At least since the California Supreme Court’s ruling in Buss v. Superior Court, 939 P.2d 766 (Cal. 1997), insurance companies have urged courts to let them sue their own policyholders to recoup the costs that the insurance companies paid to defend their policyholders if, at the end of the day, some or all of the claims are excluded from coverage. The Hawaii Supreme Court is the latest state supreme court to reject the Buss approach, instead requiring the insurance company to bear the full cost of its duty to defend.
The Hawaii Supreme Court’s ruling
On November 14, 2023, in St. Paul Fire & Marine Insurance Company v. Bodell Construction Company, the Hawaii Supreme Court succinctly dismantled the insurance company’s argument that it should be able to sue for reimbursement.
The court’s first point is the most important: there is no right to reimbursement unless the insurance policy explicitly provides for one, and almost always, general liability insurance policies contain no such provision. The court refused to allow a reservation of rights letter to “alter policy coverage or remake a contract,” holding that an insurance company may not recover defense costs for defended claims unless the insurance policy contains an express reimbursement provision. With the adoption in 2018 of Section 21 of the Restatement of the Law of Liability Insurance, that has been the black letter law.
Moreover, permitting a claim for reimbursement would erode the duty to defend, the court explained, because that duty is “determined up front, at the start. Not the end.” An insurance company has a choice at the beginning of the case to: (1) defend without reservation; (2) defend with a reservation of rights to later deny coverage for some or all of a judgment or settlement; or (3) refuse to defend. The duty to defend is broad, so an insurance company refuses to defend at its own peril.
The court also recognized that if the insurance company does assume the defense, it receives certain rights and benefits, often including the right to control the defense. In assuming the defense, the insurance company “protects itself, at least as much as it protects its insured.” For that reason, there is no unjust benefit conferred on a policyholder when the insurance company simply does what it promised to do – defend a lawsuit that contains potentially covered claims.
The simple, persuasive decision of the Hawaii Supreme Court in Bodell will surely have a positive impact on the ongoing development of this area of the law.