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N.Y. Court Takes Contrary Position on Insurers’ Right to Recoup Defense Costs

2021-01-21 15:52:18
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It has long been known that under New York law an insurance company may reclaim the defense costs paid on behalf of an insured once it is finally determined that there was no coverage in connection with the underlying promotion, provided the insurer reserved its rights to obtain a request such compensation.

Several New York courts, both at trial level and at the level of the Appellate Division, have adopted such a rule. A recent decision of the Division of Appeals, Second Division in American W. Home Ins. Co. v. Gjonaj Realty & Mgt. Co., declined to follow these earlier decisions and ruled that the insurer could not recoup the defense costs paid under a policy obligation after it was determined that the insurer did not owe cover, despite the insurer's express reservation of rights in relation to recovery.

This ruling clearly matters to those insurers who have a duty to defend policies in New York. In addition, this new ruling creates a distinction between New York's First and Second Appeals Departments with regard to an insurer's right to reimbursement of defense costs.

Insurers' right to compensation under New York law

Under the law, the duty to defend is broader than the duty to indemnify. An insurer's duty to defend its insured takes effect as long as there is a "reasonable possibility" that the insurer is required to compensate the insured under the policy.

So when an insurer disputes that its duty of defense has come into effect and the case is brought, New York courts have routinely stated that an insurer must continue to defend an insured against an underlying lawsuit until the matter of indemnification to the insured is resolved. .

This begs the question, if an insurer defends its insured, may the insurer reclaim the defense costs if it is ultimately determined that the insurer did not owe coverage?

As noted above, a number of New York courts had ruled prior to the U.S. W. Home that an insurer could recoup the defense costs, ultimately finding that the insurer did not owe coverage under the policy based on a breach of a condition in the policy or an exclusion from coverage.

For example in American Home Assur. Co. v. The Port Authority of New York and New Jersey, the insurer, American Home, has defended policyholders under a commercial general liability policy in connection with thousands of asbestos-related personal injury claims arising from exposure to asbestos during the construction of the original World Trade Center.

After defending and handling the numerous claims for more than 25 years, American Home filed a coverage lawsuit arguing that it was under no obligation to defend its policyholders in connection with the underlying claims.

The Supreme Court of New York, New York County, upheld American Home's right to demand reimbursement of defense costs, stating that under New York law, where an insurer reserves the right to reclaim, it has the right to recoup defense costs that were not covered.

The Appellate Division, First Department, upheld the Supreme Court's ruling and ruled that since American Home reserved the right to seek recovery, the Supreme Court rightly refused to dismiss the recovery claim.

Previous decisions of the Division of Appeals, First Division, have also ruled that an insurer can pursue defense costs reimbursement after it has been determined that no cover was due, based on a reservation of right of recovery.

In addition, federal courts applying New York law have passed the same rule that allows insurers to recoup defense costs when it is determined that there was no coverage. In Max Specialty Ins. Co. v. WSG Investors, LLC, the US District Court, Eastern District of New York, has issued a judgment stating that the insurer, Max Specialty, was entitled to reclaim any fees paid in connection with the defense of his insured , WSG, in an underlying lawsuit.

Decision of the Second Section in American W. Home

In 2011 Viktor Gecaj initiated personal injury proceedings against the insured, Gjonaj Realty & Management Co. and 28-47 Webb Avenue Associates, LLC in the Supreme Court, Bronx County, for damages sustained from an accident in May. 2010 when Gecaj fell off a ladder among the insured.

American W. Home Ins. Co. (American Home) issued commercial general liability insurance that provided for a duty to defend the insured. There was no question, however, that the policyholders did not report the underlying claim to American Home until October 2014, after a default judgment and monetary damages were instituted against the policyholders.

Subsequently, the policyholders succeeded in having the default judgment overturned by the Supreme Court, and American Home informed the policyholders that it would defend them in the underlying proceeding subject to the right to deny coverage to the extent that American Home was disadvantaged by the first late notification.

On April 25, 2017, the Appeals Division, First Division, overturned the lower court order overturning the default judgment and restored the judgment against the insured.

American Home then informed policyholders that it was refusing coverage and filed a lawsuit over insurance coverage in the Supreme Court, Westchester County, requesting a statement that, among other things, it had the right to recover defense costs incurred in connection with with the defense of the insured. in the underlying action.

The Supreme Court upheld American Home's motion for interim relief, stated that there was no coverage for the underlying action, and ruled that American Home was entitled to reimbursement of the costs of defense.

On appeal, the Appellate Division, Second Department, in a decision characterized as a "new legal issue that this court has not yet addressed," upheld the lower court's finding that American Home was under no obligation to defend or indemnify . , but that part of the verdict granting American Home compensation for defense costs has been reversed.

The Second Division's decision is particularly remarkable, as the court expressly refused to take over the establishment of "certain federal courts interpreting New York law and our sister courts of appeal in New York".

Specifically, the Second Division reasoned that allowing an insurance company to recover the costs incurred in defending an underlying action runs the risk of eroding the established rule that the duty to defend is broader than the duty to defend. indemnify. The second department further noted that allowing an insurance company to recoup the defense costs, the duty to defend actually coincides with the duty to indemnify.

The Second Division further distinguished between the earlier Division of Appeals and the federal court holdings that allowed for reimbursement on the ground that none of the previous decisions addressed the question of “ whether to reimburse defense costs appropriately or allowed is & # 39; and that the insurance policy in question did not expressly provide American Home with the right to recoup the defense costs.

What this means for insurers

The decision of the Second Division in W. Home, US, clearly raises the question of whether an insurance company has the right to claim reimbursement of the costs of defense on the basis of a reservation of rights, distinguishing between the First and Second Division and matter is being ripened for review by the New York Court of Appeals.

Notwithstanding the foregoing, it is important to note that American W. Home's participation is likely limited to insurance policies only containing an obligation to defend clauses, such as a CGL policy, as the Second Department's rationale was expressly based on the concept that the The duty to defend is broader than the duty to indemnify and may require insurance companies to defend claims that can ultimately be determined not to be covered.

The rationale would not affect policies that are not required to defend or that expressly state that an insurer is entitled to reimbursement of the defense costs, as may be found in a non-CGL policy, such as a D&O policy.

When considering whether to defend an insured person under a policy, insurers should carefully read the relevant language of the policy and be aware of the potential limitations to the right to compensation under New York law.

Insurers wishing to retain the right to retain the defense costs paid under a policy obligation may consider adding an approval to the relevant policy that explicitly provides for the right to such reimbursement.

In any case, one thing remains clear: to even have a chance of recovery in a court in New York, the insurer must at least have early and explicitly reserved its rights to do so.

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