Connecticut Federal Court Split On Recoupment of Defense Costs

In Nationwide Mutual Ins. Co. v. Mortensen, 2011 U.S. Dist. LEXIS 77356 (D. Conn.  July 18, 2011), the United States District Court for the District of Connecticut affirmed its earlier decision that an insurer was not entitled to recoupment of defense costs despite receiving an adjudication that it had no duty to defend.  Nearly one month later, in its recent decision in Scottsdale Ins. Co. v. R.I. Pools, Inc., 2011 U.S. Dist. LEXIS 90380 (D. Conn. Aug. 15, 2011), a different judge from the same federal district court ruled that an insurer is entitled to reimbursement of defense costs under such circumstances.

In both matters, the insurers cited primarily to the 2003 decision by the Connecticut Supreme Court in Security Ins. Co. of Hartford v. Lumbermans Mutual Casualty Co., 826 A.2d 107 (Conn. 2003), in which the court stated that it is proper to “order reimbursement for the cost of defending the uncovered claims in order to prevent the insured from receiving a windfall.”  Lumbermans involved an insured’s asbestos liabilities over a seventeen-year period, several years of which it was uninsured.  The Connecticut Supreme Court held that in light of Connecticut’s pro rata methodology for allocating defense costs, the insured should be required to pay its prorated share of the defense for uninsured periods.

The federal judge in Mortensen limited Lumbermans to its facts, reasoning that recoupment of defense costs was proper in that case since there was no potential for coverage in the uninsured periods.  The Mortensen court distinguished the facts in Lumbermans from those before it, where “there was at least a potential that the defendants’ claims [for breach of contract and trademark infringement] would be covered.”  (Emphasis in original.)   Given this potential for coverage, explained the court, “Nationwide had a temporary duty to defend until a determination on coverage was made,” and as such, it would be improper for Nationwide to recoup its defense costs incurred during this period.  The court further held that absent a policy provision to the contrary, or an explicit assent by the insured, an insurer would never be entitled to recoupment under such circumstances.

By contrast, in the more recent decision in R.I. Pools, a different judge from the same court held that the insurer was entitled to recoupment of defense costs following an adjudication of non-coverage.  Looking to the general liability policy’s supplementary payments provision, the judge concluded that the insurer is entitled to reimbursement of all defense costs associated with defending suits deemed not covered, although it would not be entitled to reimbursement of costs associated with investigating or settling any such suits.  Of note, the judge in R.I. Pools cited only to the Lumbermans decision in support of its holding, and did not address the court’s earlier decision in Mortensen.  Moreover, the judge did not discuss whether the policy must have a recoupment provision or whether the insured must assent to the possibility of recoupment of defense costs.

The contrasting decisions in Mortensen and R.I. Pools makes it very likely this issue will continue to be litigated in Connecticut, at least at the federal level.