Timing and settlement considerations when recoupment is sought in Buss cases.

• Author: Aylward, Michael F.
• Position: Insurance law

There are factors that both hinder and strengthen the timing and settlement moves when insurers seek to recoup defense costs in mixed coverage cases

WHILE decisions such as the California Supreme Court's ruling in Buss v. Superior Court (Transamerica Insurance Co.),(1) have given insurers a forceful right to claim reimbursement for non-covered defense costs, that right is only as good as the remedy that protects it. Among the crucial questions affecting the efficacy of a Buss claim is the manner in which an insurer's rights may be strengthened or compromised by settlement opportunities.

There are three issues to be considered. The first is timing--that is, the extent to which the settlement of liability cases may be decoupled from the resolution of coverage disputes. Second are the circumstances in which a liability settlement may undermine or thwart an insurer's rights. Finally, there is the consideration of the alternative circumstances in which a settlement may actually strengthen an insurer's rights.

RECOUPMENT V. ALLOCATION

In Buss, the California Supreme Court ruled for the first time that an insurer is entitled to recoup sums it had paid to defend non-covered claims in a "mixed" case, that is to say, one in which both covered and non-covered claims had been asserted. In 1993, the court held in Horace Mann Insurance Co. v. Barbara B.,(2) that an insurer has a duty to defend the entirety of an action, even if some of the claims are not covered. In Buss, however, the court explained that the duty to defend the entire suit was not based on the wording of the policy, nor was it contractual. Rather, the court stated, the insured's duty to defend the entire "mixed" action was a "prophylactic" obligation imposed by law in support of the policy.

The court stated:

To defend meaningfully, the insured must defend immediately. To defend immediately, it must defend entirely. It cannot parse the claims, dividing those that are at least potentially covered from those that are not. To do so would be consuming, it might also be futile.(3) On the other hand, the court recognized that as the insured is receiving the benefit of a defense to claims that are not covered by the policy, the insurer is entitled to restitution after the fact for those costs that would not otherwise have been incurred for the defense. In order to recover, the insurer must prove the amount of such non-covered defense costs by a standard of a preponderance of the evidence.

Recoupment must be distinguished from allocation, which the California court largely rejected in its more recent ruling in Aerojet-General Corp. v. Transport Industrial Co.(4)

TIMING CONSIDERATIONS

In many states, an insurer is forbidden to proceed with coverage litigation if the resolution of the coverage issue depends on the disposition of facts that are central to the liability suit.(5) This is not the universal rule, however. For instance, the Texas Supreme Court held in 1997 that an insurer was entitled to a declaration that it had no duty to indemnify the insured, although the underlying tort action against the insured was still pending and no declaration of liability had as yet been determined in the tort suit.(6) In Wisconsin, the preferred procedure is for the insurer to intervene in the tort proceeding and seek a stay of the liability claims until such time as the issue of coverage can be resolved.(7)

Alternatively, some courts have ruled that an insured should not be forced by its insurer to fight a "two-front war" and have stayed coverage litigation if the resolution of legal and factual issues in the coverage dispute would prejudice the insured's defense of the liability...