Request for Reimbursement of Defense Costs
December 12, 2016
This case arises from a professional liability insurance policy issued by Columbia Casualty Company to Mostafa Abdou. When the insured was sued, the insurer provided a defense under a reservation of rights. Columbia then filed a declaratory judgment action as to its responsibilities under the policy.
The lawsuit against Abdou fell squarely within the exclusions, so the court ruled that there was no coverage. However, that court did not address Columbia's request for reimbursement of defense costs. So, the insurer filed a motion seeking reimbursement of defense costs. This case is Columbia Casualty Company v. Abdou, 2016 WL 4417711.
Abdou argued that Columbia must pay his defense costs because the exclusions only exempt for loss, that is, monetary settlements or monetary judgments, and defense costs for which the insured is legally obligated to pay on account of a covered claim. Accordingly, Abdou said that the exclusions render uncovered any judgment or settlement that would be obtained against Abdou, but not the costs of defending him because the defense costs are not those that the insured is legally obligated to pay.
The United States District Court, S.D. California, said that Abdou's interpretation of a loss sets forth the expenses that the insured might be liable for as a result of a claim, and that the insurer will be required to reimburse if the claim is covered. An insured might be liable for settlements or judgments against him and if the claim is covered under the policy, the insurer will have to pay. However, the court continued, the insurer is not required to pay for the loss if the policy excludes coverage. This means the insurer's liability for any monetary settlement or judgments is eliminated and this includes defense costs.
The court said that courts must interpret contractual language in a manner that gives force and effect to every provision, and the court's interpretation of loss here follows this maxim; Abdou's interpretation does not. There was no potential for coverage in the underlying case against Abdou and so, there was no need for Columbia to pay for the defense.
The insurer's motion for relief was granted. Abdou was required to reimburse Columbia in the amount of $273,923.56.
Editor's Note: The U.S. District Court rules in this instance that the insurer did not contract to pay defense costs for claims that are not even potentially covered. The court noted that California law clearly allows insurers to be reimbursed for defense costs paid in defending insureds against claims for which there is no obligation to defend.
The underlying point being made by this court is that the insured has been enriched through the insurer's bearing of unbargained-for defense costs, and this enrichment must be deemed unjust. An insurer that properly reserves its rights is entitled to reimbursement of defense costs it never owed as a matter of law, and this is true even where the policy does not provide for reimbursement.