insurer not entitled to reimbursement for defense of non-covered claims

Welch Foods Inc. v. National Union Fire Insurance Co., 2011 WL 576600 (D. Mass.)

The Pom subfield breeds insurance litigation: Pom and a consumer class sued Welch in 2009 for unfair competition/false advertising. Welch tendered its demand for indemnification and defense to all three of its insurers, two of whom refused to defend. The third, Axis, agreed to defend under its 2008 policy subject to an express reservation of rights. The court granted declaratory judgment in favor of each of the companies, and Axis moved to alter or amend the judgment to include reimbursement of the amount it paid Welch in defense costs. (So, basically, advertising injury insurance is kind of like health insurance in this country, in that it doesn’t actually pay for most of the stuff that happens? Nice work if you can get it!)

The remaining question was whether Axis was entitled to reimbursement of over $300,000 in defense costs it paid before the court determined that it had no duty to defend. California holds that an insurer that reserves its right to reimbursement is entitled to the same when it is ultimately determined that the policy at issue never afforded any coverage, which avoids unjust enrichment. If no claims are even potentially covered by the policy, then there was never any duty to defend. There are cases where claims are potentially covered but not actually covered; an easy example would be when a claim could be made out without showing intentional conduct, and then the plaintiff ultimately shows intentional conduct. In such a case, the exclusion for intentional conduct would apply, so the insurer would have had a duty to defend but no duty to indemnify. By contrast, where there was never any duty to defend, the duty to defend was not extinguished: it never existed.

Other courts, including the Pennsylvania Supreme Court, hold the contrary: the insurer has an absolute duty to defend claims that are potentially covered, and this duty is not extinguished by a court's later determination that the claims are not covered. Thus, the insurer is not entitled to reimbursement for advanced defense costs. The duty to determine potential coverage is on the insurer when it receives notice of the complaint from the insured.

The policy here was “notably silent” on the question of reimbursement, providing only that Axis had a duty to defend claims arising under the policy.

The court began with “the principles that the duty to defend is broader than the duty to indemnify, and that it is triggered by the potential of liability, not an adjudication that the claims are covered.” When allegations are reasonably susceptible to an interpretation that states a covered claim, “the insurer has a duty to defend that is not extinguished by a court or jury's determination that the facts did not bear out a proper claim.” While the determination of claim coverage may be difficult, exposing the insurer to a risk of suit if it wrongfully denies coverage, it’s the insurer’s duty (not to mention its business) to make the decision. Thus, the court concluded, “the insurer bears the responsibility for making this determination, and the concomitant risk if its decision to advance fees is wrong.” Reimbursement denied.