Federal Courts Reject Insurers’ Attempts to Recover Defense Costs Incurred Subject to Rights | White and Williams LLP

In situations where there is a dispute over a duty to defend, an insurer may provide a defense to its insured, subject to reservation of rights, not only to deny coverage of a defense, but also to file a declaratory judgment action and recover defense costs if it is determined that there is no duty to defend. But are defense costs recoverable? Last week, federal trial courts in Georgia and Pennsylvania answered that question with a resounding “no.”

In Chemical Equipment Labs, Inc. v. Travelers Property Casualty Company of America, Case No. 19-3441, 2022 U.S. Dist. LEXIS 61298 (EDPa. March 31, 2022), the United States District Court for the Eastern District of Pennsylvania was asked to determine whether Travelers Property Casualty Company of America (Travelers) was entitled to reimbursement of defense costs after it was determined that he had no obligation to defend his insured in arbitration for breach of a charter contract. Travelers’ policies did not contain an express reimbursement clause. The court found that Travelers was not entitled to a refund because, under Pennsylvania law, “[r]reimbursement of defense costs requires an express stipulation in the written insurance contract.

Likewise, in Mt. Hawley Insurance Company v. East Perimeter Pointe Apartments LP, case no. 20-cv-3529, 2022 US Dist. LEXIS 61885 (ND Ga. Apr. 1, 2022), the United States District Court for the Northern District of Georgia considered whether Mt. Hawley Insurance Company (Mt. Hawley) was entitled to reimbursement of defense costs after determining that he had no obligation to defend his insured against a lawsuit for negligence in management and security. Mt. Hawley’s reservation of rights explicitly reserved the right to seek reimbursement of defense costs in the event that it was determined that there was no coverage available under its commercial general liability policy; however, the policy did not contain a reimbursement clause.

the East Perimeter The court acknowledged that the recovery of defense costs in the absence of express reimbursement provisions is an unresolved issue in Georgia because “Georgian courts have not decided the issue and the federal courts are divided.” In Illinois Union Insurance Company v. NRI Construction, Inc.., 846 F. Supp. 2d 1366 (ND Ga. 2012), the court allowed the reimbursement, finding that it was justified under unjust enrichment or an implied theory of contract of fact. However, in American Family Insurance Company v. Almassud, 522 F. Supp. 1263 (ND Ga. 2016), the court required an express reimbursement clause in the contract, concluding that “if a right of recovery is a benefit which the insurer deems sufficiently important, it can easily secure this right by including it in the police agreement.”

the East Perimeter court finally concluded that Almassud was more persuasive, on the grounds that allowing a right of recovery in the absence of a policy provision would allow insurers to unilaterally impose post hoc conditions on their contractual obligations.

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