According to the court in Episcopal Church in South Carolina v. Church Insurance Company of Vermont, No. 2:13-cv-02475 (D.S.C. Jan. 6, 2013), the answer is “yes.”  The court in that case held that an insurer was obligated to defend The Episcopal Church in South Carolina (TECSC) against an underlying suit in which the Protestant Episcopal Church in the Diocese of South Carolina (Diocese) sought to enjoin TECSC from continuing to use trade names, trademarks and emblems belonging to the Diocese because a claim for “prevailing party” attorney fees constituted a claim for “damages” due to covered “advertising injury.” 

In the underlying action, the Diocese asked the court to enjoin TECSC from using the Diocese’s service marks, and also sought to recover from TECSC its attorney fees incurred in bringing the suit.  Although the South Carolina statute under which the Diocese sought an injunction and its attorney fees also authorized an award of damages, the Diocese did not assert a claim for damages from TECSC. 

TECSC was insured under a general liability policy that covered TECSC’s liability for “damages due to . . . advertising injury arising out of an offense committed in the course of advertising your goods, products, or services,” and obligated the insurer to defend suits “seeking” such damages.  The policy listed a series of enumerated “advertising injury” offenses, including “injury . . . arising out of . . .  misappropriation of advertising ideas or style of doing business” and “infringement of copyright, title, slogan, trademark, or trade name.”  As an aside, this definition of “advertising injury” is similar to the “advertising injury” definitions found in the Insurance Services Office (ISO) standard CGL policy forms from 1986 (CG 00 01 11 85) through 1996, but this language was modified in the 1998 (CG 00 01 07 98) and subsequent ISO CGL policy forms.  

TECSC’s insurer refused to defend for several reasons, including that the Diocese’s claim for declaratory and injunctive relief did not constitute a claim for damages.  Unlike standard CGL policies, which do not define the term “damages,” TECSC’s policy defined “damages” as “compensation in the form of money for a person who claims to have suffered an injury.” The court disagreed with the insurer, holding that while the injunctive relief sought from TECSC did not constitute “damages,” the attorney fees sought by the Diocese did constitute “damages” because attorney fees “are monetary compensation” and the Diocese claimed to have “suffered an injury by [TECSC’s] alleged trademark infringement.” 

The court also found that the Diocese’s allegations fell within the scope of the policy’s definition of “advertising injury” because the Diocese claimed to have been injured by TECSC’s alleged use of the Diocese’s registered service marks in the course of advertising TECSC’s services.  As such, held the court, the insurer was obligated to defend TECSC against the Diocese’s lawsuit.

Outside of South Carolina, there is a split among courts that have considered whether a prevailing party attorney fee award constitutes “damages” for purposes of coverage under a CGL policy.  Some courts have held that fee awards are defense costs rather than covered “damages.”  Other courts, however, have followed the reasoning of the court in Episcopal Church in South Carolina and held that prevailing party fee awards are damages. See, e.g., Hyatt Corp. v. Occidental Fire & Cas. Co., 801 S.W.2d 382, 393-394 (Mo. App. 1991) (“[A]n award of attorneys’ fees [to the class action plaintiffs] is indistinguishable from a damages award for coverage purposes . . . .’”).  The resolution of this issue (i.e. whether a fee award is a defense cost or damages) often turns on the statutory basis for the fee award, as well as applicable common law definitions of “damages” and "costs."  

Other policies, such as D&O policies, specify that they broadly cover “loss,” which includes - but is broader than - “damages.”  Absent a policy provision to the contrary, a claim for prevailing party attorney fees should constitute covered “loss,” even in a suit that otherwise seeks only equitable relief.  See, e.g., XL Spec. Ins. Co. v. Loral Space & Comm., Inc., 82 A.D.3d 108, 116, 918 N.Y.S.2d 57 (2011) (award of plaintiffs’ attorney fees in derivative suit constituted covered “loss” even though all other relief constituted uninsured equitable relief because fee award was amount that the insured was “legally obligated to pay”).