California Supreme Court reaffirms insurers’ right to reimbursement of defense costs
January, 2006
The California Supreme Court has reversed a Court of Appeals decision that could have undermined insurers' ability to reserve the right to seek reimbursement of costs incurred to defend non-covered claims. Scottsdale Insurance Company v. MV Transportation, 36 Cal. 4th 643 (2005).
While disputing coverage, Scottsdale agreed to advance defense costs to MV Transportation, under a reservation of rights. The Court of Appeals determined that Scottsdale's policy did not potentially cover the claims against MV Transportation. However, the court refused to allow Scottsdale to recover the defense costs Scottsdale had advanced. The court reasoned that, until the court resolved the coverage dispute, Scottsdale had a duty to defend, and that duty was not extinguished until the court issued its opinion.
In reversing, the Supreme Court held that, because the allegations of the complaint did not potentially cover the claims, Scottsdale never had a duty to defend. Thus, there was no duty for the Court of Appeals to "extinguish" by way of its decision. Because Scottsdale never had a duty to defend, and because Scottsdale had reserved its right to seek reimbursement of defense costs advanced, Scottsdale could recover those costs. The Supreme Court reaffirmed its decision in Buss v. Superior Court, 16 Cal. 4th 35 (1997), the case that solidified what are now known as "Buss reservations."