Insurer Entitled to Recoup Defense Costs Absent Express Policy Provision

The United States District Court for the Eastern District of Michigan, applying Michigan law, has held that, even absent an express policy provision regarding recoupment, an insurer was entitled to recoup defense costs after an amended complaint was filed that confirmed that an exclusion barred coverage for the claim. Great Am. Fidelity Ins. Co. v. Stout Risius Ross, Inc., 2022 WL 16571316 (E.D. Mich. Nov. 1, 2022).

A professional valuation services firm was hired to serve as a financial advisor to the trustee of a company’s employee stock ownership plan (the ESOP Company). In that capacity, the valuation firm was required to perform an annual independent valuation of the ESOP Company’s parent company. The ESOP Company ultimately went bankrupt and the ESOP suffered financial losses. The ESOP Company accused the valuation firm of negligently or fraudulently appraising and overstating the value of the parent company, which it alleged contributed to its bankruptcy and the ESOP’s financial losses. The bankruptcy trustees for the ESOP Company also sued the valuation firm. The valuation firm sought coverage for both lawsuits under its professional liability policy.

The insurer agreed to defend under a reservation of rights, expressly reserving the right to seek recoupment of defense costs if it was later determined that the insurer did not owe a duty to defend or indemnify the policyholder. The policy did not include any provision regarding recoupment of defense costs. The court initially determined that the original complaints triggered the insurer’s duty to defend. After the plaintiffs filed an amended complaint, the court determined that an exclusion barred coverage in full, terminating the insurer’s duty to defend. The insurer sought recoupment of defense costs expended after the complaint was amended.

The court acknowledged that the Michigan Supreme Court has not decided the issue of an insurer’s recoupment of defense costs following a determination that the insurer does not have a duty to defend. Nevertheless, the court looked to Sixth Circuit precedent predicting that Michigan law would allow recoupment in similar circumstances. Relying on the decisions from the Sixth Circuit, the court held that the insurer was entitled to recoupment even though no provision in the policy expressly addressed that issue. The court emphasized that the insurer reserved its right to seek recoupment well in advance of the date the amended complaint was filed.