A U.S. District Court for the District of Hawaii recently denied an insurer’s request for reimbursement of defense costs when the insurer defended its insured under a reservation of rights and then prevailed on coverage. The District Court in St. Paul Fire & Marine Ins. Co. v. Bodell Construction Co., 538 P.3d 1049 (Haw. 2023) rejected the insurer’s claim for reimbursement because the insurer’s policy did not contain a provision that permitted express reimbursement.
In this case involving contested coverage for construction defect claims, the insurer defended its insured against the claims while maintaining that it was entitled to reimbursement of the costs of defense that were not potentially covered under the policy. There was no express provision in the policy authorizing the insurer’s reimbursement claim. The law in Hawaii was unsettled on the reimbursement issue. Because of this, the District Court certified the issue to the Hawaii Supreme Court.
The Hawaii Supreme Court answered the Federal District Court’s question by concluding that insurers may not seek reimbursement of defense costs unless they include reimbursement language in their policies. In the present case, the insurer did not do that. The only thing the insurer did was to send the insured a unilateral reservation of rights letter, asserting a right to reimbursement. Because of this, the Supreme Court determined that the insurer had no right to reimbursement of defense costs.
The Hawaii Supreme Court supported its decision for three reasons. First, the relationship between the insured and the insurance company was governed by the contract. The insurer was not authorized to create new rights under that contract through a reservation of rights letter. Second, the Court found that allowing reimbursement would undermine the distinction between the duty to indemnify and the duty to defend and would erode the scope of the duty to defend unreasonably. Third, the Court ruled that policyholders would not be unjustly enriched by the holding of the Supreme Court.