla. 2008) (holding that where windows in home

constructed by the defendant were damaged by defective

19 installation, damage to the windows was considered property

damage and covered by a CGL policy); Lamar Houses, Inc. v. Mid-

Continent Cas. Co.,

(Tex. 2007) (holding that

construction defects in house that damaged the house itself

constituted “property damage” sufficient to trigger the duty to

defend or indemnify under a CGL policy); Am. Family Mut. Ins.

Co. v. Am. Girl, Inc.,

(Wis. 2004) (holding

that damage to warehouse constructed by contractor caused by the

contractor’s improper soil preparation constituted “property

damage” caused by an occurrence under standard CGL policy);

Corner Const. Co. v. U.S. Fid. & Guar. Co.,

(S.D. 2002) (holding that subcontractor’s defective insulation

work that caused damage to general contractor’s work was

property damage covered by CGL policy).

Even if that property damage principle were consistent with

New Hampshire case law, it is not applicable to the

circumstances presented in this case. The arbitrator’s decision

makes clear that because of the leaking, “there was some water

intrusion in [Wallace’s] attic and in the area near the French

doors in [Trase’s] house. It is also clear that water was

getting through the three layers of shakes to the roof deck,

something that would not have occurred had there been

interlayment.” Doc. no. 14-1 at 8. Plaintiffs do not argue,

20 and the arbitrator did not find, that the leaking from the

defective roofs caused damage to the roofs themselves.

No New Hampshire case stands for the proposition that

plaintiffs argue for here: that a CGL policy covers the cost of

replacing defective work any time property damage results from

it. Nautilus’ argument, that such a principle is inconsistent

with New Hampshire law, is persuasive. Therefore, the damages

for the cost of replacing plaintiffs’ roofs are not covered by

the Policy.

B. Exclusions

Because the court has determined that the damages for the

cost of replacing plaintiffs’ roofs falls outside the scope of

the Policy’s coverage, the court does not address the parties’

arguments as to whether any exclusions apply.

II. Attorneys’ Fees

During the arbitration hearing, the parties stipulated

“that the substantially prevailing party in this action must be

awarded attorney’s fees in an amount to be determined by the

arbitrator, together with expenses.” Doc. no. 14-2 at 3. After

the arbitrator ruled in plaintiffs’ favor as to McPhail’s

liability, plaintiffs submitted legal bills and documentation to

21 the arbitrator to support their request for fees and expenses.

McPhail objected.

In a supplemental decision, the arbitrator awarded

plaintiffs $176,898.85 in attorneys’ fees and expenses, breaking

down the award as follows: $127,933 in attorneys’ fees;

$44,328.46 in expert witness expenses; and $4,637.49 in other

expenses. Nautilus paid plaintiffs amounts awarded for expert

witness and other expenses, as well as pre- and post-judgment

interest. It asserted, however, that the award of attorneys’

fees was not covered by the Policy and refused to pay that

amount on McPhail’s behalf. Plaintiffs now seek a declaration

that the arbitrator’s attorneys’ fees award is covered by the

Policy.

Nautilus, which bears the burden of showing that coverage

does not exist, makes two arguments. First, it refers to the

Policy’s “Supplementary Payments” provision, which provides that

Nautilus is obligated to pay all “costs taxed against the

insured” in any suit that Nautilus defends, as well as any pre-

and post-judgment interest. The Supplementary Payments

provision, however, does not mention attorneys’ fees. Nautilus

contends that, therefore, it is not obligated to pay such fees

on McPhail’s behalf. Second, Nautilus argues that attorneys’

22 fees cannot be considered “damages because of property damage”

as that phrase is interpreted under New Hampshire law.

Plaintiffs concede that the Supplementary Payments

provision does not reference attorneys’ fees. They argue,

however, that the court should interpret the phrase “costs taxed

against the insured” to include attorneys’ fees. They also

argue that attorneys’ fees should be considered damages under

the Policy.

A. Attorneys’ Fees as “Costs Taxed Against the Insured”

The Policy’s “Supplementary Payments” provision provides in

relevant part:

1. We will pay, with respect to any claim we investigate or settle, or any “suit” against an insured we defend:

. . .

e. All costs taxed against the insured in the “suit.”7

f. Prejudgment interest awarded against the insured on that part of the judgment we pay. If we make an offer to pay the applicable limit of insurance, we will not pay any prejudgment interest based on that period of time after the offer.

g. All interest on the full amount of any judgment that accrues after entry of the judgment and before we have paid, offered to pay, or deposited in court the

7 Nautilus does not dispute that the arbitration is considered a “suit” for purposes of the Supplementary Payments provision.

23 part of the judgment that is within the applicable limit of insurance.

Doc. no. 14-3 at 17-18. Plaintiffs urge the court to interpret

the phrase “costs taxed against the insured” to include

attorneys’ fees.

As plaintiffs concede, the Policy does not define “costs

taxed” in the Supplementary Payments provision or elsewhere.

Plaintiffs also correctly state that no courts applying New

Hampshire law have construed the phrase “costs taxed” in the

insurance policy context. Plaintiffs contend that “costs taxed”

as used in the Policy is ambiguous and, therefore, under New

Hampshire law, should be construed against Nautilus to encompass

attorneys’ fees. The court agrees.

Although no court has construed the phrase “costs taxed” in

the insurance policy context under New Hampshire law, several

courts have interpreted the phrase under other state law to

include an award of attorneys’ fees. See Ferrell v. W. Bend

Mut. Ins. Co.,

(8th Cir. 2005) (holding that

under Arkansas law, an attorneys’ fee award in an underlying

dispute “was part of the ‘costs’ taxed against the insured”);

R.W. Beck & Assocs. v. City & Borough of Sitka,

,

1484 n.13 (9th Cir. 1994) (noting that under Alaska law,

“insurance policy provision providing for payment of ‘costs

taxed against the insured’ covered attorneys’ fees”); St. Paul

24 Fire & Marine Ins. Co. v. Hebert Const., Inc.,

(W.D. Wash. 2006) (The “Court concludes that the

‘costs taxed’ provision includes the attorneys’ fees made a part

of the judgment in the state-court action . . . . the plain,

ordinary meaning of the ‘costs taxed’ clause in the [insurance]

policies includes attorneys’ fees.”); see also Hunters Ridge

Condo. Ass’n v. Sherwood Crossing, LLC,

(Or.

2017) (noting that under Oregon law, the term “costs” as used in

an insurance policy is ambiguous and should be construed against

the drafter to include attorneys’ fees); Mid-Continent Cas. Co.

v. Treace,

(Fla. Dist. Ct. App. 2015) (holding

that identical language in a CGL policy included attorneys’ fees

under Florida law); Emp’rs Mut. Cas. Co. v. Donnelly,

(Idaho 2013) (interpreting Idaho law and holding that

“[a]ll costs taxed against the insured” includes attorneys’

fees); Ins. Co. of N. Am. v. Nat’l Am. Ins. Co.,

, 206–07 (Cal. 1995) (holding that attorneys’ fees are

costs taxed against an insured in standard Supplementary

Payments provision of an insurance contract under California

law); but see CIM Ins. Corp. v. Masamitsu,

(D. Haw. 1999) (holding that interpreting the phrase “costs

taxed against the insured” to exclude attorneys’ fees is

consistent with Hawaii law).

25 Nautilus does not directly address plaintiffs’ argument as

to the interpretation of “costs taxed against the insured.”

Instead it argues simply, and without offering case law to

support its position, that “[g]iven that the policy does provide

for payments of costs, pre-judgment interest, and post-judgment

interest, the omission of a similar provision for attorneys’

fees demonstrates that attorneys’ fees are not compensable as a

supplementary payment.” Doc. no. 14 at 18. The court

disagrees.

Nautilus’ argument misses the obvious point: there is an

ambiguity as to whether attorneys’ fees are compensable as

“costs taxed against the insured” under the Supplementary

Payments provision. Thus, to draw an inference in Nautilus’

favor from the absence of the reference to attorneys’ fees would

be contrary to New Hampshire law, which construes ambiguities

against the insurer. See, e.g., Cogswell Farm,

(“If more than one reasonable interpretation is possible, and an

interpretation provides coverage, the policy contains an

ambiguity and will be construed against the insurer.”). As the

Seventh Circuit aptly stated when interpreting a CGL policy

under Illinois law,

If an insurer does not wish to underwrite attorney’s fees charged against its insureds, it need only add words of exclusion to its contracts. Here, the four words “exclusive of attorney’s fees”, inserted into

26 the policy after the word “costs”, would have accomplished State Farm’s goal. In the absence of this qualification, the district court correctly decided that the insurance policy’s coverage of costs included attorney’s fees.

Littlefield v. McGuffey,

(7th Cir. 1992).

Indeed, the standard CGL policy was subsequently amended to

make that very distinction. Section 1.e. of the Supplementary

Payments section now reads that the insurer will pay with

respect to any “suit” against an insured it defends: “All court

costs taxed against the insured in the ‘suit.’ However, these

payments do not include attorneys’ fees or attorneys’ expenses

taxed against the insured.” ISO Properties, CGL Form CG 00 01

12 07, at 8 (2007).8 The addition of this sentence only

highlights the ambiguity in the phrase “costs taxed against the

insured” in the Policy at issue in this case. See, e.g., Pan

American v. Aetna,

, 1001 n.10 (2d Cir. 1974)

(holding that a subsequent change in an insurance contract to

language which is asserted to be ambiguous is evidence of that

ambiguity).

For these reasons, the court construes “costs taxed against

the insured” in the Supplementary Payments provision of the

Policy to include attorneys’ fees. Therefore, Nautilus is

8 Available at http://www.tmsic.com/pdfs /CommercialGeneralLiabilityCoverageForm_OccurrenceBasis.pdf.

27 obligated to pay plaintiffs the attorneys’ fees assessed in the

arbitrator’s decision on McPhail’s behalf.

B. Attorneys’ Fees as Damages

Because the court holds that the Policy obligates Nautilus

to pay plaintiffs’ attorneys’ fees as awarded by the arbitrator

on McPhail’s behalf, the court does not address the parties’

arguments as to whether attorneys’ fees are also compensable as

damages under the Policy.

C. Additional Attorneys’ Fees

RSA 491:22-b provides as follows: “In any action to

determine coverage of any insurance policy pursuant to RSA

491:22, if the insured prevails in such an action, he shall

receive court costs and reasonable attorneys’ fees from the

insurer.” In their complaint and in their motion, plaintiffs

request attorneys’ fees and costs incurred in this action

pursuant to the statute.

The court has determined that plaintiffs are not entitled

to coverage under the Policy for the cost of replacing their

roofs. They are, however, entitled to reasonable attorneys’

fees incurred in the arbitration under the Policy.

28 Whether plaintiffs are prevailing parties under RSA 491:22

is not readily apparent from New Hampshire case law and has not

been briefed by the parties. Because a declaratory judgment

action under RSA 491:22-b is a “broad remedy which should be

liberally construed,” Gen. Linen Serv. Co. v. Charter Oak Fire

Ins. Co.,

(D.N.H. 1995) (internal citations

and quotation marks omitted), the court is inclined to grant

plaintiffs their costs and reasonable attorneys’ fees incurred

in this action.

In fairness to Nautilus, however, the court will hold in

abeyance its ruling as to this issue to allow the parties to

confer to attempt to reach an agreement as to whether plaintiffs

are entitled to costs and attorneys’ fees incurred in connection

with bringing this action and, if so, the appropriate award of

such costs and attorneys’ fees. As provided further below, the

parties shall notify the court as to whether they have reached

an agreement within 21 days of the date of this order. If

agreement is not reached, the parties are granted an opportunity

to brief the issue. Plaintiffs’ brief shall address whether the

court’s ruling in this order entitles them to costs and

reasonable attorneys’ fees under RSA 491:22-b and, if so, the

amount of costs and attorneys’ fees they request along with

29 supporting documentation, and Nautilus shall then file a

response.

CONCLUSION

For the foregoing reasons, Nautilus’ motion for judgment on

the stipulated record (doc. no. 14) is granted to the extent it

seeks a declaration that Nautilus has no duty to indemnify

McPhail for the costs of replacement roofs and the cost of

shingles, but denied to the extent it seeks a declaration that

it has no duty to indemnify McPhail for attorneys’ fees awarded

to plaintiffs in the arbitration. Plaintiffs’ motion for

judgment on the stipulated record (doc. no. 16) is granted to

the extent it seeks a declaration that Nautilus has a duty to

indemnify McPhail for attorneys’ fees awarded to plaintiffs in

the arbitration, but denied to the extent it seeks a declaration

that Nautilus has a duty to indemnify McPhail for the costs of

replacement roofs and the cost of shingles.

The court holds in abeyance its ruling as to whether

plaintiffs are entitled to costs and reasonable attorneys’ fees

incurred in bringing this suit under RSA 491:22-b. The parties

shall notify the court as to whether they have reached an

agreement as to costs and fees within 21 days of the date of

this order. If the parties cannot reach an agreement,

30 plaintiffs shall file a brief in support of their request within

14 days of the day notification is provided to the court.

Nautilus shall then have 14 days to file a response.

SO ORDERED.

__________________________ Landya McCafferty United States District Judge

July 23, 2019

cc: Counsel of Record

31