I’ve been saying for years that reimbursement of defense costs can be an overrated issue. It is the CATS of coverage issues. First, many states – especially lately -- have rejected an insurer’s right to seek reimbursement of defense costs. Second, even in a state where the right exists, it usually has to be a situation where there was a finding of no duty to defend at all, from the get-go – not one where there was only no duty to defend certain counts or where there was a duty to defend but then a later finding of no duty to indemnify. [This is why the right has more bite in California, where Buss gives insurers more options on this issue.] And even if all of this is satisfied, to make it worthwhile the insured has to be financially able to repay the defense costs. Many are unlikely to be. So while reimbursement of defense costs is not without some applicability, the stars need to be aligned just right for the insurer for it to have a practical impact.

Not long ago a New York federal court addressed an insurer’s right to reimbursement of defense costs. As I said, I think the issue is often-times much ado about nothing. While Coverage Opinions strives to examine cases that can have influence beyond their borders, that’s not the situation here. And, on top of these shortcomings, the decision isn’t just from a federal district court, but it’s unpublished too. But despite all these caveats, the fact remains that a lot of people follow reimbursement of defense costs cases, New York is, well, New York, and there is very little law on the issue in the Empire State. So, for these reasons, American Family Home Insurance Co. v. Delia, No. 12-5380 (E.D.N.Y. Nov. 15, 2013) gets some space here.

There isn’t much to say about the background of Delia. American Family undertook Richard Delia’s defense, subject to a reservation of rights, in a bodily injury action. The specifics are not important. American Family denied coverage on the ground that the underlying injury occurred in connection with the “business pursuits” of the insured on “uninsured premises” as defined in the policy. American subsequently commenced a declaratory judgment action with regard to insurance coverage for Delia and to recoup the defense costs paid.

The court held that American had no obligation to defend Delia as the policy, on account of the “business pursuits” exclusion, had no application to a work-related incident that occurred on premises other than those insured. The court then went on to hold that “[b]ecause American had no obligation to defend Delia, it is entitled to reimbursement of the monies it spent on that defense, and the invoices reflecting defense costs in the third party action show the amount owing to be as stated, $41,227.95.” [Query whether American Family will be able to collect this.]

The Delia court did not explain the basis for its decision to allow reimbursement of defense costs. The court simply cited National Union Fire Ins. Co. of Pittsburgh, PA v. Ambassador Group, Inc., 556 N.Y.S.2d 549 (1st Dep’t 1990) and provided the parenthetical that “interim advances on defense costs subject to recoupment where it is determined that coverage was not required.” Ambassador Group, involving a D&O policy, seems a curious case to cite here as support for an insurer’s right to reimbursement of defense costs under a policy that treats defense costs differently.

Granted, there isn’t much New York law on the issue, but a more appropriate case to cite for support would have been Gotham Ins. Co. v. GLNX, Inc., No. 92 Civ. 6415, 1993 WL 312243, (S.D.N.Y. Aug. 6, 1993) (reasoning that the insurer was entitled to reimbursement of defense costs because it explicitly reserved its right to do so if it were determined that no duty to defend existed and insured offered no evidence that it expressly refused to consent to such reservation of rights).

And, more recently, there is Max Specialty Ins. Co. v. WSG Investors, LLC, No. 09–CV–5237, 2012 WL 3150579 (E.D.N.Y. Apr. 20, 2012) (“Here, as in Gotham, Max Specialty made an explicit reservation of the right to pursue recoupment in its letter to WSG disclaiming coverage. . . . Mand has put forth no evidence that WSG objected to this reservation. Therefore, because Max Specialty specifically reserved this right and is entitled to it under New York law, Max Specialty is entitled to a declaration that it may recoup the legal fees it expended in defense of WSG in the underlying action.”).

For those insurers that have the right case, New York is starting to gain traction as a state that allows for reimbursement of defense costs.