Between the Lines

A Discussion of Case Law and Statutory Law Affecting Commercial Lines of Insurance

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If the Claim Isn’t Covered, Does the Insurer Get Its Defense Costs Back?

17283526416_7e5c6e438c_kIn Holyoke Mutual v. Vibram USA, Inc., 33 Mass.L.Rptr. 564, Superior Court Judge Mitchell Kaplan found that Massachusetts law does not permit an insurer to recoup defense costs it has committed to pay.  When Vibram, the insured, was sued, Holyoke reserved rights, including the right to seek recoupment of defense costs in the event a court found there was no coverage.  Vibram exercised its right to select its counsel and control the defense.  Holyoke filed a declaratory judgment action seeking to free itself of the duty to defend and obtain reimbursement of defense costs paid.  The court found no duty to defend but declined to permit the insurer to be reimbursed for the insured’s defense costs incurred prior to the decision in the declaratory judgment action.  While acknowledging that jurisdictions go both ways on whether an insurer can obtain reimbursement, the court sided with those jurisdictions that hold the insurer does not have the right to say it will defend but reserve the right to collect back all of the defense costs, unless the policy itself so provides.  The court rejected the insurer’s argument that permitting the insured to keep insurance payments for defending an uncovered claim was unjust enrichment.  In doing so, the court explained that it was not unjust for the insurer to bear the defense costs, because the insurer had a financial interest in defending the insured unless and until the court ruled there was no duty to defend in order to avoid the potential substantial consequences of a finding of a breach of the duty to defend in the event the court disagreed on coverage.

The insured also argued that having committed to pay defense costs, the insurer could not withdraw that commitment before the underlying case concluded.  There Judge Kaplan drew the line and held that the insurer was free to stop funding the defense once the court declared there had been no duty to defend.

 

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About the Author

Steven Schreckinger – Partner

Steve litigates complex insurance cases, and represents corporations in legal malpractice claims.

Please contact him with questions at sschreckinger@andersonkreiger.com or (617) 621-6537.


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