(Article from Insurance Law Alert, March 2024)
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Holding
The First Circuit ruled that an insurer is not entitled to recover costs incurred in defending its insured or in settling an excluded underlying claim. Berkley National Ins. Co. v. Atlantic-Newport Realty LLC, 93 F.4th 543 (1st Cir. 2024).
Background
Berkley National Insurance Company issued a liability policy to Granite Telecommunications that listed Atlantic-Newport Realty as an additional insured. When a personal injury suit was filed against both entities, Berkley agreed to defend under a reservation of rights. While that suit was pending, Berkley commenced an action against Granite and Atlantic-Newport, seeking a declaration of no coverage and asserting a claim for restitution based on amounts paid to defend the underlying suit. The personal injury suit ultimately settled, with Berkley funding the settlement. Thereafter, Berkley amended its complaint to add a request for restitution of the settlement payment as well.
A Massachusetts district court denied Granite and Atlantic-Newport’s motion for judgment on the pleadings. Following discovery, the district court granted Berkley’s summary judgment motion, ruling that it had no duty to defend or indemnify the underlying suit based on a policy exclusion, and was entitled to restitution of its defense and indemnity payments. The First Circuit reversed.
Decision
The First Circuit held that the district court’s ruling as to restitution of the settlement payment conflicted with Massachusetts precedent. In Med. Malpractice Joint Underwriting Assoc. of Mass. v. Goldberg, 425 Mass. 46 (1997), the Supreme Judicial Court of Massachusetts held that where a policy does not contain a provision for reimbursement of settlement payments by the insurer, an insurer may nonetheless seek reimbursement only where the following conditions are met:
if the insured has agreed that the insurer may commit the [insurer’s] own funds to a reasonable settlement with the right later to seek reimbursement from the insured, or if the insurer secures specific authority to reach a particular settlement which the insured agrees to pay.
The district court had concluded that Goldberg was distinguishable from this case because unlike the insured in Goldberg, Granite and Atlantic-Newport had participated significantly in the settlement process and had essentially “whipsawed” Berkley into settling. The First Circuit disagreed, finding Goldberg controlling authority and further holding that the Goldberg conditions were not met. In this respect, the First Circuit emphasized the undisputed fact that the insureds never agreed to Berkley’s request for reimbursement.
The First Circuit also rejected Berkley’s contention that Goldberg is no longer good law in light of a subsequent decision that allowed an insurer to bring a restitution claim based on a reservation of rights that included a right to seek recoupment. The First Circuit emphasized that case involved a disability policy, whereas this case involved a liability policy, and therefore held that the decision did not conflict with Goldberg.
The First Circuit reached the same conclusion with respect to Berkley’s claim for restitution of defense costs. The court reasoned that Berkley’s “full” reservation of rights to disclaim coverage is not the equivalent of a reservation of the right to seek reimbursement of defense costs, and that there was no basis in Massachusetts law for allowing a claim for restitution of defense costs absent any such express reservation.
Comments
As the First Circuit noted, and as we have discussed in previous Alerts, courts in other jurisdictions have allowed insurers to seek reimbursement of defenses costs following a ruling of no duty to defend, under various circumstances. In some cases, the court has relied an insurer’s unilateral reservation of right to do so (and the insured’s implicit agreement to such reservation by accepting the insurer’s defense) and/or theories of unjust enrichment.