In a recent decision, a Massachusetts trial court addressed whether an insurer could recoup previously-paid indemnity and defense costs from its insured. Finding that the insured had not obtained the payments as a result of fraud or bad faith, and that the insurer had failed to cite policy language permitting reimbursement or show that the insured had entered into an express agreement regarding the insurer’s right to seek reimbursement, the court rejected the insurer’s request for reimbursement. The case is Lexington Ins. Co. v. CareCore Nat’l, LLC, No. SUCV2012-01782-BLS2 (Mass. Super. Ct. July 17, 2014) (“CareCore”).
The insured in CareCore had previously sought coverage for various lawsuits under consecutive claims-made professional liability policies issued by the insurer. The plaintiffs in each of these lawsuits alleged that they had been denied entry into physician networks managed by the insured, and that the insured had consequently violated antitrust laws. The insurer made defense and indemnity payments under the insured’s 2004, 2006 and 2007 policies in connection with these lawsuits. Thereafter, the insurer went off risk.
When two new antitrust cases were filed against the insured in 2011 with allegations similar to those in the prior lawsuits, the insured took the position that the new lawsuits were “related” to the prior lawsuits such that they should be covered by the earlier policies issued by the insurer. The insurer contended that if the 2011 claims were “related” to the earlier lawsuits, then the insured should be required to reimburse the insurer for amounts it paid as defense and indemnity under the misimpression that the earlier lawsuits were separate and unrelated claims. Under a theory of unjust enrichment, the insurer argued that because the claims would have been subject to a single policy limit of $10 million per claim if they had been aggregated under one policy, it was entitled to a setoff of amounts it had paid over $10 million.
The court determined that although some jurisdictions outside of Massachusetts permit an insurer to recoup defense costs, such recoupment is only permitted where the insurer has made it clear to the insured, either in the policy or in a reservation of rights letter, that it retains the right to seek reimbursement if a court later determines that there was no duty to defend. The court found that none of the letters that the insurer had sent to the insured in CareCore suggested even by implication that the insurer was advancing defenses costs subject to its right to seek recoupment at a later date.
Importantly, the court also expressed “considerable doubt” that the Massachusetts Supreme Judicial Court would recognize as enforceable even an express reservation of rights regarding defense costs, given that the Supreme Judicial Court has previously held that an insurer may not obtain reimbursement of amounts paid as disability benefits or amounts paid to indemnify an insured against liability unless the policy contains a provision permitting reimbursement, or there was a specific agreement between the insurer and the insured regarding the insurer’s right to seek reimbursement at or before the time payment was made. See Metropolitan Life Ins. Co. v. Cotter, 464 Mass. 623, 641-42 (2013); Medical Malpractice Joint Underwriting Ass’n of Massachusetts v. Goldberg, 425 Mass. 46, 56-57 (1997). The court stated that in the absence of fraud or bad faith on the part of the insured, an insurer may not rely on a unilateral reservation of rights to seek reimbursement of indemnity payments under Massachusetts law.
The court also found that there was no evidence of fraud or bad faith in the CareCore case. Rejecting the insurer’s argument that the insured had acted improperly by representing that the claims were separate, the court found that the insurer was aware of the potential “relatedness” of the matters when the lawsuits were noticed.
The CareCore decision is an important development in the law surrounding an insurer’s right to seek reimbursement of defense payments in Massachusetts. Unlike jurisdictions such as California, which permit an insurer to recoup defense costs for uncovered claims if it has merely reserved its right to do so, even in the absence of policy language permitting recoupment, the CareCore decision suggests that an insurer may not rely on a unilateral reservation of rights to obtain recoupment of defense costs where the policy contains no recoupment language. CareCore suggests that under these circumstances, an express agreement between the insurer and the insured is required. We will closely monitor whether the Massachusetts appellate courts agree that their previous rulings pertaining to an insurer’s ability to recoup disability and indemnity payments apply to defense costs as well.