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Vol. 2, Iss. 21
November 13, 2013

Coverage Opinions Guest Commentary

The Duty to Defend – Part III
The (Insurance) Legacy of Jerry Buss

By Joseph M. Junfola, CPCU, RPLU+, SCLA

In Part I of this series, The Anomaly of the Duty to Indemnify without a Corresponding Duty to Defend, we explored the peculiarity of an insurer having a duty to indemnify its insured but not a corresponding duty to defend. Part II, Two’s Company and Sometimes Three’s a Crowd, addressed the insurer’s right to defend and the impact that a conflict of interest may have on that right.

In this third, and final, installment, we tackle the insurer’s right to reimbursement of defense expenses from its insured if it is determined that there was not a potential for coverage as to some of the causes of action in a lawsuit, commonly known as a “mixed” action.

The “Right” to Reimbursement

In February 2013, Dr. Jerry Buss, long-time owner of pro basketball’s Los Angeles Lakers and hall of famer, died at the age of 80. Aside from a legacy of world championships, he also left one for the insurance industry in the form of a California Supreme Court case decided in 1997, Buss v. Superior Court, 16 Cal. 4th 35 (Cal. 1997), probably the leading case supporting the right of an insurer to seek reimbursement for expenses incurred in the defense of causes of action that are not potentially covered under the policy.

It is common that the defense of an insured is conducted under a reservation of rights due to coverage issues. The reservations may include the right to seek reimbursement for defense expenses paid. Because the duty to defend is very broad, and because the insurer must defend the entire action, some jurisdictions provide for the right to reimbursement of defense expenses specific (solely) to causes of action that are not potentially covered in a mixed action.

The Buss case is probably the poster child for this right to reimbursement. In the underlying case against Buss and others, H&H Sports had contracted with Buss to provide advertising and other services. A dispute between the parties evolved into a lawsuit in which 27 causes of action were asserted, including count 23 for defamation. Buss’ insurer defended the entire lawsuit on the premise that only the defamation count was potentially covered.

The central issue was whether the insurer could recover the expenses incurred in a “mixed” action, namely, where some of the causes of action are not potentially covered while others are. The court held that the insurer can seek reimbursement for expenses paid solely to defend the causes of action that are not potentially covered, and the insurer has the burden, by a preponderance of evidence, of making the distinction.

But theory and practice are significantly different, and the burden on the insurer to make that distinction may not be an easy one: The Buss court held that an insurer is only entitled to recover those defense expenses which can be fairly and reasonably allocated solely to non-covered claims for which there never was any potential for coverage. And that’s not always easy to do.


Of course, while California is a bellwether state in many instances, not every jurisdiction always follows its lead. For example, in 2010, the Supreme Court of Pennsylvania ruled in Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 606 Pa. 584 (Pa. 2010) that the right of reimbursement should be included in the insurance policy if the insurer wishes to preserve this right, as opposed to creating a new contractual obligation by way of an unilateral reservation of rights letter within which the insurer attempts to preserve its right to reimbursement and where the insured accepts the defense. The Court also rejected the insurer’s argument that the insured was unjustly enriched for receiving the defense:

…Royal cannot employ a reservation of rights letter to reserve a right it does not have pursuant to the contract…the policy here did not provide for a right of reimbursement of defense costs for non-covered claims. A reservation of rights letter asserts defenses and exclusions that are already set forth in the policy…We are persuaded that permitting reimbursement by reservation of rights, absent an insurance policy provision authorizing the right in the first place, is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract…A reservation of rights letter “does not relieve the insurer of the costs incurred in defending its insured where the insurer was obligated, in the first instance, to provide such a defense”…Absent the creation of a new contract through the reservation of rights letters, there is no contractual basis upon which to order Insured to reimburse Royal for defense costs. Am. & Foreign Ins. Co. 614-615


Nor are we persuaded that there are any equitable bases upon which to grant a right to reimbursement…

Insured was not unjustly enriched…Royal had not only the duty to defend, but the right to defend under the insurance contract. This arrangement benefited both parties. The duty to defend benefited Insured to protect it from the cost of defense, while the right to defend allowed Royal to control the defense to protect itself against potential indemnity exposure. Am. & Foreign Ins. Co. 615-616

It would appear that, at least in Pennsylvania, an insurer’s right to recoupment of expenses incurred in the defense of a claim or cause of action that is not potentially covered must be provided for in the insurance policy, and cannot be preserved in a simple, unilateral reservation of rights letter extrinsic to the policy. Other states have adopted a similar rule. And some carriers have issued policies that expressly contain such right.


The information contained in this article is intended to be used for informational purposes only. Any views expressed do not necessarily represent the views of the Admiral Insurance Company, any of its affiliates, Randy Maniloff or Coverage Opinions. The information contained herein is not intended to constitute and should not be considered legal advice, nor should it be considered a substitute for obtaining legal advice.

About the Author

Joe Junfola has been in the insurance industry for over 35 years, the last 20 of which have been at Admiral Insurance Company in the position of Assistant Secretary, Claims. Joe specializes in long-term exposure, or continuous injury/damage, claims, in particular construction defect and product liability claims, and he also handles design professional liability claims.

Joe holds numerous industry professional designations. He created and conducts the webinar/workshop series, Cause and Effect: Managing the Construction Defect Claim.

Published articles include Allocation in Continuous Damage Claims, CPCU eJournal, February 2011; Apples and Oranges: Policy Provisions Related, But Distinct, Property Casualty 360°, November 7, 2011; Perspectives on the Mediation Process and Its Participants: How and Why People Mediate – The Claims Professional’s Perspective, FDCC Quarterly, Winter 2012.

Joe is a graduate of La Salle University in Philadelphia and resides in Washington Township, New Jersey. He is past-president of a small condominium association in Cape May, NJ. He is also a member of the CPCU Society and the Society of Claim Law Associates.


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