Superior Court of Massachusetts, Suffolk, Business Litigation Session
Holyoke Mutual Insurance Company in Salem et al.
Vibram USA, Inc. No. 136378
March 21, 2017
MEMORANDUM OF DECISION AND ORDER ON CROSS MOTIONS FOR
SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE
Mitchell H. Kaplan, Justice of the Superior Court.
action arises out of a coverage dispute between the plaintiff
insurance companies, Holyoke Mutual Insurance Company in
Salem (Holyoke) and Maryland Casualty Company
(Maryland) (individually an Insurer, and collectively the
Insurers), and the defendant, Vibram USA, Inc. (Vibram). Each
of the insurers issued commercial general liability policies
to Vibram (or its affiliate) (the Policies). An action was
filed against Vibram in the United States District Court for
the Western District of Washington at Tacoma captioned:
Tefere Abebe Bikila, and others, v. Vibram, case no.
3:15-cv-05082-RBL (the Underlying Action). Vibram asserted
coverage under the Policies and tendered defense of the
Underlying Action to the Insurers. The Insurers each sent a
" reservation of rights" letter to Vibram in which
they agreed to provide its defense to the claims asserted in
the Underlying Action, but also maintained that coverage did
not exist under the Policies and reserved their rights to
bring a declaratory judgment action and seek reimbursement
for defense costs advanced. The Insurers then filed this
declaratory judgment action seeking a declaration that the
claims asserted against Vibram in the Underlying Action are
not covered under the Policies; Vibram counterclaimed for a
declaration that they are. In a Memorandum of Decision and
Order on Cross Motions for Summary Judgment and Partial
Summary Judgment originally issued on August 17, 2016 (the
Decision) [33 Mass.L.Rptr. 564], this court held that the
Policies do not provide coverage for the claims asserted
against Vibram in the Underlying Action and, accordingly,
there is no duty to defend.
case is now before the court on cross motions for summary
judgment addressing the issues of recoupment of defense costs
advanced or, conversely, recovery of defense costs incurred
before the court rendered the Decision but left
unpaid--issues of first impression in Massachusetts. The
Insurers contend that since the claims asserted in the
Underlying Action were not insured under the Policies, they
are entitled to recoup the defense costs that they previously
paid Vibram. Vibram, in turn, maintains that it is entitled
to recover defense costs already incurred, but still unpaid,
as of the date the Decision issued. For the reasons that
follow, each party's motion is allowed, in part, and
denied, in part.
the facts necessary to resolve these cross motions are in
the Insurers sent reservation of rights letters to Vibram,
Vibram exercised its right to control its defense of the
Underlying Action and retained its own counsel. Vibram's
counsel kept the Insurers informed concerning the status of
the Underlying Action and forwarded copies of pleadings to
them. By August 17, 2016, the date the Decision issued,
Vibram had sent the Insurers invoices for defense costs
totaling $1, 272, 212.57 and the Insurers had collectively
reimbursed Vibram $667, 901.71--$472, 216.80 from Holyoke and
$195, 684.91 from Maryland. Vibram last received a payment
from the Insurers on July 18, 2016. Neither Insurer informed
Vibram why it did not pay the full amount of the
relevant to the issues raised by the pending motions, the
Policies provide that the Insurers " will pay those sums
that the insured becomes legally obligated to pay as damages
because of 'personal and advertising injury' to which
this insurance applies. We have the right and duty to defend
the insured against any 'suit' seeking those damages.
However, we will have no duty to defend the insured against
any 'suit' seeking damages for 'personal and
advertising injury' to which this insurance does not
apply." The Policies also state that the Insurers "
will pay, with respect to any claim we investigate or settle,
or any 'suit' against any insured we defend: . . .
All expenses we incur . . ."
Metro. Life Ins. Co. v. Cotter, 464 Mass. 623, 984
N.E.2d 835 (2013) ( Cotter ), the Supreme Judicial
Court (SJC) was called upon to decide if a disability insurer
could recoup from its insured benefit payments made under a
reservation of rights after a court determined that the
insured's benefits claim was not covered. In considering
that claim for recoupment, the SJC noted that, with respect
to liability policies:
We have not addressed whether an insurer may seek
reimbursement for the costs of a defense undertaken pursuant
to a unilateral reservation of rights. We note that other
jurisdictions are split as to the validity of such claims.
See Perdue Farms, Inc. v. Travelers Cas. & Sur.
Co., 448 F.3d 252, 258 (4th Cir. 2006), and cases cited
(" jurisdictions differ on the soundness of an
insurer's right to reimbursement of defense costs").
Based on the theory that insurers are in the business of
analyzing and allocating risk, and thus in a better position
to do so, courts in some jurisdictions have declined to allow
liability insurers to bring reimbursement claims for the
costs of defense. See Texas Ass'n of Counties County
Gov't Risk Mgmt. Pool v. Matagorda County, 52 S.W.3d
128, 135 (Tex. 2000). See, e.g., Excess Underwriters at
Lloyd's, London v. Frank's Casing Crew & Rental
Tools, Inc., 246 S.W.3d 42, 45-47 (Tex. 2008) ("
imposing an extra-contractual reimbursement obligation places
the insured in a highly untenable position"); United
States Fid. v. United States Sports Specialty, 2012 UT
3, 270 P.3d 464, 470-71 (Utah 2012) (" The right of an
insurer to recover reimbursement from its insured distorts
the allocation of risk unless it has been specifically
Id. at 641 n.21. This question is squarely before
this court in this case.
acknowledging that there are divergent views on the right of
recoupment in cases such as this, in which a court has
entered a declaratory judgment that none of the claims
alleged in the complaint are covered under the Policies, the
Insurers maintain that the majority of jurisdictions permit
recoupment. Perhaps, the most frequently cited case for the
proposition that defense costs advanced under a reservation
of rights may be recovered is Buss v. Superior
Court, 16 Cal.4th 35, 65 Cal.Rptr.2d 366, 939 P.2d 766
(Cal.App. 1997). In a more recent decision, the California
Supreme Court reaffirmed its holding in Buss with
the following comments:
As Buss explained, the duty to defend, and the
extent of that duty, are rooted in basic contract principles.
The insured pays for, and can reasonably expect, a defense
against third-party claims that are potentially covered by
its policy, but no more. Conversely, the insurer does not
bargain to assume the cost of defense of claims that are not
even potentially covered. To shift these costs to the insured
does not upset the contractual arrangement between the
parties. Thus, where the insurer, acting under a reservation
of rights, has prophylactically financed the defense of
claims as to which it owed no duty of defense, it is entitled
to restitution. Otherwise, the insured, who did not bargain
for a defense of noncovered claims, would receive a windfall
and would be unjustly enriched.
* * *
As Buss further noted, " [n]ot only is it good
law that the insurer may seek reimbursement for defense costs
as to the claims that are not even potentially covered, but
it also makes good sense. Without a right of reimbursement,
an insurer might be tempted to refuse to defend an action in
any part--especially an action with many claims that are not
even potentially covered and only a few that are--lest the
insurer give, and the insured get, more than they agreed.
With such a right, the insurer would not be so tempted,
knowing that, if defense of the claims that are not even
potentially covered should necessitate any additional costs,
it would be able to seek reimbursement."
Though these comments were made in the context of "
mixed" actions [including covered and uncovered claims],
they apply equally here. An insurer facing unsettled law
concerning its policies' potential coverage of the
third-party's claims should not be forced either to deny
a defense outright, and risk a bad faith suit by the insured,
or to provide a defense where it owes none without any
recourse against the insured for costs thus expended. The
insurer should be free, in an abundance of caution, to afford
the insured a defense under a reservation of rights, with the
understanding that reimbursement is available if it is later
established, as a matter of law, that no duty to defend ever
Scottsdale Ins. Co. v. MV Transportation, 36 Cal.4th
643, 655, 31 Cal.Rptr.3d 147, 115 P.3d 460 (Cal.App. 2005)
(Internal citations and quotations omitted). In this case,
the Insurers make the same arguments that the California
Supreme Court describes in Scottsdale .
however, points the court to a recent, unreported decision of
the United States District Court in Massachusetts that
reaches an opposite conclusion: Welch Foods, Inc. v.
Nat'l Union Fire Ins. Co. No. 09-12087-RWZ, 2011 WL
576600 (D.Mass. Feb. 9, 2011). In that case, like this one,
the District Court found that claims in an underlying action
were not covered by the liability policy and then addressed
the insurer's claim for recoupment of defense costs paid
under a reservation of rights. The District Court
acknowledged the holding and reasoning of Buss, but
rejected the California Supreme Court's opinion in favor
of a more recent decision by the Pennsylvania Supreme Court,
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