Cases addressing an insurer’s right to reimbursement of defense costs, following a determination that it had no duty to defend in the first place, are not infrequent.  But such decisions, from state high courts, are the ones that get the attention of scorekeepers on this issue.  [Curiously, the issue has been the most popular to be addressed by courts that have turned to the ALI’s Insurance Restatement as a source of guidance.  Whoda thunk it?]

In St. Paul Fire & Marine Ins. Co. v. Bodell Constr. Co., No. SCCQ-22-0000658 (Haw. Nov. 14, 2023), the Hawaii Supreme Court answered the following question from a Hawaii District Court:

“Under Hawaiʻi law, may an insurer seek equitable reimbursement from an insured for defense fees and costs when the applicable insurance policy contains no express provision for such reimbursement, but the insurer agrees to defend the insured subject to a reservation of rights, including reimbursement of defense fees and costs?”

Hawaii’s top court, concluding that the state’s “stout duty to defend clashes with repayment” answered “no.”  Having done so, the court did not reach the follow-up certified questions: “(A) for what specific fees and costs may the insurer obtain reimbursement, (B) which party carries the burden of proof, and (C) what is the burden of proof?”

The court in Bodell Construction, after noting that some states allow reimbursement and others do not, employed a three-part approach to deciding in which camp Hawaii would join.  These are generally the same issues that all courts coming before it have addressed 
 
The Insurance Policy Does Not Contain the Right
“Insurers may reserve contractual rights, not create new ones. Permitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.  A reservation of rights letter does not alter policy coverage or remake a contract.  It "does not relieve the insurer of the costs incurred in defending its insured where the insurer was obligated, in the first instance, to provide such a defense.”

Reimbursement is Inconsistent With a Broad Duty to Defend
“The duty to defend is broader than the duty to indemnify.  An insurer only indemnifies covered claims.  But an insurer must defend when there is possible coverage, even ‘groundless, false, or fraudulent’ claims.  And the insurer has to defend mixed actions: some claims covered, others not. The insurer is obligated to provide a defense against the allegations of covered as well as the noncovered claims.”  Based on this, as the court saw it, “[i]f insurers recover for defending uncovered claims, our law flips: the duty to defend may be determined after the insurer tenders a defense. Not only does this sequence narrow the broad duty to defend, it dilutes an insurer’s good faith duty to take on a defense…”

Policyholders Are Not Unjustly Enriched By the Insurer’s Defense Of Uncovered Claims
“Since the insurer faces indemnity exposure, it deserves what it bargained for — near total control over a case.  Normally, an insurer’s duty to defend is coupled with the right to control the defense of the litigation.  . . .  An insurance company that tenders a defense protects itself, at least as much as it protects its insured.  No scrubs, say the insurers. An insurer has the right to defend its own way to avoid the risks of an inept or lackadaisical defense of the underlying action.
 
“If we allowed reimbursement, the unjustly enriched party may very well be the insurer.  When the insured pays back defense costs to the insurer, it pays for the insurer to protect itself.  If a court later determines that there is no duty to defend, then reimbursement protects the insurer from bad faith or breach of contract actions - without any responsibility for defense costs.  An all reward, no risk proposition creates a win-win situation for the insurer: buffered from bad faith, it defends all claims, yet has no obligation to pay for the whole defense. Meanwhile, the insured receives no greater benefit than if its insurer had refused to defend outright.”

Turning to the insurer’s argument that “the sky will fall and a world without a right to reimbursement is ‘rife with temptation to deny . . . costly and questionable claims,’ the court concluded that “insurers are seasoned, skilled, and well positioned to evaluate whether they need to defend. And bad faith or breach actions motivate them to honor contractual obligations.”