Illinois Casualty Company v. Kladek
Illinois Casualty Company v. Kladek, Inc. doing business as King of Diamonds, Andra Cheri Moreland, April Puck, Brittany Wilcox, Brooke Marrin, Denise Trlica, Emily Sears, Ina Schnitzer, Jaime Longoria, Jamie Middleton, Jennifer Archuleta, Jessica Burciaga, Jessica Hinton, Jessica Rockwell, Lina Posada, Lucy Pinder, Maysa Quy, Rhian Sugden, Rosie Wicks, Tara Leigh Patrick, and Ursula Mayes
- Donovan Frank
- 0:22-cv-03214
- U.S. District Court · District of Minnesota
- 8
In Illinois Casualty Company v. Kladek, Inc. doing business as King of Diamonds, Judge Frank granted in part and denied in part Kladek's motion for attorney fees, awarding only $3,138.75 for unpaid defense costs incurred after Kladek notified its insurer of the lawsuit, while denying fees incurred before that notification and fees spent litigating the insurance coverage dispute itself.
Insurance policyholders (particularly businesses) who have been denied full reimbursement of defense costs by their insurer, and insurers navigating the boundaries of the duty to defend under Minnesota law. Also relevant to attorneys litigating insurance coverage disputes in Minnesota federal courts applying Minnesota's American rule on attorney fees.
What happened
In Illinois Casualty Company v. Kladek, Inc. doing business as King of Diamonds, a gentlemen's club called King of Diamonds (operated by Kladek, Inc.) was sued by a group of models who claimed the club used their photos in social media advertisements without permission. Kladek was covered by a business insurance policy issued by Illinois Casualty Company (ICC). After Kladek notified ICC of the lawsuit in December 2021, ICC eventually agreed to take over Kladek's defense — though it simultaneously filed this separate lawsuit asking the court to declare that it had no obligation to defend or pay for the claims against Kladek. The court previously ruled that ICC did owe Kladek a duty to defend, and Kladek then asked to be reimbursed for all of its legal fees: those paid before notifying ICC, those paid after notification but before ICC took over, and those spent fighting ICC in this coverage lawsuit.
Kladek sought reimbursement on three categories of fees. First, it sought $28,701.81 in fees paid to its law firm before it ever notified ICC of the lawsuit. Second, it sought the full $15,695.34 billed by its law firm after notification but before ICC took over the defense, of which ICC had already paid $12,556.59, leaving a disputed balance of $3,138.75. Third, it sought fees for litigating this declaratory judgment case — the lawsuit over whether ICC had to provide coverage at all — arguing that ICC's refusal to accept its defense obligations forced Kladek to go to court.
Judge Frank denied most of Kladek's request. Under Minnesota law, an insurer's duty to defend is not triggered until the insured formally notifies the insurer of the lawsuit, so Kladek could not recover the $28,701.81 spent before it notified ICC. As for the fees spent litigating this coverage lawsuit, Judge Frank found that ICC had not actually breached its duty to defend — because ICC did eventually provide a defense (even while disputing coverage) — and Minnesota law only allows recovery of fees in a coverage lawsuit when the insurer has breached its duty, typically by refusing to defend at all. Since ICC defended Kladek while reserving its right to dispute coverage, no such breach occurred. The court did order ICC to pay the remaining $3,138.75 balance on the post-notification, pre-takeover fees, because the record did not clearly show that ICC's earlier payment of $12,556.59 was intended as full payment rather than a partial one.
The detailed version
This fee dispute arises from Illinois Casualty Company v. Kladek, Inc. doing business as King of Diamonds, Civil No. 22-3214, decided by United States District Judge Donovan W. Frank of the District of Minnesota on February 18, 2026.
Background
Kladek, Inc. operates a gentlemen's club called King of Diamonds. A group of models (named defendants in this action) sued Kladek in a separate underlying lawsuit (Moreland v. Kladek, Inc., Civ. No. 21-1975) alleging that Kladek used their photographs in social media advertisements without consent, in violation of federal and state law. Kladek held a Businessowners Policy issued by Illinois Casualty Company (ICC), which included a Businessowners Liability Coverage Form and a Cyber Protection Endorsement.
Kladek was served with the underlying lawsuit in September 2021. Without first notifying ICC, Kladek retained the DeWitt law firm, which billed $28,701.81 through December 13, 2021. On December 13, 2021, Kladek first tendered — i.e., formally notified — ICC of the lawsuit and requested that ICC assume its defense. DeWitt continued representing Kladek after tender and billed an additional $15,695.34 through December 2022, covering work such as answering the complaint, serving initial disclosures, and preparing a discovery plan.
ICC asserts it agreed in September 2022 to assume Kladek's defense under a reservation of rights (meaning ICC defended while preserving its right to later argue it owed no coverage), and appointed the Stich Angell law firm. Those attorneys appeared in the underlying suit on October 14, 2022. ICC issued a formal Reservation of Rights letter on December 5, 2022. Meanwhile, on December 29, 2022, ICC filed this declaratory judgment action seeking a court ruling that it owed no duty to defend or indemnify Kladek. Kladek counterclaimed, asserting ICC did owe those duties.
In a July 31, 2023 order, the Court sent the Cyber Endorsement coverage question to arbitration, and an arbitration panel ruled that ICC owed a duty to defend under that endorsement. In its July 2025 Order, the Court ruled that ICC also owed a duty to defend under the Businessowners Liability Coverage Form, granting summary judgment in Kladek's favor on the declaratory judgment counterclaim. Kladek then moved for attorney fees and costs.
Pre-Tender Fees ($28,701.81) — Denied
Under Minnesota law, an insurer's duty to defend is not triggered until the insured properly tenders a defense request. Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 739 (Minn. 1997). Because Kladek did not notify ICC until December 13, 2021, fees incurred before that date are not recoverable. Kladek offered no circumstances justifying an exception to this rule.
Post-Tender, Pre-Takeover Fees — Partially Granted ($3,138.75)
DeWitt billed $15,695.34 for work performed after the December 13, 2021 tender through December 2022. ICC paid $12,556.59 and claims this was a negotiated, full-and-final payment at a reduced hourly rate. Kladek disputes this, asserting the payment was only partial. The court found the record unclear on whether a full-and-final agreement was reached and therefore ordered ICC to pay the remaining balance of $3,138.75. The court noted, however, that ICC's position that the payment was intended as full payment was 'reasonable,' and that ICC's partial payment did not constitute a breach of its duty to defend.
Declaratory Judgment Action Fees — Denied
The court applied the American rule on attorney fees (each side bears its own fees unless a contractual or statutory exception applies), as required by Minnesota law in this diversity case. Carroll Elec. Coop. Corp. v. Alltel Corp., 118 F.4th 934, 937 (8th Cir. 2024); Buckner v. Robichaud, 992 N.W.2d 686, 689 (Minn. 2023).
Kladek invoked the Morrison exception, recognized by the Minnesota Supreme Court in Morrison v. Swenson, 142 N.W.2d 640 (Minn. 1966), which allows an insured to recover declaratory judgment fees when those fees arise directly from the insurer's breach of contract — typically, a wrongful refusal to defend. Courts have consistently limited this exception to situations where the insurer actually breached its duty to defend. See American Standard Ins. Co. v. Le, 551 N.W.2d 923, 927 (Minn. 1996); In re Silicone Implant Ins. Coverage Litig., 667 N.W.2d 405, 425 (Minn. 2003); Garrick v. Northland Ins. Co., 469 N.W.2d 709, 714 (Minn. 1991).
The court held that ICC did not breach its duty to defend because ICC did in fact provide a defense — it appointed counsel (Stich Angell) who defended Kladek in the underlying suit, even though it did so under a reservation of rights and while simultaneously filing this coverage lawsuit. Because there was no breach of the duty to defend, the Morrison exception did not apply, and Kladek could not recover fees spent litigating this declaratory judgment action.
Disposition
Kladek's motion for attorney fees and costs (Doc. No. 76) was granted in part and denied in part. ICC was ordered to pay Kladek $3,138.75. All other requested fees and costs were denied.
Reviewer note from the AI+
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