Tred R. Eyerly | Insurance Law Hawaii
In a case of first impression, the Supreme Court of New York, Appellate Division, found the insurer had no right to reimbursement of defense costs paid to defend the insured. Am. W. Home Ins. Co. v. Gjoaj Realty & Mgt. Co., 2020 N.Y. App. Div. LEXIS 8286 (N.Y. App. Div. Dec. 30, 2020).
Gjonaj Realty was sued by Viktor Gecaj when he fell from a ladder at the premises managed by Gjonaj Realty. The matter was not tendered to American Western Home Insurance Company until four years after the accident and after a judgment of $900,000 had been entered against Gjonaj Realty after its default. American denied coverage after late notice was given. Thereafter, the Supreme Court in the underling action vacated the default judgment. American then agreed to defend under a reservation of rights.
The Appellate Division reversed the vacatur of the default judgment and reinstated the default against the insured. American then advised Gjonaj Realty that it was denying coverage and reserving its right to recover any fees and costs incurred in defending the underlying action.
American sued Gjonaj Realty for a declaratory judgment, establishing that it had no duty to defend, no duty to indemnify, and was entitled to reimbursement of defense costs. The Appellate Division agreed American had no duty to indemnify and no duty to defend.
Regarding reimbursement, a handful of cases in New York had affirmed orders allowing an insurance company to recoup its defense costs upon a determination that no duty to indemnify existed. Here, the policy and the supplementary payment provision expressly promised the insureds that the insurer would bear all the costs “to defend the insured against any suit” to which the policy applied. The policy, however, was silent as to any reimbursement by the insurer for the costs of defense incurred prior to a declaratory judgment determine that there was no duty to defend or indemnify the insured in the underlying action. Had the insurer wanted to include language that allowed it to recover the costs of defending claims that were later determined not covered, it could have done so. But it did not do so here. Therefore, American could not recover its defense costs in the underlying action absent an express provision to that effect in the policy.
Nor could the insurer recover under an equitable argument that the insureds would be unjustly enriched if the insurer had to bear the costs of defense. New York law precluded claims of unjust enrichment where the policy governed the subject matter at issue. Where the insurer and insured were contractually bound by the terms of the policy, any resort to equitable remedies as a basis for an award of defense costs was unavailing. Further, there was no unjust enrichment here. Given New York’s policy imposing upon insurers a broad duty to defend, there could be no finding that the insured was unjustly enriched as a result of the defense provided by the insurer for claims that were later found to be outside the policy.
Other than dicta, there is no Hawaii appellate decision on the right of the insurer to obtain reimbursement of defense costs. See Lexington v. Nautilus, 132 Haw. 283, 293, 321 P.3d 634, 644 (2014) (suggesting if an insurer defending under a reservation of rights determined it has not duty to defend, the insurer may recoup its expenses from the insured). While the Hawaii federal district court has come out on both sides of the issue, one decision noted that “a ruling on reimbursement would be a major decision on Hawaii insurance law that could have a tremendous impact on the duty to defend in hundreds of other cases.” Exec. Fisk Indem., Inc. v. Pac. Educ. Servs., 451 F. Supp. 2d 1147, 1163 (D. Haw. 2006).