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Holyoke Mutual Insurance Co. v. Vibram USA, Inc.

Superior Court of Massachusetts, Suffolk, Business Litigation Session

March 20, 2017

Holyoke Mutual Insurance Company in Salem et al.
v.
Vibram USA, Inc. No. 136378

          Filed March 21, 2017

          MEMORANDUM OF DECISION AND ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT ON RECOUPMENT AND RECOVERY OF DEFENSE COSTS

          Mitchell H. Kaplan, Justice of the Superior Court.

         INTRODUCTION

         This action arises out of a coverage dispute between the plaintiff insurance companies, Holyoke Mutual Insurance Company in Salem (Holyoke)[1] 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).[2] 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.

         The 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.

         ADDITIONAL BACKGROUND

         None of the facts necessary to resolve these cross motions are in dispute.

         Because 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.[3] 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 invoices.[4]

         As 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 . . ."

         DISCUSSION

         Recoupment

         In 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 bargained for").

Id. at 641 n.21. This question is squarely before this court in this case.

         While 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 arose.

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 .

         Vibram, 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, American & Foreign Ins. Co. v. Jerry's Sport Center, Inc., ...


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