HNRK Coverage Corner

On November 14, 2023, the Supreme Court of Hawaii issued a decision in St. Paul Fire & Marine Ins. Co. v. Bodell Construction Co., Case No. SCCQ-22-0000658, holding that insurers may not recoup defense costs for non-covered claims absent an express policy provision for reimbursement. 

Answering a certified question from the United States District Court for the District of Hawaii, the Court explained:

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.

Hawaii’s duty to defend is determined up front, at the start.  Not the end.  Although an insurer’s duty to indemnify arises only after damages are fixed, the duty to defend arises as soon as damages are sought.  When a claim may fit a contract’s confines, the insurance company’s refusal to defend at the outset of the controversy is a decision it makes at its own peril.

If 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; worse it may bring on bad faith.  Allowing an insurer to exercise an independent right to reimbursement before it obtains a declaratory judgment would be wholly inconsistent with and likely constitute a breach of, its duty under established law to undertake the defense in good faith.

Reimbursement for defense costs undercuts the duty to defend.  It would amount to a retroactive erosion of the broad duty to defend by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims.  Letting the insurer recoup defense costs would effectively require that insurers only defend to the same extent that they must ultimately indemnify.

The Court (correctly, in our view) rejected the argument that an insurer can, in its reservation of rights letter, unilaterally condition the defense on a right of recoupment:  “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.”

At the Coverage Corner, we have been closely following the issue of recoupment of defense costs under New York law, where there is a split of authority in the Appellate Divisions.  See our prior posts here, here, and here.

The Hawaii Supreme Court’s decision follows what a federal appeals court described earlier this year as a “recent trend of state high courts holding that there is no right to reimbursement in similar cases.”