An insurance carrier that spent years trying to avoid paying out on a claim has instead been ordered to cover something else entirely: the legal bills of the company it fought against. A New York federal court has directed excess insurer GuideOne National Insurance Co. to pay the attorney fees of Systems 2000 Plumbing Service Inc., months after ruling the carrier is obligated to provide coverage for claims tied to a Manhattan apartment fire.

The Judge's Ruling on Fees

U.S. District Judge J. Paul Oetken issued the order Monday, granting Systems 2000's motion for attorney fees after determining that GuideOne's duty to defend the plumbing company is imminent, given that the primary insurance policy's $2 million limit has already been exhausted.

Legal Precedent Behind the Decision

The judge grounded his ruling in the New York Court of Appeals' 1979 decision in Mighty Midgets Inc. v. Centennial Insurance Co., finding that "New York state courts would grant fees to an insured who prevailed in a declaratory judgment action pertaining to an excess carrier's looming, likely-to-be-triggered duty to defend."

How the Dispute Began

The underlying coverage fight traces back to a March 2021 fire at a Manhattan co-op building, where Systems 2000 had been working to replace valves within the property's plumbing system, according to court filings.

At the time of the fire, the plumbing company carried a $2 million primary commercial general liability policy through Travelers Indemnity Co. of Connecticut, layered with a $4 million follow-form excess policy through GuideOne.

Two Insurers, Two Denials

Systems 2000 submitted claims to both insurers following the fire — and both initially denied coverage, court records show. Travelers first pointed to a policy exclusion covering claims arising from work on residential apartment projects, but later reformed the policy to remove that provision entirely. GuideOne, however, held firm on its denial.

GuideOne Takes the Fight to Court

Rather than reconsidering its position, GuideOne filed the underlying lawsuit in June 2022, seeking a court declaration that it owed no duty to defend or indemnify Systems 2000 whatsoever.

The December Ruling Against GuideOne

That strategy backfired in December, when Judge Oetken ruled that GuideOne was indeed required to cover the underlying claims. The judge found there had been a mutual mistake between GuideOne and Systems 2000 regarding the scope of coverage under the excess policy, and concluded the insurer couldn't enforce its residential-work exclusion, since doing so would effectively render the coverage meaningless — illusory in the eyes of the law.

Systems 2000 Pursues Its Legal Costs

Following that initial loss, Systems 2000 moved in April to recover its attorney fees from the litigation, setting up the ruling issued this week.

Weighing Competing Legal Precedents

Judge Oetken noted that New York's highest court, in its 2004 decision in U.S. Underwriters Insurance Co. v. City Club Hotel LLC, had held under the Mighty Midgets framework that an insured prevailing in an insurer's declaratory judgment action may recover attorney fees regardless of whether the carrier actually provided a defense.

However, the judge also acknowledged a complicating wrinkle: the Second Circuit's 2005 ruling in Liberty Surplus Insurance Corp. v. Segal Co. had challenged whether fees could be recovered in cases where an excess insurer seeks a declaration disclaiming its duty to defend.

Distinguishing This Case From Prior Precedent

Ultimately, Judge Oetken determined that ruling didn't control the outcome here. "Importantly, the Second Circuit stopped short of holding that an insured may never recover fees from an excess carrier whose duty to defend had not yet been triggered," the judge wrote. "The court concludes that Liberty Surplus does not dispose of this case because GuideOne's duty to defend is 'looming' and 'likely will be' triggered."

The Numbers That Sealed GuideOne's Fate

Judge Oetken pointed to stark math underlying his decision: the underlying claims against Systems 2000 collectively seek more than $15 million — over seven times greater than the primary policy's $2 million limit, making GuideOne's eventual involvement all but inevitable.

"Indeed, the largest underlying complaint seeks nearly $6 million, meaning that, after legal fees, that lawsuit alone could exhaust not only Travelers' $2 million primary coverage, but also GuideOne's $4 million excess coverage," the judge noted.

GuideOne Knew the Stakes Going In

Adding another layer to the ruling, Judge Oetken found that GuideOne's own communications with Travelers showed the excess insurer already understood the loss would likely exceed the primary policy's limit at the time it filed its lawsuit — undercutting any claim that its duty to defend was purely speculative.

Systems 2000's Attorney Reacts

Marina A. Spinner of Nicoletti Spinner Ryan Gulino Pinter LLP, counsel for Systems 2000, said both the firm and the plumbing company were pleased with the outcome. "We believed it was the right decision under the law. Throughout the litigation of this case and even after GuideOne lost at trial, GuideOne took very unreasonable positions on every issue to the detriment of its insured," Spinner said.

She added that she'd long suspected GuideOne was banking on Systems 2000 eventually giving up during the drawn-out litigation, and expressed relief that her client stuck it out. "I always believed that GuideOne was hoping that Systems 2000 would throw in the towel at some point during this protracted litigation," Spinner said, adding she is "very happy that our client persevered and in the end will be made whole."

A representative for GuideOne did not immediately respond to a request for comment Tuesday.

The Legal Teams

GuideOne is represented by Jeremy A. Berman of Russo & Gould LLP and Daniel C. Rosenberg of the Law Offices of Reiners & Rosenberg. Systems 2000 is represented by Marina A. Spinner and Edward S. Benson of Nicoletti Spinner Ryan Gulino Pinter LLP.