The Massachusetts Supreme Judicial Court recently agreed to a joint request for direct appellate review of a decision earlier this year in which the trial court ruled that insurance companies were not entitled to reimbursement of defense costs they had paid to defend their insured, absent policy provisions requiring such.

Vibram USA, Inc., a shoe maker, sought coverage for a suit alleging that it unlawfully obtained a trademark for its running shoe named after an Olympic marathon runner.  The insurers, Holyoke Mutual Insurance Company and Maryland Casualty Company, defended Vibram in the trademark action under a reservation of rights and brought a declaratory judgment action seeking a declaration that the underlying claims against Vibram were not covered by their policies.  Upon receipt of the reservation of rights letter, Vibram retained defense counsel of its choice and controlled the defense of the trademark claims.  In August 2016, the trial court in the coverage action ruled that the subject insurance policies did not provide coverage, and accordingly, that the insurers had no duty to defend Vibram.

Vibram and the insurers thereafter filed cross-motions for summary judgment regarding the cost of defense.  The insurers maintained that they were entitled to reimbursement of the defense costs which they had already paid because they had paid under a reservation of rights.  Vibram asserted that it was entitled to recovery of defense costs that were incurred, but not yet paid, as of the date the court determined that there was no coverage.

In March 2017, the trial court held that the insurers were not entitled to reimbursement of the defense costs which they had already paid, in the absence of an provision in their policies requiring such.  See Holyoke Mutual Insurance Company v. Vibram USA, Inc., 34 Mass.L.Rptr. 185 (Mass. Super. Ct. Mar. 21, 2017).  In doing so, the court rejected the arguments found in the landmark California case of Buss v. Superior Court, 16 Cal. 4th 35 (Cal. Ct. App. 1997), in which that court held that an insurer providing a defense under a reservation of rights was entitled to reimbursement of defense costs as a matter of law following a determination that it did not have a defense obligation.  The Buss court concluded that allowing insurers to recover the defense costs which they had paid avoided the risk that insureds would be unjustly enriched by receiving a benefit (i.e. costs to defend non-covered claims) that they never bargained for.

Instead, the Vibram court ruled that the Pennsylvania decision of American & Foreign Ins. Co. v. Jerry’s Sport Center, Inc., 2 A.3d 526 (2010) and an unreported First Circuit decision, Welch Foods, Inc. v. Nat’l Union Fire Ins. Co., No. 09-12087-RWZ, 2011 WL 576600 (D. Mass. Feb. 9, 2011), reflected Massachusetts law that an insurer’s duty to defend arises when the underlying complaint shows a possibility that the claim falls within the scope of coverage, and that “there is no requirement that the facts alleged in the complaint specifically and unequivocally make out a claim within the coverage.”  The Vibram trial court further ruled that there was nothing in these policies that provided the insurers with a right to recoup defense costs, and that right could not be created by a unilateral reservation of rights letter. The trial court added that the insurers at any point could have changed their minds with respect to advancing defense costs, as they were under no contractual obligation to pay them.

The trial court, however, also rejected Vibram’s attempt to recover defense costs that had been incurred, but not paid, at the time of the court’s determination of non-coverage.  In doing so, the trial court noted that the “duty to defend ends when there is no longer any chance that the facts alleged in an underlying action can support a covered claim.”

The Massachusetts Supreme Judicial Court’s decision to take up this issue of reimbursement of defense costs upon a finding of no coverage even in the absence of a reimbursement provision strongly suggests that it is prepared to set forth Massachusetts law on the issue.  Certainly, this is a critical issue for both insurers and their insureds – one that should be watched closely.