Can an Insurer Make a Payment But Then Seek Reimbursement from its Insured?
In Massachusetts, the answer would appear to be “no.” In the recent Metropolitan Life Ins. Co. v. Cotter, the SJC held against an insurer seeking reimbursement for benefits it had paid out, even though it agreed with the insurer that it had had no obligation to provide continuing benefits. Although the insurer had reserved the right to reimbursement when making the payments – alerting the insured that it was seeking a judicial determination of its obligation to pay – the court held that those actions were insufficient for two reasons: the policy did not provide for it, and the insured did not agree to it.
Cotter, concerns a disability insurer that first paid substantial benefits. Later, it reviewed the insured’s condition, sought expert medical advice, and concluded that, while the insured was seeking care, he was not seeking care “appropriate for the condition causing the disability.” The insurer then advised its insured that while it would continue to pay benefits, it was instituting a lawsuit to determine its continuing obligation to pay benefits. At that time, it also advised the insured that it was reserving its right to seek reimbursement of the continuing payments.
The trial judge concluded that the insurer’s policy interpretation was correct, and it was no long obligated to pay benefits. However, he held that the insurer was not entitled to reimbursement, despite its reservation of rights to do so, because the policy did not provide for it, and the insured did not agree to it.
While Cotter involved a first party disability policy, this case has significant implications for third party policies as well. In upholding the trial court decision, the SJC did discuss its decision regarding a third party policy in Medical Malpractice Joint Underwriting Ass’n v. Goldberg, 425 Mass. 46 (1997) (a case argued by attorneys from this firm), in which the court held that a liability insurer could not settle a case under a reservation of rights and seek reimbursement from its insureds.
Increasingly in the third party context, insurers are defending under a reservation of rights to seek reimbursement of defense costs. While the court in Cotter leaves some room for insurers to seek reimbursement, the combination of Goldberg and Cotter suggests that, in Massachusetts at least, the burden will be too high to overcome, unless the policy explicitly provides for it (and most policies do not).
About Steve: I specialize in Insurance Law and Litigation at Anderson & Kreiger. My most recent blog post discussed a recent case that shows how powerful certain terms can be when used in exclusions.