Civil Litigation Newsletter
From left to right: Christopher A. Kenney and Adam M. Veness of Kenney and Sams PC.
Massachusetts Federal District Court Holds That An Insurance Company Cannot Recoup Defense Costs From An Insured
by Christopher A. Kenney and Adam M. Veness*
A very important and highly debated area of law is the extent of
an insurer's ability to recoup defense costs that it advanced to an
insured under a duty to defend. The debate only arises when the
insurance policy does not contain language explaining the potential
for a recoupment of defense costs. The law on this subject differs
greatly depending on the state law that governs the issue. Until
recently, Massachusetts courts had not officially adopted a
position on the question, but in February, the Massachusetts
Federal District Court has finally chosen a side. Before discussing
the court's opinion, it is important to analyze the two cases with
which the court grappled in making its decision.
To Recoup or
Not to Recoup
In the controversial decision of Buss v. Superior
Court, the Supreme Court of California was the first court to
directly address the issue of whether an insurer is entitled to
recoup costs for defending the noncovered counts of a third party
action against its insured. 939 P.2d 766 (Cal. 1997). In
Buss, the insurer defended an entire action and sought
restitution for its costs in defending the 26 out of the 27 counts
which were not covered by its policies. Id. at 770. The
court affirmed a primary insurer's duty to defend an entire "mixed
action" but held that the insurer had a quasi-contractual right to
secure reimbursement for costs incurred in defending noncovered
counts. Id. at 776. The court further held, however, that
an insurer is entitled to reimbursement only of defense costs "that
can be allocated solely to the claims that are not even
potentially covered." Id. at 778.
The court reasoned that the insurer could only recover defense
costs allocated solely to the claims not even potentially covered
because the insured paid premiums to the insurer to cover claims
that are at least potentially covered by the policy. Id.
The insured also paid premiums to cover defense costs that can be
allocated jointly to both potentially covered and noncovered claims
(i.e. mixed claims). Id. The court noted that defense
costs which were required to defend actually or potentially covered
claims, whether or not joined with noncovered claims, cannot be
recovered by the insurer. Id. at 778, n.15.
The other decision the Massachusetts Federal District Court
considered was American & Foreign Ins. Co. v. Jerry's Sport
Center, Inc., 2 A.3d 526 (Pa. 2010). In Jerry's
Sport, the court determined that the insurer had an absolute
duty to defend claims that are even potentially covered, and that
an insurer must make the decision about whether to advance defense
costs. Id. at 542. If the insurer determines that there is
no possibility of coverage, then it should deny its insured a
defense. Id. However, if the insurer is incorrect in
denying coverage, then it risks being liable for breach of
The Jerry's Sport court placed the duty to determine
coverage and the risks associated with an incorrect determination
solely on the insurer. Following the Jerry's Sport
holding, an insurer has two choices: it can advance defense costs
and not have a claim for recoupment even if the claims against the
insured are not even potentially covered by the policy, or it can
deny its insured a defense and risk breaching its contract with the
Makes Its Determination
Relying on the reasoning of the two opposite holdings in
Buss and Jerry's Sport, the Massachusetts Federal
District Court fell directly in line with Jerry's Sport.
In Welch Foods Inc. v. Nat'l Union Fire Ins. Co., the
Massachusetts Federal District Court determined that an insurer
must bear the risk of advancing defense costs to an insured. 2011
WL 576600, at *3 (D. Mass. Feb. 9, 2011). The Welch court
agreed with Jerry's Sport in that it is the insurer's duty
to make the determination of whether a claim is covered.
Id. The court reasoned that the insurer is in the business
of making that determination and should do so in these situations.
Id. If the insurer was incorrect in its determination to
advance defense costs, the insured will not be required to
reimburse the insurer for the insurer's incorrect determination.
Although Welch is a federal opinion and has no direct
authority over Massachusetts state courts, it does shed light on
the direction that Massachusetts is headed on this issue. One thing
that is for sure, the Welch opinion will at least have a
deterrent effect on Massachusetts insurance companies that are
considering whether to seek reimbursement for defense costs
advanced to insureds.
& Sams PC