(Article from Insurance Law Alert, December 2023)
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Holding
The Hawaii Supreme Court ruled that an insurer that has defended an insured may not subsequently seek equitable reimbursement of defense costs unless an express policy provision affords that right. St. Paul Fire & Marine Ins. Co. v. Bodell Construction Co., 2023 Haw. LEXIS 194 (Haw. Nov. 14, 2023).
Background
This dispute arose from the allegedly negligent construction of a residential development, which resulted in a lawsuit against a subcontractor involved in the project. The subcontractor tendered defense of the suit to several primary and excess policies under which it was listed as an additional insured. The insurers agreed to defend under a reservation of rights, which included a statement reserving the insurers right to seek reimbursement for fees and costs related to claims not potentially covered under the policies.
The underlying suit was stayed pending two arbitrations. An arbitration between the subcontractor and the claimant resulted in a settlement agreement, and an arbitration between the subcontractor and general contractor resulted in an arbitration award against the general contractor. The award was confirmed by a Hawaii court and a judgment was issued in favor of the subcontractor.
Thereafter, the insurers filed suit, seeking reimbursement of costs incurred in defending the underlying suit. The district court certified the following question to the Hawaii Supreme Court:
Under Hawaii law, may an insurer seek equitable reimbursement from an insured for defense fees and costs when the applicable insurance policy contains no express provision for such reimbursement, but the insurer agrees to defend the insured subject to a reservation of rights, including reimbursement of defense fees and costs?
The Hawaii Supreme Court answered this question in the negative.
Decision
The court provided three main rationales for its decision. First, the court emphasized that contractual language unequivocally governs the parties’ rights and obligations, and that the policy was silent as to a right to reimbursement of defense costs. The court rejected the notion that a reservation of rights alters those rights, stating: “Insurers may reserve contractual rights, not create new ones.” Second, the court reasoned that reimbursement would erode the broad duty to defend. The court noted that an insurer’s duty to defend is determined at the outset, based on allegations in the complaint, and that allowing reimbursement at a later date “would effectively require that insurers only defend to the same extent that they must ultimately indemnify.” (Citations omitted). Finally, the court ruled that an insured is not unjustly enriched by receiving a defense for claims outside the scope of coverage. The court explained that by providing a defense, the insurer retains the benefit of strategic control over the litigation and that allowing reimbursement would unjustly enrich the insurer.
Comments
Courts in other jurisdictions are split on this issue. While some jurisdictions, such as California, allow insurers to recoup defense costs under certain circumstances, others, such as Pennsylvania, do not. Courts that have allowed reimbursement have employed various reasoning, including that the reservation of rights creates an implied contractual right to such reimbursement and/or that denying reimbursement would result in unjust enrichment to the insured.