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Insurance Law

New York Court Says N-O To Reimbursement Of Defense Costs: Most Extensive N.Y. Case To Address The Issue

I’ve been saying for years that reimbursement of defense costs can be an overrated issue. It is the CATS of coverage issues. First, many states – especially lately -- have rejected an insurer’s right to seek reimbursement of defense costs. Second, even in a state where the right exists, it usually has to be a situation where there was a finding of no duty to defend at all, from the get-go – not one where there was only no duty to defend certain counts or where there was a duty to defend but then a later finding of no duty to indemnify. [This is why the right has more bite in California, where Buss gives insurers more options on this issue.] And even if all of this is satisfied, to make it worthwhile the insured has to be financially able to repay the defense costs. Many are unlikely to be. So while reimbursement of defense costs is not without some applicability, the stars need to be aligned just right for the insurer for it to have a practical impact. But despite all this, the subject gets a lot of attention from coverage commentators. Guilty as charged.

But the Eastern District of New York’s opinion in General Star Indemnity Co. v. Driven Sports, Inc., No. 14-3579 (E.D.N.Y. Jan. 23, 2015), [enhanced version available to lexis.com subscribers], is worthy of mention here. First, it involves New York law, which is, well, New York. Second, the court rejected the insurer’s claim for reimbursement of defense costs, which departs from some other New York cases on the issue.

The opinion is lengthy. At issue is coverage for Driven Sports, a producer and seller of a pre-workout energy supplement called “Craze.” The court’s opinion begins with this neat and tidy and convenient summary: “In 2013, defendant was sued in three separate actions alleging that Craze contains an illegal and potentially dangerous methamphetamine analog, and defendant sought coverage under the Policy. Both parties have moved for summary judgment, asking the Court to declare the extent of plaintiff's obligation to defend the underlying lawsuits. The Court concludes that the underlying lawsuits are excluded from coverage by [the Failure to Conform Exclusion] in the Policy.” The insurer sought “to recoup its expenses in defending the underlying lawsuits, but the Court declines to award recoupment as a remedy, finding that the New York Court of Appeals would find recoupment to be inappropriate under these circumstances.”

Now skipping a ton of ink and getting to the reimbursement of defense costs aspect. The Driven Sports court acknowledged that four New York decisions had permitted reimbursement – three federal District Courts and one Appellate Division. However, the court concluded that none of those cases answered whether, under New York law, recoupment was appropriate, or even authorized, under the situation at hand – where the insured “effectively resisted the idea of recoupment from the very beginning by rejecting plaintiff’s offer of a separate recoupment agreement.” In the absence of any clear guidance from the New York courts, the court was left to predict how the New York Court of Appeals would address the question.

The Driven Sports court concluded that, under the circumstances before it, the New York Court of Appeals would find recoupment to be an inappropriate remedy. It cited just about every reason, given by any court, why. A list follows:

• “New York law generally precludes claims of unjust enrichment where a contract covers the ‘particular subject matter’ at issue.”

• The policy’s supplementary payments provision, where the insurer agrees to pay defense costs, offered an opportunity there for the insurer to “have contracted for a right to seek recoupment, but it did not do so.”

• “As other courts have noted, plaintiff bears the risk of not providing for recoupment in the Policy itself, and [the insurer] is not saved by its later, unilateral reservation of rights.”

• The insured rejected reimbursement, “and, as a matter of equity and good conscience, the Court will not now imply the same agreement into the Policy.”

• To allow reimbursement “would risk eroding the well-established doctrine under New York law of imposing an ‘exceedingly broad’ duty to defend on insurers.”

• “As it operates now, th[e] rule incentivizes an insured to seek coverage, but if insurers can threaten the later collection of costs, an insured’s incentives would change drastically, and he would be faced with a ‘Hobson's choice’ in any close case. In other words, an insured whose claim might be covered could be dissuaded from seeking coverage out of concern that the legal costs would be so prohibitive that the insured could never pay them if a court later disagreed.”

• “[A]awarding recoupment in this case would effectively make the duty to defend coextensive with the duty to indemnify, despite the fact that New York courts have repeatedly held that the duty to defend is broader.”

• “It is also relevant to the Court’s consideration of equity and good conscience that an insurer receives some benefit from undertaking a defense, even if it believes the claims are excluded.”

Courts nationally are generally split on the insurer’s right to seek reimbursement of defense costs – with insurers, in the past few years, losing more of the big cases. While Driven Sports is a federal District Court opinion, it is New York’s most detailed pronouncement to date on the issue.

Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.

The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.

    Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.

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