New York Federal Court Allows Recoupment of Defense Costs

A New York federal court has held that an insurer was entitled to recoup defense costs where it expressly reserved its right to contest the duty to defend and to recoup defense costs without any demonstrated objection from the insured. Maxum Indemn.Co.v. A One Testing Labs., Inc., No. CV 14-4023 (S.D.N.Y. Dec. 10, 2015). The court also determined that the insurer had no duty to defend the policyholder because the plaintiff in the underlying lawsuit failed to allege an “occurrence” within the meaning of the policy.

The insurer issued a commercial general liability policy to a testing agency covering “property damage” caused by an “occurrence” during the policy period. A building owner sued the policyholder alleging that the insured negligently performed testing services on a construction project and breach of contract. The insurer defended the action while expressly reserving the right to initiate a coverage action, to contest the duty to defend, and to recoup defense costs. Later, the insurer brought a declaratory judgment action seeking a declaration of non-coverage and a determination that it was entitled to recoup defense costs.

The court granted summary judgment to the insurer, holding that it was entitled to recoup defense costs paid because there was no coverage for the underlying lawsuit as it failed to allege an “occurrence” within the meaning of the policy. In so holding, the court observed that under New York law, an insurer can recoup defense costs upon a determination of non-coverage “so long as the reservation was communicated to the insured, who did not expressly refuse to consent to the reservation.” Here, the court found that there was an express reservation of rights to recoup defense costs and there was no indication that the policyholder had objected to that reservation.