provide a defense to CBL [Defendants] under a full and complete reservation of rights. Specifically, Catlin reserves the right to bring a declaratory judgment action in court against the CBL [Defendants] to obtain a judicial determination of Catlin's rights and obligations under the policy, including a determination of whether Catlin has a duty to defend and/or indemnify the CBL [Defendants] in the [Underlying Action]. In the event that it is determined that Catlin does not have a duty to defend the CBL [Defendants] in the [Underlying Action], Catlin reserves the right to be reimbursed by the CBL [Defendants] for all Claim Expenses Catlin paid in connection with the [Underlying Action].

Catlin sought a declaratory judgment as to whether it had a duty to defend or indemnify the CBL Defendants under the contractor's protective, professional, and pollution liability insurance policy that it had issued to the CBL Defendants.

The Delaware court found in Catlin's favor on the duty to defend.

Catlin subsequently asked the court to order the CBL Defendants to reimburse Catlin for the defense costs Catlin had paid under the reservation of rights on their behalf in the Underlying Action, as well as prejudgment interest on that amount. Catlin filed its motion for reimbursement under Section 6508 of Delaware's Declaratory Judgments Act (the “DJA”).

Catlin argued that, under applicable Tennessee law, it was entitled to reimbursement for providing a defense to the CBL Defendants because it had initially reserved its right to reimbursement in its letter notifying the CBL Defendants of its intent to defend them and the CBL Defendants had accepted the defense under that reservation of rights.

For their part, the CBL Defendants contended that Catlin's reimbursement claim required a threshold showing that they had been unjustly enriched by the defense, which showing Catlin could not make. The CBL Defendants asserted that Catlin's payment of the expenses constituted a benefit to the insurer in the form of protection against the risk of an “adverse coverage decision,” precluding any finding of unjust enrichment.

The Court's Decision

The court granted Catlin's motion.

In its decision, the court explained that Catlin sent a “timely and explicit reservation-of-rights letter” to the CBL Defendants on July 19, 2016, and that Catlin brought an action seeking a declaratory judgment regarding its duty to defend the very next day. The court added that the CBL Defendants did not object to the terms of the reservation-of-rights letter, and that Catlin then disbursed payments in March and July 2017 totaling $628,794.67.

Under applicable Tennessee law, the court ruled, this formed “a quasi-contract or a contract implied in law based on unjust enrichment.” The court reasoned that Catlin conferred the benefit of a defense subject to a reservation of rights; the CBL Defendants accepted such a defense; and “it would be inequitable” for the CBL Defendants to retain the benefit of the defense without payment of its value.

Therefore, the court decided, the CBL Defendants had to reimburse Catlin for the $628,794.67 it paid to the CBL Defendants in claims expenses.

The court concluded by finding that Catlin was entitled to prejudgment interest calculated from September 20, 2017, the date when the court determined that Catlin had no duty to defend the CBL Defendants.

The case is Catlin Specialty Ins. Co. v. CBL & Associates Properties, Inc., No. N16C-07-166 PRW CCLD (Del. Super.Ct. Aug. 9, 2018). Attorneys involved include: Emily K. Silverstein, Esquire, Marks, O'Neill, O'Brien, Doherty & Kelly P.C., Wilmington, Delaware, Louis H. Kozloff, Esquire (pro hac vice) (argued), Goldberg Segalla LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiff. John A. Sensing, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Alan E. Popkin, Esquire (pro hac vice), David W. Sobelman, Esquire (pro hac vice), Melissa Z. Baris, Esquire (pro hac vice), Husch Blackwell LLP, St. Louis, Missouri, Attorneys for Defendants.

FC&S Legal

Other courts that have considered this issue have reached different results.

For example, in Cincinnati Ins. Co. v. Grand Pointe, LLC, 501 F. Supp.2d 1145 (E.D. Tenn. 2007), the U.S. District Court for the Eastern District of Tennessee framed the issue as whether an insurer may “seek reimbursement from an insured for defense costs and settlement funds paid on behalf of the insured when it is subsequently determined the insurer owed no duty to defend or indemnify the insured, and the insurance policy does not expressly provide for a right of reimbursement[.]” Because Tennessee appellate courts had not addressed the question before, the insurer argued that the federal district court should adopt the majority position – permitting reimbursement when it was “determined the insurer has no duty to defend or indemnify, the policy does not contain an express provision regarding reimbursement, and the insurer timely reserves its right to reimbursement in a specific and adequate notice” – while the insured argued in favor of the minority position, prohibiting reimbursement unless the policy expressly provided for it. The majority approach had been embraced by the U.S. Court of Appeals for the Sixth Circuit (see United National Ins. Co. v. SST Fitness Corp., 309 F.3d 914 (6th Cir. 2002)) as well as Florida, Guam, Arkansas, and California courts; the minority view was favored by Illinois, Wyoming, and Texas courts.

The Grand Pointe court ultimately followed the majority, grounding its holding on past Tennessee case precedent on similar, though not identical, issues. The court ruled that the insurer had given timely and adequate notice of its reservation of right to seek reimbursement, and that such notice established a quasi-contract implied in law. The court observed that “[f]or almost six months” after being notified that the insurer intended to reserve its rights, the insured “did not opt to utilize any alternative to acceptance of [the insurer's] offer of a defense in the [u]nderlying [l]itigation subject to its reservation of rights.” The court held that “[g]iven this [c]ourt's determination that [the insurer] had no duty to defend . . . with regard to the claims asserted in the [u]nderlying [l]itigation . . . the evidence before the [c]ourt establishes [that the insurer] has a right to reimbursement under a quasi-contract theory of unjust enrichment,” and, further, that it would be “inequitable for [the insured] to retain the benefits of the defense without repayment of the defense costs.” “[The insured] received the benefit of a defense they were not paying for, . . . knew they were receiving a defense they were not funding, and . . . were aware from [the insurer's] reservation-of-rights letter that [the insurer] claimed a right to reimbursement if it was determined [the insurer] owed no duty to defend.” 

Since then, courts have been moving away from awarding reimbursement costs “unless an agreement to the contrary is found in the policy[.]” National Surety Corp. v. Immunex Corp., 297 P.3d 688, 693 (Wash. 2013) (quoting Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510, 514 (Wy. 2000)).

Washington, Arkansas, and the U.S. Court of Appeals for the Eighth Circuit have declined to follow Grand Pointe. See National Surety Corp., 297 P.3d at 693; Westchester Fire Ins. Co. v. Wallerich, 563 F.3d 707, 719 (8th Cir. 2009) (acknowledging a different factual record, but holding that “although Minnesota appellate courts have not announced whether they would permit a right of reimbursement, we find the most recent state and federal court decisions' adoption of the minority position more persuasive . . . . [The insurer] could have included in the policy an express provision for such reimbursement.”); Medical Liability Mutual Ins. Co. v. Alan Curtis Enterprises, Inc., 285 S.W.3d 233, 235 (Ark. 2008) (but finding that the court need not consider the majority or minority approach, as “we have stated on numerous occasions that attorneys' fees are not allowed in Arkansas except where expressly provided for by statute.”).

The trend away from what was the majority position at the time of Grand Pointe is reflected in the revision by the American Law Institute to Section 21 of the Restatement of the Law on Liability Insurance – although the Restatement itself acknowledged that “[s]ome courts follow the contrary rule[.]” Restatement of the Law of Liability Insurance § 21, Reporters' Note (a) (2017). For example, Delaware is among the states that permit recovery of claim expenses. See Nationwide Mut. Ins. Co. v. Flagg, 789 A.2d 586, 597 (Del. Super. Ct. 2001) (holding that the insurer “has as a duty to defend on all claims, but it may seek reimbursement from [the insured] of those expenses, costs or fees incurred by providing his defense on those claims which may be proven later to fall outside the policy coverage.”). See also First Fed. Say. & Loan Ass'n of Fargo, N.D. v. Transamerica Title Ins. Co., 793 F.Supp. 265, 269 (D. Colo. 1992) (“An insurance company may also reserve its right to deny its duty to defend and later recover for any attorney fees paid.”).