Insured Required to Reimburse Defense Costs Paid by Insurer for Non-Covered Claim

In a win for a Wiley Rein client, the United States District Court for the Southern District of California, applying California law, has held that an insured is required to reimburse his insurer for defense costs incurred for a non-covered claim where the insurer properly reserved its right to recoupment. Columbia Cas. Co. v. Abdou, 2016 WL 4417711 (S.D. Cal. Aug. 18, 2016).

The insured life insurance agent was sued by one of his clients, who alleged that he lost more than $3 million as a result of a premium-financed life insurance agreement that the agent had brokered, and that the agent made misrepresentations regarding future premium payments. The insurer defended the agent under a reservation of rights and initiated a coverage action. The court held that no coverage was available for the suit because it fell within the policy’s exclusions for claims based upon, directly or indirectly arising out of, or in any way involving premium finance mechanisms or guarantees about future premiums. However, the court did not address the insurer’s request for reimbursement of the defense costs it had already expended on the suit, and the insurer filed a motion to alter the judgment.

Citing Buss v. Superior Court, 16 Cal. 4th 35 (1997), the court held that California law clearly allows insurers to be reimbursed for attorneys’ fees and other expenses paid in defending against claims for which there was no obligation to defend, and an insurer that properly reserves its rights is entitled to reimbursement of defense costs as a matter of law, even where the policy does not provide for reimbursement. The court found that the insurer in its coverage correspondence “adequately reserved its right to assert non-coverage and seek reimbursement.” The court rejected the agent’s argument that the policy language required the insurer to continue to defend, finding that the exclusions eliminated both the insurer’s liability for any monetary judgments or settlements and its duty to pay the costs of defending.

The court determined that the agent did not need discovery regarding the amount paid by the insurer, concluding that the insurer’s evidence, including declarations by its claim consultant and cancelled checks made out to the agent’s defense counsel, was sufficient. The court also refused to stay the reimbursement order while the agent appealed because of his low likelihood of success on the merits.