Duty to Defend
As a general matter, an insurer’s duty to defend is broader than its duty to indemnify.[5] This contractual obligation to defend under the CGL policy is separate and apart from an insurer’s duty to provide coverage.
As a result, an insurer must provide its insured with a defense against all actions covered by the CGL policy. When a complaint is filed against the insured alleging a covered claim, the insurer’s duty to defend is triggered. Thus, when the allegations in the complaint fall within a risk that is covered by the CGL policy, the insurer is obligated to defend. Indeed, as long as the allegations in the complaint comprehend a claim or injury that may possibly be covered by the insurance policy, a duty to defend will arise.[6]
Courts will generally determine whether a third-party claim asserted against an insured is potentially covered under the CGL policy by comparing the allegations in the complaint with the insurance policy’s language. The duty to defend arises even if the allegations in the complaint are “poorly developed and almost sure to fail.”[7]
The duty to defend is not limited to only meritorious actions. Indeed, the merit of the claim asserted against the insured is immaterial. Rather, courts will look only at the allegations asserted. In other words, that the allegations may be “groundless, false, or fraudulent” does not defeat the duty to defend. [8]
As the New Jersey Supreme Court recently pronounced, the “determination of an insurer’s duty to defend requires review of the complaint with liberality to ascertain whether the insurer will be obligated to indemnify the insured ‘if the allegations are sustained.’”[9]
The Buss Line of Cases
Buss arose out of an underlying lawsuit in which only 1 of 27 claims was potentially within the insurance policy’s coverage. The underlying action was brought against Jerry Buss, the owner of several sports teams, including the Los Angeles Lakers, who was alleged to have, among other things, breached a contractual obligation with a third party. The underlying complaint alleged 27 causes of action, including a count for defamation that turned out to be the only potentially covered claim. The insurer provided a defense for all 27 counts pursuant to a reservation of rights letter, which included a right to seek reimbursement of all defense costs. The coverage action eventually came before the California Supreme Court, which held that because the insurer’s duty to defend extended to claims that were at least potentially covered, the insurer was not entitled to seek reimbursement of defense costs for the one potentially covered defamation claim. The court held, however, that the insurer could seek reimbursement of all the defense costs related to the 26 claims that were not potentially covered.[10]
In support of its conclusion that the insurer was entitled to reimbursement of the non-covered claims, the California high court observed that the insurer had not been paid premiums by the insured with regard to those non-covered claims, nor did the insurer bargain to bear the costs of defending claims that were not potentially covered under the insurance policy. According to the court, the insurer had a right to seek reimbursement that is “implied in law as quasi-contractual, whether or not it has one that is implied in fact in the policy as contractual.”[11]
The court also reasoned that the insurer had the right to seek reimbursement because the insured would be “unjustly enriched” if the insurer had to incur defense costs it had not bargained for, which the court found to be unjust.[12] In short, while the insurer had no right to seek reimbursement of the potentially covered claim, the insurer did have a right to seek reimbursement for claims that were not potentially covered.
Following Buss, insurers have routinely issued reservation of rights letters seeking reimbursement of defense costs. Numerous courts following Buss have found in favor of the insurer, usually based on contractual or equitable principles, or both. For example, several courts view the insurance policy as being inapplicable because reimbursement was sought for defense costs incurred for claims that were not covered and the reservation of rights letter was an offer to create a “new contract” regarding those non-covered claims. These courts view the insured as having accepted that reservation of rights letter by virtue of having accepted the insurer’s payment of defense costs pursuant to that reservation.[13]
Besides this contractual viewpoint, other courts following Buss apply the equitable theory of unjust enrichment and the remedy of restitution in quantum meruit. This theory disallows the insured from being unjustly enriched when the insurer paid defense costs for non-covered claims.[14]
Although many courts have followed the Buss lead on this issue of reimbursement of non-covered claims, that majority view has eroded over time. As the next section demonstrates, there is now a growing minority view embraced by a number of courts that reject the reasoning of Buss.
The Growing Trend to Get Off the Buss
A number of courts have now rejected Buss for a variety of reasons. Some courts have concluded that reimbursement of defense costs is simply inconsistent with the broader duty to defend.[15] Other courts have rejected the notion that reimbursement of defense costs can be allowed based on a reservation of rights letter, pointing out that the insurer voluntarily undertakes the defense in order to protect its own self-interest. The Third Circuit Court of Appeals endorsed this reasoning in Terra Nova Insurance Co. Ltd. v. 900 Bar, Inc.,several years before Buss was decided. The court explained that an insurer’s role in providing a defense with a reservation of rights is just as much for its benefit as the insured’s. By providing a defense, an insurer avoids the risks that an inept defense will expose it to should indemnity be required. By also asserting a reservation of rights, the insurer preserves its ability to contest that same indemnity should its defense ultimately be unsuccessful. If the insured were later required to pay the insurer’s defense costs, the insurer would not be required to carry any financial burden for protecting its interests in the underlying action.[16]
Further, several courts have rejected Buss by finding that a unilateral reservation of rights letter from the insurer does not create new contractual rights that were absent in the insurance policy itself.[17] Other courts have rejected Buss by finding that, as a matter of fairness, an insurer should not be able to benefit unfairly by hedging its bets on its defense obligations by reserving its right to reimbursement while potentially controlling the defense and avoiding a bad-faith claim.[18]
The Pennsylvania Supreme Court recently joined this growing trend of cases that have rejected the Buss rationale. In American & Foreign Insurance Co. v. Jerry’s Sports Center, Inc.,the National Association for the Advancement of Colored People filed a civil action against several firearms wholesalers and distributors seeking to hold the firearms industry liable for injury, death, and other damages through the negligent creation of a public nuisance for failing to distribute firearms in a reasonable and safe manner. The insured notified its carrier of the action and requested a defense and indemnification, noting that the allegations fell under the “bodily injury” coverage provided by the CGL policy. The insurer assigned defense counsel to provide a defense and respond to this lawsuit pursuant to a full reservation of rights, which included the right to seek reimbursement for all defense costs for claims ultimately determined not to be covered. The insurer sent the insured several reservation of rights letters emphasizing this right to seek reimbursement.[19]
In rejecting Buss, the Pennsylvania high court concluded that the growing minority view was more consistent with Pennsylvania’s broad duty to defend when also viewed in light of the CGL policy’s express language.[20] The court noted that where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, allowing reimbursement for costs that the insurer incurred in exercising its right and duty to defend potentially covered claims prior to a court’s determination on coverage would be inconsistent with Pennsylvania’s broad duty to defend. It would also amount to a “retroactive erosion of the broad duty to defend in Pennsylvania by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.”[21]
The court accordingly held that the insurer could not employ a reservation of rights letter to reserve a right it did not originally have under the CGL policy, which the court found would be “tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.”[22]
The Pennsylvania high court also rejected the notion that there was any equitable basis on which to allow the insurer the right of reimbursement. The court reasoned that an insured is not unjustly enriched by the insurer’s payment of defense costs. This is because the insurer has not only the duty to defend but also the right to defend pursuant to the insurance agreement. This arrangement, the court observed, assists both parties in that the duty to defend benefits the insured to protect it from the costs of defense, while the right to defend allows the insurer to control the defense to protect itself against potential indemnity exposure.[23]
Last, the court recognized that if the insurer could seek reimbursement of defense costs that are beyond the express language of the CGL policy, that would allow the insurer to “design its own right to reimbursement subject only to the insurer’s designs.”[24] The court was concerned that allowing the insurer to “design” its own right of reimbursement would open the door to unjustified maneuverings by insurance companies at their policyholders’ expense.[25] Therefore, the court held that the insurer cannot obtain reimbursement of defense costs for a claim for which a court later determines there was no duty to defend, even where the insurer attempts to claim a right to reimbursement through a reservation of rights letter.[26]
Courts Should Follow Growing Minority View
As noted at the outset, several courts have not yet addressed the issue of an insurer’s ability to seek reimbursement of defense costs incurred in connection with non-covered claims. Nationwide, the courts appear to be evenly divided over this issue. It appears, however, that the growing trend of authority that rejects Buss,as exemplified by the recent Pennsylvania Supreme Court decision, is the better-reasoned approach to this coverage issue and should be adopted by other jurisdictions as well.
As an initial matter, the plain language of the standard CGL policy simply does not authorize an insurer to seek reimbursement. The CGL policy provides the insurer with the duty and right to defend its insured against third-party claims. Once the insurer elects to defend its insured, the carrier has no contractual right to unilaterally modify that agreement—an agreement the carrier drafted in the first instance—by trying to create a new agreement through a reservation of rights with different terms that were never agreed to by the insured. If the insurer wants to have this right to reimbursement, it can easily be included in the policy language. Presently, that language is absent and should not be imposed unilaterally on an insured after a complaint has been filed. Moreover, by defending the insured, the carrier also benefits its own self-interests by controlling the defense with the hope of avoiding or minimizing its indemnity obligation.[27]
Buss’s duty to reimburse rule is also inconsistent with the widely recognized broader duty to defend. All potentially covered claims trigger the insurer’s duty to defend. There is always the possibility, however, that a court will later determine a claim is not covered. In that instance, there may no longer be a duty for the insurer to indemnify that claim. However, the duty to defend is broader than the duty to indemnify. To allow the insurer to be reimbursed for defense costs would improperly place those two contractual rights on the same level—yet, they have historically always been considered separate and apart.[28]
Further, the concept of “fairness” has no place in this analysis. Buss espoused that it would be unfair for insurers to be required to defend non-covered claims because the insured never paid a premium for that coverage. Buss misses the point. The plain language of the CGL policy provides that very coverage. The insured paid a premium so it would be defended against third-party claims that are potentially covered under the insurance agreement. That was the understanding struck, and it is the insurer that is in the better position to appreciate the risks it is underwriting. Indeed, insurers are in the business of taking risks and determining when claims are covered or not covered. Insurers should not be allowed to have it both ways, which is exactly what Buss allows when it sanctions the unilateral abridgement of the insurance contract through a reservation of rights letter.
Because most states recognize that the insurer has a broad duty to defend its insured, because the plain language of the standard form CGL policy recognizes that duty and does not authorize the insurer to seek reimbursement for claims later determined to be non-covered, and because the insurer receives the benefit of controlling the defense in defending its insured and minimizing its indemnity exposure, the Buss rationale that a carrier can unilaterally alter the CGL policy’s duty to defend by the issuance of a reservation of rights letter is inconsistent with the broad duty to defend as well as the plain language of the insurance agreement itself. For these reasons, we believe those courts that have yet to decide this issue should follow the Pennsylvania high court’s lead and, accordingly, exit the Buss.
Benjamin D. Morgan is with Archer & Greiner PC, Haddonfield, NJ. The views and opinions expressed in this article are those of the author and not necessarily those of Archer & Greiner or its clients.
[1] Buss v. Super. Ct., 939 P.2d 766 (Cal. 1997).
[2] See Angela R. Elbert & Stanley C. Nardoni, “Buss Stop: A Policy Language Based Analysis,” 13 Conn. Ins. L.J. 61, 94 (2006–2007) (noting that many courts have overlooked the CGL policy’s “supplementary payment” clauses that “promise that the insurer will bear the full costs for cases it defends,” which policy language “runs expressly against a right of reimbursement”).
[3] Am. & Foreign Ins. Co. v. Jerry’s Sports Ctr., Inc., 2 A.3d 526 (Pa. 2010).
[4] Jerry’s Sports Center, 2 A.3d at 540–46.
[5] W9/PHC Real Estate LP v. Farm Family Cas. Ins. Co., 970 A.2d 382, 391 (N.J. App. Div. 2009) (noting that “duty to defend is broader than the duty to indemnify”); Goldberg v. Lumber Mut. Cas. Ins. Co. of NY, 77 N.E.2d 131, 133 (N.Y. 1948) (“The courts have frequently remarked that the duty to defend is broader than the duty to pay.”); Kvaerner Metal Div. of Kvaerner US, Inc. v. Commercial Union Ins. Co., 909 A.2d 888 (Pa. 2006) (same).
[6] See, e.g., Erie Ins. Exch. v. Transamerican Ins. Co., 533 A.2d 1363, 1368 (Pa. 1987) (describing duty to defend as arising “whenever the complaint filed by the injured party may potentially come within the coverage of the policy”); BP Air Conditioning Corp. v. One Beacon Ins. Grp., 871 N.E.2d 1128, 1131–32 (N.Y. 2008) (noting defense must be afforded whenever claims even potentially fall within coverage); Abouzaid v. Mansard Gardens Assocs., LLC, 23 A.3d 338, 346 (N.J. 2011) (noting that whenever the allegations in the complaint encompass an injury or claim that is “potentially coverable,” the insurer is required to provide a defense); Ameron Int’l Corp. v. Ins. Co. of the State of Pa., 242 P.3d 1020, 1025 (Cal. 2010) (noting defense will be provided as long as insured can show a claim “may fall” within policy coverage).
[7] Voorhees v. Preferred Mut. Ins. Co., 607 A.2d 1255, 1259 (N.J. 1992); Patterson v. Standard Accident Ins. Co., 144 N.W. 491, 492 (Mich. 1913).
[8] Abouzaid, 23 A.3d at 346 (finding defense required even if claims are groundless); BP Air Conditioning Corp., 871 N.E.2d at 1132 (same); Waller v. Truck Ins. Exch., Inc., 900 P.2d 619, 627 (Cal. 1995) (same).
[9] Abouzaid, 23 A.3d at 346.
[10] Buss v. Super. Ct., 939 P.2d 766, 775–76 (Cal. 1997).
[11] Buss, 939 P.2d at 776.
[12] Buss, 939 P.2d at 776.
[13] See, e.g., Valley Forge Ins. Co. v. Health Care Mgmt. Partners, 616 F.3d 1086 (10th Cir. 2010); United Nat’l Ins. Co. v. SST Fitness Corp., 309 F.3d 914, 921 (6th Cir. 2002); Underwriters at Lloyds London v. STD Enters., Inc., 395 F. Supp. 2d 1142, 1150–51 (M.D. Fla. 2005); Travelers Cas. & Sur. Co. v. Ribi Immunochem Research, Inc., 108 P.3d 469, 480 (Mont. 2005).
[14] See, e.g., Blue Ridge Ins. Co. v. Jacobsen, 22 P.3d 313, 321 (Cal. 2001); Cincinnati Ins. Co. v. Grand Pointe, LLC, 501 F. Supp. 2d 1145, 1169 (E.D. Tenn. 2007).
[15] See Perdue Farms, Inc. v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252 (4th Cir. 2006); Liberty Mut. Ins. Co. v. FAG Bearings Corp.,153 F.3d 919 (8th Cir. 1998).
[16] Terra Nova Ins. Co. Ltd. v. 900 Bar, Inc., 887 F.2d 1213, 1219–20 (3d Cir. 1989) (construing Pennsylvania coverage law); see also Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 828 N.E.2d 1092 (Ill. 2005) (similarly rejecting insurer’s right to reimbursement if not included in written contract).
[17] See, e.g., Excess Underwriters at Lloyds, London v. Franks Casing Crew & Rental Tools, Inc.,246 S.W.3d 42 (Tex. 2008); Shoshone First Bank v. Pacific Employers Ins. Co., 2 P.3d 510 (Wyo. 2000).
[18] Shoshone First Bank, 2 P.3d 510.
[19] Am. & Foreign Ins. Co. v. Jerry’s Sports Ctr., Inc., 2 A.3d 526, 529–30 (Pa. 2010).
[20] Jerry’s Sports Center, Inc.,2 A.3d at 540.
[21] Jerry’s Sports Center, Inc.,2 A.3d at 544.
[22] Jerry’s Sports Center, Inc.,2 A.3d at 544.
[23] Jerry’s Sports Center, Inc.,2 A.3d at 545.
[24] Jerry’s Sports Center, Inc.,2 A.3d at 545.
[25] Jerry’s Sports Center, Inc.,2 A.3d at 545.
[26] Jerry’s Sports Center, Inc.,2 A.3d at 546.
[27] Terra Nova Ins. Co. Ltd. v. 900 Bar, Inc., 887 F.2d 1213, 1219 (3d Cir. 1989).
[28] See supra note 5.