This article is written by Mr. Randy Maniloff. Randy J. Maniloff is a Partner in the Business Insurance Practice Group at White and Williams, LLP in Philadelphia . He concentrates his practice in the representation of insurers in coverage disputes over primary and excess policy obligations for various types of claims, including construction defect, mold, general liability (products/premises), environmental property damage, asbestos/silica and other toxic torts, first-party property, homeowners, director's & officer's liability, a variety of professional liability exposures, including medical malpractice, media liability, community associations, public official's liability, school board liability, police liability, computer technology liability, managed care and additional insured/contractual indemnity issues. The views expressed herein are solely those of the author and are not necessarily those of his firm or its clients.

Topics covered:

Introduction

Insurers' magic buss

Reimbursement of defense costs—post-buss

Courts permitting reimbursement of defense costs

Courts rejecting reimbursement of defense costs

Conclusion

|

Introduction

If coverage issues were stocks, the duty to defend would be Blue Chip. Like the returns characteristic of stocks in this category, the duty to defend has been consistent and predictable. Just as it's not a surprise when General Electric declares a dividend (as it has done every quarter for over 100 years), it also doesn't raise any eyebrows when a court somewhere declares that the duty to defend is—get ready—broader than the duty to indemnify.

Unlike flash-in-the-pan coverage issues, such as Y2K; emerging issues, such as junk faxes; fickle ones, like the absolute pollution exclusion; or the many coverage issues that develop slowly, but are at least subject to some incremental change, the duty to defend just keeps plodding along, as the Steady Eddie of the coverage world. Indeed, its general principles haven't changed since the days of Woodrow Wilson's administration. See Greer-Robbins Company v. Pacific Surety Company, 174 P. 110 ( Cal. App. 1918). (The insurer argued that the duty to defend depends upon the outcome of the action against the insured. The court disagreed: “If the position of the appellant [insurer] were adhered to in all cases, it would work an alteration in the very language of the policy. It would change its terms from those imposing an obligation evidenced by the words 'will defend' to terms laying a duty indicated by some such words as 'should have defended.'”)

It is perhaps because the breadth of the duty to defend has achieved taken-for-granted status that policyholders cry foul anytime they perceive an insurer straying from what they believe to be such a sacrosanct principle. And at no time does the shrill get louder than when an insurer, following a determination that the duty to defend did not in fact arise, attempts to recover defense costs from an insured to whom it provided a defense. Insureds typically respond, vocally, that reimbursement of defense costs is simply not a right that exists for insurers, and any attempt to do so is the coverage equivalent of trying to put the toothpaste back into the tube.

The duty to defend has been the subject of litigation for decades. But litigation surrounding an insurer's right to reimbursement of defense costs has a much shorter history. While there are certainly some older cases that address the issue, the vast majority of decisions have come within the past ten years, with a significant spike witnessed in just the past two. In general, insurers have been winning a few more of these cases than they've been losing. The score is close. But even when insurers succeed in establishing that the right to reimbursement exists, they sometimes find that practical problems associated with the implementation of this right diminish its actual value. Thus, in some cases, an insurer's right to reimbursement of defense costs has more bark than bite.

What follows is a discussion of how several courts around the country have addressed reimbursement of defense costs and the rationales employed for permitting or rejecting it. In general, an insurer's right to reimbursement of defense costs is beginning to evolve into a two-schools-of-thought issue, with a body of case law emerging that permits reimbursement and a similar-size body that rejects it. Just as with other coverage issues that are the subject of competing schools, such as the absolute pollution exclusion (is it limited to so-called traditional environmental pollution?) and allocation of multiple triggered policies (pro-rata time on the risk versus joint and several liability), courts confronting the reimbursement issue for the first time will usually take note of the absence of binding precedent, turn to the competing schools for guidance and then decide in which one to enroll.