The California Supreme Court has ruled that when a CGL insurer properly reserves its rights to recoup defense costs from its insured, the insurer can obtain full reimbursement of those defense costs if the insurer ultimately establishes that the policy never afforded a potential for coverage at the time of tender. ( Scottsdale Insurance Company v. MV Transportation (2005) 36 Cal.4th 643)
Facts
A third-party competitor sued MV Transportation for breach of contract, unlawful business practices and misappropriation of trade secrets. MV tendered its defense to Scottsdale, MV’s general liability insurer. Scottsdale asserted it did not believe its defense obligation was triggered based on the facts alleged in the underlying action. However, Scottsdale agreed to defend MV under a reservation of rights, including the right to seek reimbursement of defense costs for causes of action not potentially covered. MV and its competitor ultimately settled the underlying case.
In a separate action for declaratory relief, Scottsdale filed a motion for a determination that it never had a duty to defend and that it was entitled to reimbursement of all defense costs it advanced. The trial court denied Scottsdale’s motion.
While the Court of Appeal reversed the trial court and found that Scottsdale did not have a duty to defend, the Court of Appeal nonetheless concluded that Scottsdale’s defense duty was only extinguished prospectively and that Scottsdale was not entitled to reimbursement of defense costs from the insured. Scottsdale then sought review in the California Supreme Court.
Holding
The Supreme Court reversed, in part, the Court of Appeal’s decision. The Supreme Court affirmed the determination that Scottsdale never had a duty to defend, and separately held that Scottsdale was entitled to reimbursement of all defense costs it had advanced to MV.
The Supreme Court reasoned that, because there was never a potential for coverage at the time of tender, a duty to defend “never arose.” Because Scottsdale properly reserved its right to seek reimbursement of defense costs from its insured, and because Scottsdale established that there was never a potential for coverage with respect to any of the claims asserted in the underlying action, the Supreme Court concluded that Scottsdale was entitled to reimbursement of all defense costs.
Comment
This case provides important clarification of a CGL insurer’s Buss rights. While the Buss case analyzed an insurer’s defense costs reimbursement rights in a “mixed” action (i.e. an action involving potentially covered and non-covered claims), the MV Transportation caselogically extends an insurer’s Buss rights to an action in which there was no potential for coverage for any of the claims at the time of tender.
Consequently, when an insurer is faced with a tender of defense involving unsettled case law concerning the policy’s potential coverage, the insurer is not forced to deny a defense outright and risk a bad faith suit by the insured. Instead, the insurer can “in an abundance of caution, afford the insured a defense under reservation of rights,” with the understanding that the insurer can recoup all defense costs advanced if the insurer later establishes, as a matter of law, that its duty to defend never arose.