Appeal from Mobile Circuit Court (CV-12-902722)
In January 2011, James Ross Pritchard, Jr., was involved in an automobile accident with an automobile driven by Broderick McCants. McCants was insured by GEICO Insurance Company ("GEICO"); his policy limits were $50, 000. State Farm Mutual Automobile Insurance Company ("State Farm") was Pritchard's insurer; Pritchard's policy included $100, 000 in underinsured-motorist ("UIM") coverage.
Pritchard sued McCants, State Farm, USAA Casualty Insurance Company,  and fictitiously named parties, alleging various causes of action and seeking damages in excess of the limits of McCants's policy. GEICO offered McCants's policy limits to settle the claim against him. State Farm "bought out" or advanced to Pritchard the $50, 000 limits of McCants's policy, and it opted out of the litigation. After a jury trial, the trial court entered a judgment in favor of Pritchard for $400, 000. Pritchard filed a motion requesting that State Farm be ordered to contribute $20, 000 toward his attorney fee under the common-fund doctrine. The trial court granted Pritchard's motion.
State Farm appeals from the order requiring it to pay $20, 000 of Pritchard's attorney fee. State Farm requested oral argument regarding its contention that the common-fund doctrine should not apply and that it should not be responsible for any portion of the attorney fee incurred by Pritchard. Oral argument was held in this case on April 15, 2015. We review de novo the trial court's order requiring State Farm to pay a portion of Pritchard's attorney fee under the common-fund doctrine. Ex parte State Farm Mut. Auto. Ins. Co., 118 So.3d 699, 704 (Ala. 2012) ("Although this matter involves an award of attorney fees, which we generally review to determine whether the trial court exceeded its discretion, whether the common-fund doctrine applies in a case where the facts are undisputed presents a question of law, which we review de novo.").
What is the Common-Fund Doctrine?
"Generally, the 'common fund' doctrine is an equitable principle designed to compensate an attorney whose services on behalf of his client operated to create, discover, increase, preserve, or protect a fund to which others may also have a claim. 7A C.J.S., Attorney & Client § 334."
Henley & Clarke, P.C. v. Blue Cross-Blue Shield of Alabama, 434 So.2d 274, 276 (Ala. Civ. App. 1983). The common-fund doctrine is an exception to the American rule, which provides that each party bear his or her own attorney fees. Ex parte State Farm Mutual Auto. Ins. Co., 118 So.3d at 703. Under the American rule, attorney fees are recoverable by a party "only when 'authorized by statute, when provided in a contract, or by special equity.'" Mitchell v. Huntsville Hosp., 598 So.2d 1358, 1360 (Ala. 1992) (quoting, among other cases, Eagerton v. Williams, 433 So.2d 436, 450 (Ala. 1983)).
"The common-fund exception as recognized in Alabama is derived from notions of equity and, in matters involving insurance subrogation, proceeds from the proposition that when an insurance carrier 'is entitled to share, to the extent of its subrogation interest, in any recovery its insured achieves against a tortfeasor, ' that carrier 'should bear a proportionate share of the burden of achieving that recovery -- including a pro rata share of the insured's attorney fee.' Government Emps. Ins. Co. v. Capulli, 859 So.2d 1115, 1119 (Ala. Civ. App. 2002)."
Mitchell v. State Farm Mut. Auto. Ins. Co., 118 So.3d 693, 694 (Ala. Civ. App. 2011), aff'd, Ex parte State Farm Mut. Auto. Ins. Co., 118 So.3d at 712.
Generally, in order to be entitled to a common-fund payment, a plaintiff must prove five elements:
"(1) there must be a 'fund' from which to compensate the attorney; (2) the attorney's services must directly benefit the fund; (3) the party seeking the fee and the party to be charged with the fee must have a common interest in the fund; (4) the proceedings must be equitable in nature, and (5) the fund must be within the control of the court."
Government Emps. Ins. Co. v. Capulli, 859 So.2d 1115, 1122 (Ala. Civ. App. 2002). However, in insurance-subrogation cases, this court has explained that only two elements must be proven: "(1) there must be a 'fund' from which to compensate the attorney; and (2) the attorney's services must directly benefit the fund." Capulli, 859 So.2d at 1122. This is so, we explained, because the third and fourth requirements are necessarily met in an insurance-subrogation case because of the nature of the right of subrogation. Id. Regarding the fifth element -- the fund must be within the control of the court -- the issue in Capulli was whether the "fund" must be created by actual litigation; we concluded that litigation is not required to create the "fund." Id. at 1123. The fifth element is not at issue in the present case.
The Common-Fund Doctrine As Applied in UIM Cases
There are only two Alabama cases directly considering the application of the common-fund doctrine to UIM insurers: Eiland v. Meherin, 854 So.2d 1134 (Ala. Civ. App. 2002), and Alston v. State Farm Mutual Automobile Insurance Co., 660 So.2d 1314 (Ala. Civ. App. 1995). In both, a common-fund payment was required of the UIM insurer.
In Alston, Dennis Alston's minor son was injured in an automobile accident. Alston, 660 So.2d at 1314. Alston was insured by State Farm; Alston's policy included UIM coverage. Id. Alston sued the driver of the other automobile involved in the accident, Linda Leatherwood. Id. Leatherwood was insured by Allstate Insurance Company, which offered to settle Alston's claim by paying the $20, 000 policy limits of Leatherwood's policy to Alston. Id. at 1315. In compliance with the procedure outlined in Lambert v. State Farm Mutual Automobile Insurance Co., 576 So.2d 160, 167 (Ala. 1991), State Farm advanced the $20, 000 to Alston and executed an agreement with Alston to protect its subrogation rights. Id. After a trial, the jury returned a verdict of $26, 574 in favor of Alston. Id. State Farm paid $6, 574 to Alston in satisfaction of its liability for UIM benefits. Id. Alston moved for a common-fund payment from State Farm; the trial court denied that motion, and Alston appealed. Id.
On appeal, Alston argued that State Farm should be required to contribute to his attorney fee. Id. He contended that the fund in which he and State Farm held a common interest was the $20, 000 State Farm had advanced to preserve its subrogation rights. Id. State Farm did not dispute the existence of the fund, that the parties shared a common interest in the fund, or that the benefits bestowed on it were direct as opposed to incidental. Id. at 1316. Instead, relying on the principle that an insurer is not required to contribute to the insured's attorney fee when the insurer itself had expended substantial sums in creating the fund, State Farm argued that it had intervened in the action and that, as a result, it had actively participated in the litigation. Id. This court determined that, despite State Farm's intervention in the action and its filing of a few discovery requests, it had not "expend[ed] a substantial cost of the litigation." Id. Thus, we reversed the judgment of the trial court and remanded the cause for the trial court to enter a judgment requiring State Farm to pay its pro rata share of the attorney fee. Id.
In Eiland, the issue was whether, when the amount of recovery was equal to the amount of the insurer's subrogated interest, the insurer should pay any portion of the insured's attorney fee. Eiland, 854 So.2d at 1136. The insured in Eiland, Shelby Eiland, was insured by State Farm; he had UIM coverage under his State Farm policy. Id. at 1135. Eiland was injured in an automobile accident caused by Bridgette Meherin. Id. Eiland sued Meherin, seeking damages in excess of her policy limits, and Meherin's insurer offered the $100, 000 policy limits of Meherin's insurance policy. Id. State Farm paid to Eiland $100, 000 to protect its subrogation rights and opted out of the litigation. Id. The judgment entered on the jury verdict was $50, 000. Id. Meherin's insurer paid the $50, 000 judgment into court. Id.
Eiland sought a common-fund payment from State Farm. Id. at 1136. The trial court denied Eiland's request, determining that the only party having any interest in the $50, 000 collected was State Farm, i.e., that the parties did not share a common interest in the fund. Id. On appeal, this court concluded that, based on Alston, State Farm was ...