(Article from Insurance Law Alert, September 2018)
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A Delaware state court ruled that, under Tennessee law, an insurer has a right to reimbursement of defense costs following a judicial determination that there was no duty to defend, where the insurer preserved such a claim. Catlin Specialty Ins. Co. v. CBL & Assocs. Props., Inc., 2018 WL 3805868 (Del. Super. Ct. Aug. 9, 2018).
When CBL was sued in a class action, it sought defense and indemnity from Catlin. Catlin agreed to advance defense costs but expressly reserved its right to seek reimbursement of those costs in the event it was determined that Catlin had no duty to defend. In a subsequent declaratory judgment action, a Delaware court ruled that Catlin had no duty to defend the class action. Catlin then sought reimbursement, arguing that CBL was unjustly enriched by the defense. The court agreed and ruled in the insurer’s favor.
Although the Tennessee Supreme Court had not addressed the issue, the Delaware court concluded that an insurer’s right to reimbursement based on unjust enrichment was supported by Tennessee case law. In particular, the court concluded that reimbursement is proper where it is determined that the insurer had no duty to defend, the insurer expressly reserved its right to reimbursement, the policy is silent as to reimbursement and the policyholder accepted the defense notwithstanding the reservation. The court rejected CBL’s contention that there was no unjust enrichment because Catlin’s offer to defend served its own interests in that it provided protection against the risk of an adverse coverage decision.
The court also rejected CBL’s assertion that an insurer’s right to reimbursement “has lost favor in recent years.” The court noted that the recently-formulated Restatement of the Law on Liability Insurance reflects this purported shift, but explained that the Restatement is “mere persuasive authority” rather than controlling law until a court has adopted it and that Tennessee courts have not expressly endorsed the new Restatement.
Finally, the court granted Catlin’s request for pre-judgment interest, finding that Tennessee statutory law permits the imposition of pre-judgment interest based on equitable factors. The court deemed the accrual date for pre-judgment interest the date upon which the court ruled that Catlin had no duty to defend.