When Does An Insured Have to Reimburse Its Insurer for Amounts Paid by the Insurer On a Claim?

Well, this is something. I think the partner who mentored me as a junior associate and I started reserving insurers’ rights to recover defense costs back from insureds if the claim at issue turned out to be uncovered thirty years ago – and someone has finally convinced a Massachusetts court to order an insured to repay defense costs to an insurer under those circumstances, as pointed out in this Massachusetts Lawyers Weekly article (it’s behind a paywall, so if you are not a subscriber, here is the decision itself). The idea behind this issue is that an insurer’s duty to defend its insured against lawsuits is so broad at the outset of a case that insurers inevitably end up paying to defend insureds against innumerable claims that, once the facts are learned, clearly were actually never covered. The equitable solution sought by insurers in many circumstances and in many jurisdictions has been the recovery from the insured of the defense costs paid by it on those claims. Whether insurers can or should have this right is a pretty contentious point just about anywhere and anytime it is broached, and it is fascinating to see a federal court in Massachusetts – where the law, from bad faith standards to policy interpretation rules to the interpretation of the claims handling statute, has long armed insureds for battle against their carriers – find so powerfully in favor of insurers on this issue.

In a way, the decision, Berkley National Insurance v. Granite Telecommunications, is of a piece with a handful of recent Massachusetts state court cases concerning interpretation of insurance policies which, in my view, reflect the pendulum swinging back away from insureds on disputes over the extent of coverage granted by policies. In those circumstances and cases – which is a topic for another day – the courts appear to be cutting back on the long standing, almost kneejerk belief that, if an insurance policy is unclear at all, it must be deemed ambiguous and the dispute decided in favor of the insured, in favor of a more nuanced, evidence-based inquiry into the meaning of the language in the policy. A continuation of that trend would go far towards placing insurers and insureds on a more neutral playing field in the context of coverage disputes in Massachusetts, and the ruling in Berkley concerning defense costs would add still more to that shift.

In this regard, though, it is worth noting that the Court made clear in Berkley that its ruling in favor of the insurer on reimbursement to the insurer of defense costs was fact specific, and the decision and its reasoning can easily be distinguished by the typical insured consumer in the typical duty to defend type of case – such as a homeowner sued for a slip and fall or the driver sued for an auto accident, which are circumstances where the insurer pretty much acts unilaterally in defending the insured. In Berkeley, in contrast, the insured aggressively pressed the carrier for coverage in a way that the Court viewed as having a “flavor of extortion,” which the Court clearly considered central to its ruling. Given this, the decision is probably best understood as simply adjusting the relationship between insureds and insurers a little bit in the direction of insurers, and not as the sea change one might otherwise think was occurring. Either way, I still see it, when combined with other recent decisions, as part of an overall, perhaps unintentional, recalibrating of the legal relationship between insurers and insureds in Massachusetts.