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California Federal Courts Tell Insurers Not to Jump the Gun in Suing Policyholders for Reimbursement

In a series of opinions issued over the past few months, federal judges in California have reiterated that insurers must wait until they are finished defending their policyholders before they sue those policyholders for reimbursement of defense costs.  While California remains one of the handful of states in which an insurer can try to claw back defense costs from its insured, these recent opinions demonstrate that this purported right to equitable reimbursement cannot be used as an early offensive tactic against policyholders.

In late 2013 and early 2014, homeowners from all over California brought a series of construction defect lawsuits in courts across the state against the home builder Centex Homes.  When Centex tendered the claims, its insurer, Travelers, asserted its purported right to equitable reimbursement.  Contrary to state high courts across the country (including IllinoisPennsylvaniaTexas, and Wyoming), as well as many federal courts, California’s Supreme Court has held that insurance companies have a right to equitable reimbursement of costs they paid in defending non-covered claims if, and only if, those claims were not even potentially covered by the insurance policy.  Seizing on this unfortunate California authority from Buss v. Superior Court, Travelers almost immediately filed federal lawsuits against Centex seeking equitable reimbursement of the defense costs the insurer had paid and would paydefending non-covered claims.  In at least one case, Travelers brought suit for equitable reimbursement before it even sent its reservation-of-rights letter.  Centex moved to dismiss, arguing that Travelers could not seek reimbursement while Travelers continued to owe Centex a duty to defend.  The courts agreed.

In an order issued earlier this month, the Central District of California held that “the right of equitable reimbursement operates retrospectively” and is a doctrine “premised on a ‘defend now seek reimbursement later’ theory.”  St. Paul Fire and Marine Ins. Co. v. Centex Homes, No. 14-cv-01216 (C.D. Cal. Oct. 7, 2014).  So long as a duty to defend exists, the Central District opined, courts should not “force the insured to fight a prejudicial ‘two-front war, doing battle with the plaintiff in the third party litigation while at the same time devoting its money and its human resources to litigating coverage issues with its carriers.”  The court dismissed Travelers’ claim for equitable reimbursement.

The Eastern District of California has also recently reached this conclusion in similar cases brought by Travelers against Centex.  It has repeatedly held that an insurer cannot assert a claim for equitable reimbursement unless the insurer has “defended the … action in its entirety.”  Travelers Indem. Co. v. Centex Homes, No. 14-cv-1235 (E.D. Cal. Oct. 14, 2014).  This generally requires the insurer to “allege facts showing that the [underlying] action has resolved.”  Alternatively, the insurance company may allege that it “no longer owe[d] a duty to defend [the policyholder] in that action.”  On October 14, the Eastern District dismissed one of Travelers’ lawsuits against Centex because the insurance company still had a duty to defend its policyholder. 

Although these cases go a long way in shielding policyholders from tactics like those employed by Travelers, companies should be cautious about taking any step that may discharge their insurer of its duty to defend, as doing so may trigger a claim for equitable reimbursement.  In one of the cases brought against Centex, the Eastern District of California held that, even though Travelers could not bring its reimbursement claim if it still had a duty to defend, Travelers had sufficiently alleged that its duty to defend had been discharged by Centex’s refusal to cooperate in the underlying litigation.  Travelers Indem. Co. v. Centex Homes, No. 14-cv-217 (E.D. Cal. July 30, 2014).  While these recent opinions are critical in preventing an unwarranted expansion of Buss by insurance companies trying to shirk their duties, they do place additional pressure on policyholders to make sure they avoid doing anything that could be seen as voiding their right to a defense.

© 2022 Proskauer Rose LLP. National Law Review, Volume IV, Number 306
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About this Author

Shawn Ledingham, Securities Attorney, Proskauer Rose Law Firm
Associate

Shawn S. Ledingham, Jr. is an Associate in the Litigation Department, and a member of the Sports Law and Insurance Recovery & Counseling Groups, resident in the Los Angeles office.

Shawn has substantial experience in and knowledge of the sports industry, with a particular focus on antitrust claims and intraleague relationships. Shortly after joining Proskauer, where he previously worked as a Summer Associate, he represented Major League Baseball in its investigation into Frank McCourt’s ownership of the Los Angeles Dodgers, as well as in the subsequent Dodgers bankruptcy. Shawn...

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