AHK Law Office

The California Supreme Court rules that an insurer may seek reimbursement of defense expenses it can prove solely relates to noncovered claims

On July 24, 1997, the California Supreme Court issued its long awaited decision in Buss v. Superior Court (Transamerica Ins. Co.) 97 D.A.R. 9412. Mosk wrote the decision for the majority in which Justice Kennard dissented. The majority held that the burden of proof was upon the insurer in an action to obtain reimbursement for defense costs. The insurer must prove by a preponderance of the evidence that the defense costs sought to be reimbursed "solely" relate to a cause of action which had "no potential" for coverage.

The Supreme Court reaffirmed several important holdings regarding the scope of an insurer's duty to defend and an insurer's right to seek reimbursement. The Supreme Court reaffirmed that an insurer owes a duty to defend the entire action when a lawsuit raises "mixed" claims in which only some claims are potentially covered. Also, "as to the claims that are at least potentially covered, the insurer may not seek reimbursement for defense costs", wrote Justice Mosk. Moreover, in order for an insurer to seek reimbursement for defense costs, an insurer must specifically reserve its rights to seek reimbursement. This allows the insured to decide whether or not to accept the defense at the insurer's hands. The Supreme Court also stated that "through reservation, the insurer avoids waiver."

The Supreme Court also appeared to indicate that the insurer's reservation of rights to seek reimbursement could be done unilaterally without the insured's consent although this was not an issue in the Buss case. The insurer and insured had entered into a written agreement permitting the insurer to reserve its rights to seek reimbursement which was "supported by consideration". The insurer also agreed to provide its insured with Cumis counsel.

Time will tell as to whether Justice Mosk is correct that allowing insurer's to seek reimbursement and lowering the standard of proof from "undeniable evidence" to a "preponderance" of the evidence will encourage insurers to accept the defense of mixed claims and not be "tempted" to wrongfully deny defending lawsuits in which only a few claims are potentially covered. The Buss case stresses the importance of a policyholder obtaining representation by his or her own coverage counsel if an insurer agrees to defend a lawsuit but reserves its rights to seek reimbursement later.