Why it matters
A policyholder who does not act promptly to seek advancement of defense fees and costs from its carrier could face a double whammy if the carrier denies coverage: not only will the policyholder be required to then fund the defense of the underlying action, but it may not be able to seek reimbursement of past fees and costs until a subsequent coverage action is finally adjudicated.
QBE Americas was accused of participation in kickback schemes involving forced-place insurance for mortgage borrowers, faced roughly 40 lawsuits across the country, and was the subject of at least one government investigation.
The company sought coverage for, inter alia, defense costs incurred in pending litigation where AIG and Darwin refused to advance them. The AIG policies stated that “[AIG] shall have the right, but not the duty, to assume the defense of any Claim made against the Insured.” The Darwin policies, in contrast, provided that the insurer “shall have the right and duty to defend any Claim to which the Insuring Agreements apply.”
That seemingly slight difference meant that QBE could recover all of its go-forward defense fees and costs from Darwin now, but any recovery from AIG had to await the outcome of the coverage litigation.
“The AIG policies expressly disclaim the duty to defend,” the court said. “[A]t most, before the merits of the coverage dispute is adjudicated, QBE could only compel AIG to pay for its defense costs for the portion of its pending litigation attributable to covered claims.”
But “Darwin, in contrast, has a duty to defend,” Judge Kornreich said, based on the “right and duty” language of its policy. “Hence, Darwin . . . is obligated to advance all of QBE’s litigation costs so long as each lawsuit presents the possibility that any of the QBE entities or any of the claims asserted might be covered.”
Significantly, the court further held that QBE could not recover at this time defense fees and costs already incurred either in pending litigation or in litigation that had settled, notwithstanding the duty-to-defend language. The court ruled that if QBE had wanted defense costs advanced in those lawsuits (some of which had been filed three years prior), then it should have sought them while the underlying litigation was pending. Because it waited, it could not recoup the amounts spent until the merits of the coverage action were finally adjudicated.
To read the opinion in QBE Americas, Inc. v. ACE American Insurance Co., click here.